SECURITIES AND EXCHANGE COMMISSION
                           Washington, D. C. 20549


                                 FORM 10-K

[x]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934. 
For the fiscal year ended May 31, 1997

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from            to 
                                ---------      -----------
Commission File:  0-19678

                           ETS INTERNATIONAL, INC.
           (Exact Name of Registrant as Specified in its charter)

            Virginia                                 54-1414643
  (State or other Jurisdiction              (IRS Employer Identification
  of Incorporation or Organization)         Number)


       1401 Municipal Road, NW
       Roanoke, VA                                   24012-1309
 (Address of Principal Executive Offices)            (Zip Code)


Registrant's Telephone Number, including Area Code: (540) 265-0004

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

                       Common Stock without par value
                              (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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.       [x]  Yes  [ ] No 

Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.      [x]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
registrant is (based on closing price on July 31, 1997) was $5,046,361*.

The total number of shares outstanding as of July 31, 1997 was 14,539,453.

*Affiliates for the purposes of this item refer to the officers, directors
and/or any persons or firms owning 5% or more of the registrant's common
stock, both of record and beneficially. 

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12 and 13) are
incorporated by reference to the Company's definitive proxy statement to be
filed with the Commission on or before 120 days after the end of the fiscal
year covered by this Form 10-K.
<PAGE>

                           ETS INTERNATIONAL, INC.
                                 FORM 10-K
                   For the Fiscal Year Ended May 31, 1997


                                                                        Page
Part I
      Item 1.     Business                                                 4
      Item 2.     Properties                                              24
      Item 3.     Legal Proceedings                                       25
      Item 4.     Submission of Matters to a Vote of Security Holders     25

Part II
      Item 5.     Market for Registrant's Common Equity and Related  
                  Stockholder Matters                                     27
      Item 6.     Selected Financial Data                                 30
      Item 7.     Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                     30
      Item 8.     Financial Statements and Supplementary Data             38
      Item 9.     Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure                  38

Part III
      Item 10.    Directors and Executive Officers of the Registrant      38
      Item 11.    Executive Compensation                                  38
      Item 12.    Security Ownership of Certain Beneficial
                  Owners and Management                                   38
      Item 13.    Certain Relationships and Related Transactions          39

Part IV
      Item 14.    Exhibits, Financial Statement Schedules,
                  and Reports on Form 8-K                                 39

SIGNATURES                                                                

SUPPLEMENTAL INFORMATION AND EXHIBITS                                     

<PAGE>

PART I 

Item 1.     Business

Introduction

ETS International, Inc. ("ETSI"), a Virginia corporation, is a technology
based firm which provides environmental and infrastructure products and
services.  ETSI specializes in toxic emission measurement and control, as
well as infrastructure design, construction and maintenance.  ETSI operates
through four wholly-owned affiliates:  ETS, Inc., ETS Analytical Services,
Inc., ETS Water and Waste Management, Inc. and ETS Liner, Inc., a subsidiary
of ETS Water and Waste Management, Inc.

ETS, Inc. ("ETS"), a Virginia corporation, owns the proprietary rights to a
number of patented inventions.  Resources have been allocated for the
commercialization of two of these inventions.  The first of these proprietary
systems, the Limestone Emission Control System is designed to address the
acid rain problem by eliminating greater than 90 percent sulfur oxide
emissions from electric power plants and industry.  The first commercial
system is operating in Taiwan.  The second invention, the Baghouse
Performance Monitor ("BPM"), is a patented instrument which serves as an
early warning system of industrial dust collector malfunctions.  A number of
Baghouse Performance Monitor systems are operating in the United States.

The services offered by ETS generally include:  training, contract research
and development, engineering, consulting, regulatory assistance and field
testing.  These services and related unique capabilities have been the
springboard from which ETS has developed its patented air pollution control
products and systems.  

ETS Analytical Services, Inc. ("ETSAS"), a Virginia corporation, is an
environmentally oriented analytical laboratory serving both government and
industry.  ETSAS has executed numerous United States Environmental Protection
Agency ("USEPA") contracts and has been a contract authorized Superfund
laboratory participating in the USEPA's Contract Laboratory Program.  ETSAS
currently is executing a multi-year contract for the USEPA's Office of Water. 
In addition to a number of industrial clients, ETSAS is known for its work
with electric utilities.  The lab specializes in the areas of trace
environmental analysis, methods development and research and development.  In
addition, ETSAS provides comprehensive field and laboratory services relating
to wastewater/treatability, water/drinking water, OSHA compliance and toxic
substances.  

ETS Water and Waste Management, Inc. ("ETSW"), organized under Virginia law
and headquartered in Richmond, Virginia, is a construction and maintenance
service firm whose history dates back to 1947.  ETSW provides storm and sewer
line, water system and gas line construction with a special focus, through
its subsidiary, ETS Liner, Inc. ("ETSL"), which is headquartered in Orlando,
Florida, on trenchless rehabilitation, i.e., the repair of sewer and water
lines by relining these lines without digging up and replacing them.  ETSW
also designs and installs septic systems and irrigation systems. 
Additionally, related repair and maintenance services are provided.  Among
its customers are municipalities, government agencies, Fortune 500 companies
and developers.  ETSW has completed major infrastructure projects in eastern
Virginia and the greater Washington, D.C. area.  
<PAGE>

ETSI divides its revenues into four categories:  (a) services - encompassing
field and analytical testing, regulatory assistance and monitoring;
(b) consulting/engineering - encompassing consulting and engineering services
and educational areas; (c) products; and (d) construction.  In fiscal 1997,
77% of ETSI's total revenues came from the construction operations of ETSW,
20% came from the testing service operations of ETS and ETSAS and 3% came
from the consulting/engineering and products operations of ETS.  In fiscal
1996 and 1995, the following percentages of ETSI's total revenues were
derived from its affiliates' products and services:  Fiscal 1996:  69% from
construction, 29% from testing service and 2% from consulting/engineering and
products.  Fiscal 1995:  67% from construction, 31% from testing service and
2% from consulting/engineering and products.  See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

History

ETSI, a Virginia corporation, was incorporated on February 25, 1987.  On
January 28, 1988, it acquired all of the issued and outstanding common stock
of ETS from John D. McKenna and John C. Mycock (officers and directors of
ETSI) and two others, and the next day completed a public offering pursuant
to the rules of the Vancouver Stock Exchange ("VSE").  On October 29, 1989,
certain sophisticated analytical laboratory equipment of Centec Analytical
Services, Inc. ("Centec"), an analytical laboratory, were purchased by ETSI
and, in 1990, placed in ETSAS.  In 1992, the common stock of ETSI commenced
trading on the Emerging Company Marketplace of the American Stock Exchange;
and ETSI voluntarily delisted its securities from the VSE.

In June, 1994, ETSI exchanged 2,730,000 of its shares of common stock
("Shares of Common Stock") for all the outstanding common stock of Stamie E.
Lyttle Co., Inc., Lyttle Utilities, Inc. and LPS Corp., all of which were
merged into ETSW.  In January, 1995, Environmental Laboratories Incorporated,
an environmental laboratory located in Richmond, Virginia, was merged into
ETSAS, the Company's analytical laboratory subsidiary, in exchange for
183,600 Shares of Common Stock issued to its stockholders; and, in April,
1995, the assets of Air Compliance, Inc. were acquired by ETS, Inc., the
Company's air quality subsidiary, for 113,000 Shares of Common Stock issued
to Air Compliance, Inc.

In February, 1996, ETSI acquired certain assets of Olympic Industries, Inc.,
Pompano Beach, Florida, for 539,130 Shares of Common Stock.  The assets were
placed in a newly-formed corporation, ETSL, which is a wholly-owned
subsidiary of ETSW, and the business just moved to Orlando, Florida.  The
focus of ETSL's business is trenchless rehabilitation of aging sewer lines.  

In April, 1996, ETSI acquired the assets of an environmental laboratory in
Fairfax, Virginia, from Dewberry & Davis in exchange for 65,617 Shares of
Common Stock.  The assets were placed in ETSAS and continue to be operated at
the same location.
<PAGE>

The Subsidiaries

ETS, Inc.

History and Overview

ETS, formed in 1973, has been engaged in designing, manufacturing and
supplying air pollution control systems, with particular emphasis on fabric
filter particulate collectors, providing software and testing services to
industry and utilities and conducting industrial and government contract
research and development.  It also has developed three products designed for
use in the air pollution control industry - the Limestone Emission Control
System, the Baghouse Performance Monitor and the Dry Reactor.  It has
suspended the development of one product, the Reduced Entrainment
Precipitator, until suitable funding can be obtained, of which there is no
guarantee.  In fiscal 1997, ETS's service business generated almost all of
its operating revenues.  Since its acquisition by ETSI in 1988, ETS has
expanded the services it offers, particularly in the fields of air pollution
control, consulting, regulatory assistance, toxic emission testing, asbestos
surveys and fabric filter testing and has developed and sold related systems
and products.  It intends to continue to develop, market and license
proprietary products for the air pollution control industry.  In April, 1995,
ETS expanded its service area to Pennsylvania and New Jersey through the
acquisition of the assets of Air Compliance, Inc., an air pollution control
and toxic emission testing company, located in Feasterville, Pennsylvania. 

Products

The Limestone Emission Control System (the "LEC")

The LEC is an air pollution control system which controls acid gas and
particulate emissions from utility and industrial boilers.  Development of
the LEC began in 1982 and was successfully completed in 1993.  In December
1994, a commercial unit was constructed and is currently in operation.  Since
the close of fiscal 1997, ETS has entered a letter of intent with a Taiwan
firm, contingent upon successful negotiations and posting a performance bond,
to supply three of the Company's Limestone Emission Control Systems, which
will take two years to install and start-up.

In the LEC, hot sulfur dioxide ("SO2") laden flue gas passes through the
cross section of a vertical moving bed of standard quarry limestone ("CaCO3")
gravity fed from a hopper and covered by a thin film of water.  The rate of
flow of the limestone can be adjusted by varying the speed of a screw
conveyor into which the limestone falls.  Sulfur dioxide is absorbed from the
flue gas into the water and subsequently reacts with the limestone to form a
surface layer principally of calcium sulfate ("CaSO2") and calcium sulfite
("CaSO3").  The limestone granules are then reactivated by mild abrasion to
remove the calcium sulfite and calcium sulfate layers.  The particles of
calcium sulfate and calcium sulfite fall through a fine screen, thereby
exposing the active limestone for further reaction.  Gypsum, the waste
product, is the main content of wallboard.

Management believes that the gypsum produced by the LEC will be readily
marketable by utilities or other users as it conforms to commercial
standards.  The recycled limestone, supplemented by a new supply, is then fed
back into the hopper for continued reaction with flue gas.
<PAGE>
Title IV of the Clean Air Act Amendments of 1990 ("CAAA") deals with the
prevention of smokestack pollution causing "acid rain."  It finds that acidic
compounds and their precursors in the atmosphere threaten natural resources,
ecosystems, materials, visibility and public health and that the principal
sources of acid rain are sulfur dioxide and nitrous oxides.  It regulates the
emissions of those substances from fossil fuel fired combustion devices, in
part by permitting companies with low emissions to trade pollution credits
with companies with higher levels.  As a consequence, the LEC, with its
ability to remove 99% sulfur dioxide may be considered attractive in meeting
the SO2 Allowance Program and the ability of companies to trade pollution
credits.

On June 23, 1992, ETS entered into a license agreement with Procedair
Industries, Montreal, Canada, a subsidiary of Stein Heurtey, an industrial
furnace manufacturer and a sister company of Procedair, S.A., a French air
pollution control firm, and EGCI, S.A., a French engineering firm
specializing in combustion, to license the LEC.  The license was extended on
July 1, 1995 for a period of twelve months.  Presently, this agreement has
been extended orally on an "at will" basis.  The license is exclusive in
North America and non-exclusive outside North America.  ETS will receive
royalties at the rate of 8% of sales until a sales level of $8,333,333 is
reached.  Thereafter, until the expiration of the agreement, ETS will receive
royalties of 5% of sales.  ETS is obligated to maintain patents, provide and
make available know-how, provide sufficient information to enable the
licensee to design applications for the system, to make available fully
qualified and competent employees and make available technical information
and sales support at specified levels.  No sales have resulted from this
agreement to date and there is no assurance that any royalties will be
generated.

In February, 1993, ETS entered into a license agreement with U-Tah Industrial
Company, Ltd. ("U-Tah") located in Taipei, Taiwan to market the LEC within
Taiwan, R.O.C.  The five year contract calls for U-Tah to provide ETS an
up-front license fee, followed by 5% royalties on LEC system sales.  In 1993,
ETS opened an office in Taipei, to provide technical support to its
licensees.  In March, 1994, the first commercial sale of the LEC system was
made through U-Tah to Shing Ming Metal Industrial Company, a plant near
Taipei.  The plant is modest in size, but represents, to ETS, an opportunity
to prove the technology on a commercial basis.  The LEC system was made
operational in December, 1994 and has performed pursuant to its
specifications to date.  Management believes that this installation
represents a breakthrough for future sales as it proves the LEC technology in
ability to remove SO2 from smokestack emissions on a commercially viable
basis as well as its reliability and its cost effectiveness.  No sales have
resulted from this agreement to date, and there is no assurance that any
royalties will be generated.  In November 1996, ETS granted a license to E &
C Engineering Corporation for the exclusive right to sell the LEC throughout
Taiwan, R.O.C.  Since the close of fiscal 1997, ETS received a Letter of
Intent from China Steel Corporation, in Taiwan, to supply three LEC systems,
contingent upon successful negotiations and posting a performance bond. 

The Baghouse Performance Monitor (the "BPM") and the Baghouse Performance
Monitor Expert System 

A baghouse, also referred to as a "fabric filter," is essentially a
collection of numerous fabric bags.  Baghouses are the leading method of
collecting particulates from industrial and commercial smokestacks.  Of the
250,000 baghouses presently operating in the United States, ETSI has targeted
the 2,500 largest as its present market.  Each bag works in a fashion similar
<PAGE>
to a vacuum cleaner to trap dust and particulate matter from a gas stream. 
However, as particulates collect on the fabric of each bag, they form a dust
cake which develops increasing resistance to the flow of gas.  Thus, the dust
cake must be periodically removed to maintain system flow stability.  

The BPM, and its associated expert system software (both devices referred to
as the "BPM," unless otherwise noted), collects, organizes, displays and
assists the analysis of all the important parameters of a baghouse emission
control system.  Its primary purpose is to monitor current status and
stability, warn operators of any system instability or developing problems
and prepare an easy to access and use database of operational history for any
necessary troubleshooting.  A BPM can directly monitor the flow and pressure
drop characteristics of many individual bags within an operating baghouse,
thus providing the capability of simultaneous side-by-side evaluations of
alternative fabrics, designs, or operational methods.  To date, the BPM has
been utilized extensively for this purpose in all types of baghouses.

The BPM is manufactured to order from standard components, such as printed
circuit boards and fabricated metal parts which are readily available from
multiple sources.  After purchase, materials and components are inventoried
and some subassemblies are completed in-house.  Upon receipt of an order,
ETSI technicians assemble, calibrate and test the devices prior to shipment
and installation.  ETS's present manufacturing facilities are considered
adequate.

ETS's marketing strategy for the BPM has been to concentrate on the utility
and large industrial baghouse markets which include utilities, industrial
boilers, chemical plants, forest products plants, steel mills, cement plants
and nonferrous mining and smelting operations.  ETS believes that potential
customers in these markets may require a monitoring system.  Bag replacement
costs are relatively high and a small percentage of savings justifies the
purchase of this relatively inexpensive monitor.  In addition, reduced
baghouse capacity may reduce performance of a given customer's production
rates and may result in emissions of unacceptable levels of pollutants and
the closure of the process and/or imposition of monetary penalties.

The first commercial BPM installation was completed in 1983.  Customers have
included chemical plants, steel mills, glass manufacturers, foundries,
industrial coal-fired boilers and utilities.  The BPM has been described in
literature published by the Electric Power Research Institute, Inc. ("EPRI"),
which is distributed to all electric utilities.  The EPRI refers all
inquiries to ETS.  To implement its marketing strategy, ETS has initiated a
direct mail advertising campaign and employs in-house sales personnel.  In
addition, ETS conducts technical seminars and has entered into agreements
with firms in both Mexico and Taiwan for the sale and servicing of the BPM.

ETS believes that strict enforcement of Title IV of the CAAA dealing with
permitting would have a positive impact on sales of the BPM.  At present,
enforcement is lax and sales of the BPM have been sporadic.  Title IV
requires that after the effective date of any permit program relating to
major sources of pollution, it would be unlawful to violate the conditions of
such a permit.  States are required, within three years, to submit a
conforming permit program.  Major sources are those which emit, per year, ten
tons of any hazardous air pollutant or a combination of 25 tons of hazardous
air pollutants.  Title III of the CAAA relating to Air Toxics establishes a
list of 189 substances and compounds which must be considered hazardous air
pollutants and a procedure for review of that list.  Title VII of the CAAA
expands and defines the authority of the individual states to include
enhanced monitoring and requires major source owners to demonstrate
compliance at regular intervals using approved continuous monitoring
technology which the BPM can provide.<PAGE>

The Dry Reactor

The "Dry Reactor" is an air pollution control system designed to control
emission of acid gases, such as hydrochloric acid, sulfur oxides and nitrous
oxides and particulates.  Hot flue gases pass through the Dry Reactor, and
the acid gases and particles are substantially removed before the flue gases
enter the atmosphere.  The Dry Reactor has applications for emission control
in hospital and hazardous waste incinerators and small municipal solid waste
facilities.  Both the LEC and the Dry Reactor use a dry scrubber system to
control acid gas pollutants.  However, the Dry Reactor is a smaller, modular
unit, designed for use in smaller installations, whereas the LEC is targeted
at larger utility and industrial boilers.

The Dry Reactor uses a process called a "dry" scrubber, in contrast to
competing "wet" and "semidry" (sometimes referred to as "half-dry" or
"spraydrying") systems.  In wet and semidry systems, when noxious gases are
brought into contact with alkaline materials, these systems produce liquid
wastes which must be handled with pumping and plumbing systems.  Such waste
often is corrosive, causing scaling, flaking and clogging of the handling
systems and requiring further treatment.  In the Dry Reactor, flue gas is
directed into a chamber where it is mixed with a dry reagent (lime) by the
mechanical action of a rotating plate, known as a "slinger."  The slinger
delivers the lime perpendicularly to the flue gas allowing intimate contact
of the dry reagent and any pollutants in the flue gas.  This contact causes a
reaction which forms a non-acidic compound and removes as much as 90% of
unwanted acid gases.  An internal recirculator, located above the slinger,
increases the contact time, thus enhancing the removal of pollutants.

ETS's only commercially sold Dry Reactor was installed at the Fairfax
Hospital, Fairfax, Virginia in 1987 and was successfully operated until
recently when they discontinued the use of their incinerator.  It has removed
greater than 98% of unwanted acid gases since installation without
degradation or greater than normal maintenance.  In management's opinion,
future sales, if any, of the Dry Reactor will be generated through increasing
enforcement and the imposition of tougher standards of clean air legislation
and regulations.  Specifically, the CAAA institutes a program under which all
subject air pollution sources must obtain an operating permit.  The USEPA is
responsible for issuing regulations and monitoring compliance.  The various
states must develop and implement the programs.  If a state fails to develop
or implement such a permitting program, the USEPA must develop and implement
a federal permit program for that state.  However, until enforcement is
strengthened, ETS does not contemplate substantial sales, if any, of the Dry
Reactor.

In 1992, Gibbson Engineering Company Ltd. ("Gibbson"), located in Taipei,
Taiwan, was granted the exclusive right to market the Dry Reactor throughout
Taiwan, R.O.C.  The agreement provides that Gibbson pay ETS an up-front
license fee followed by a 7% royalty fee on all system components.  No sales
have resulted from the agreement, and there is no assurance that any
royalties will be generated.
<PAGE>

The Reduced Entrainment Precipitator (the "REP")

An electronic precipitator gives dust particles an electric charge which
attracts them out of a gas stream onto the sidewalls of the collector for
subsequent collection and disposal.  However, in standard designs, not all
the dust particles remain captured on the side walls and some become
dislodged by the gas motion and are "re-entrained" in the gas flow.  The REP
prevents reentrainment of dust particles.  The REP uses a conventional
electrostatic precipitator to attract dust particles to a porous fabric
collecting surface.  Since the collection surface is porous, a small portion
of the gas stream containing the dust flows through the pores which ensures
that the dust layers remain attached to the collection surface.  Specified
applications for REP include control of fine particulate emissions from
coal-fired utility boilers and, possibly, fine particulate control in
so-called "clean rooms" in which complex electronic and computer circuits are
produced.

On the basis of the pilot plant test conducted in 1990, management concluded
that the test identified additional design parameters which, if adopted,
would improve performance and that the REP concept can be utilized, when
properly developed, to enhance the collection of fine particulates at lower
cost than existing methods.  ETS has not pursued further testing, does not
intend to fund future development and will require future Government or
private funding to continue development.  As the Company's more mature
technologies, such as the BPM and LEC, neared commercial development, the
Company determined that its financial commitment to products should be
concentrated on commercializing and marketing the BPM and LEC.  Although it
continues to seek outside funding sources, ETS has no current proposals
outstanding for further funding.  In the event the question of commercial
viability is successfully resolved, of which there is no guarantee, ETS
intends to secure a licensee to market the REP of which there is no
guarantee.  Even if commercial viability is established to ETS's
satisfaction, it is unlikely that development will be completed and delivery
of orders will commence in the foreseeable future.

Services

Contract Research and Development.  ETS has performed specific research and
development projects for both government and private industry.  These
projects primarily involve the advancement of air pollution control
technology and have included the design and fabrication of pilot plants to
demonstrate certain air pollution control hardware, operation of equipment
within the pilot plants and long-term testing and monitoring of systems.  ETS
has designed, built, operated and tested pilot plants for coal-fired
industrial boiler systems, refuse-fired boilers, cement kilns and glass
furnaces.  These pilot plants have examined, among other things, control of
fly ash, sulfur dioxide and toxic emissions.

For clients such as Dupont, Celanese, Phillips Fibers, Baltimore Gas &
Electric, Serrine, ARCO and General Electric, ETS has performed studies of
alternative filtration.  Studies have ranged from bench top swatch test
programs to pilot plant evaluations, to full scale tests within operating
baghouses utilizing the BPM analysis tools.  Some programs were designed to
evaluate the usability of new fabric offerings in specific applications,
others to provide evaluation of new fabrics as a viable general fabric filter
candidate and others to select the optimum candidate from a group of possible
fabric alternatives in a specific baghouse.  Except for U.S. Government
sponsored research and development, all research and development contracts
have been performed on behalf of customers.
<PAGE>

Fabric Testing Services.  The fabrics used in baghouses to collect dust must
meet certain requirements as to strength, permeability, pressure resistance,
air flow characteristics and chemical content.  ETS offers quality control
and other fabric testing services to the fabric filtration industry to
determine whether baghouse fabrics meet these standards.

Stack Testing and Other Field Services.  ETS offers analyses of particulate
and gaseous emissions for evaluating the performance of pollution control
devices and statutory compliance.  Customers include both government and
private industry.  Testing has been undertaken at steel plants, cement
factories, quarries, foundries, incinerators, chemical plants and utilities. 
To assist in supplying these services, ETS has five mobile field testing
laboratories for on-site testing and analysis.

Other field services include continuous emission monitor certification,
asbestos surveys, environmental audits, analysis and evaluation of on-line
systems, filter bag analysis of operating systems through on-site and
laboratory examinations, evaluation of bags for use in particulate filtration
systems, new filter media inspection and testing, compliance with emissions
standards, on-site and laboratory particle size analysis and OSHA in-plant
air quality testing.  This service is appropriate for compliance with Title
III of the CAAA involving Air Toxics because compliance requires
sophisticated field and laboratory capability.  Title IV of the 1990 CAAA
requires the annual testing of 2,000 utility continuous emissions systems.
ETS has become a major vendor for this service.

Major clients, on a continuing basis, for ETS's field service activities
include Westinghouse, Philip Morris, DuPont, Air and Water Technologies,
Allied Chemical, Duke Power, Sun Oil Company, Tennessee Valley Authority and
Baltimore Gas & Electric.

Regulatory Assistance.  ETS offers its industrial clients which operate
facilities subject to state and federal environmental regulations
professional assistance in understanding relevant environmental regulations. 
Many environmental regulations are complicated, apply only to certain types
of operations and not to others and change in their scope and content from
time to time.  They are written by technical personnel employed by the
regulatory agencies in order to fulfill legal requirements of the relevant
laws and statutes promulgated thereunder.  ETS staff consists of technically
trained people who maintain a current knowledge of these environmental
regulations and are also familiar with clients' plant operations.  Thus, ETS
can provide clients specific interpretations of regulations and assist in
establishing the most effective route to demonstrate or achieve compliance
with specific requirements.  The CAAA, particularly Title V regulating
permitting, has had a positive effect on demand for ETS's regulatory
assistance services.  ETS does not employ an attorney on a regular basis in
rendering its regulatory assistance services; but has available specialized
counsel on an as-needed basis.  ETS recommends that its clients seek
independent legal counsel to address legal issues, including but not limited
to past noncompliance with environmental regulations.  In addition, ETS often
works with the clients' legal counsel in resolving issues of noncompliance
with federal and state environmental regulations.
<PAGE>
Monitoring.  Federal and state environmental protection agencies are
increasingly requiring self-monitoring by industry. Monitoring activities
involve either direct measurement of pollutants emitted in the stack gases or
measurement of pollutant concentrations in ambient air at or beyond the
plant's fence line.  Both measurements involve the collection of large
quantities of data using sensitive continuous monitoring systems.  ETS
assists in designing, calibrating and auditing the monitoring systems and in
preparing periodic reports and summaries of the data obtained. 

Consulting.  The consulting aspect of ETS's business is diverse.  Included
are expert testimony, pollution control equipment operational problem
solving, review of plant specifications, market analysis recommendations,
license evaluation and acquisition analysis.

Technical Services.  ETS has performed technical and economical evaluations
of existing and proposed air pollution control systems.  It provides air
pollution control system design and on-site services during system erection
and start up.  ETS also provides advice on emission control system design,
specifications, bid evaluation, and air pollution control systems trouble
shooting and maintenance as well as operator training.

Training and Education.  ETS regularly offers several in-depth seminars in
the fields of air pollution control design and regulatory assistance,
incinerator emissions control, fabric filtration and electrostatic
precipitation.  It also has produced a cassette tape seminar.  Although
training and education constitute only a minor portion of ETS's business,
ETSI believes that its involvement in this area allows industry participants
to become familiar with its products and services.  In total, in excess of
1,000 industry representatives have attended ETS seminars since their
inception.  The seminars resulted in numerous clients for other services
offered by ETSI.  ETS has a continuous and comprehensive seminar program
servicing industry and government.  Recent seminars have been conducted in
Canada, Brazil, Egypt, India and Turkey in addition to those held in the
United States.  

Technical Writing.  ETS's technical writing staff is experienced in all areas
of air and water pollution control and is proficient at the art of relating
technical data in a readily understandable manner.  Other capabilities
include research, graphics layout and design and proofreading.  

Literature Searches.  Under contract with both government and industry, ETS
has successfully conducted extensive literature searches in the area of
particulate and sulfur dioxide control.  ETS maintains an extensive and
well-cataloged in-house library and, when required, employs outside library
services.  

It is anticipated that the service business will continue with additional
expansion of revenues from areas such as engineering, field testing and
regulatory assistance.  ETSI intends to continue to explore foreign market
opportunities for ETS's products, particularly in Taiwan, Canada, Brazil,
Korea, Egypt, India and China to focus on marketing the BPM system and more
actively to pursue licensing of the Dry Reactor and Limestone Emission
Control System.  In addition, the stricter enforcement of the CAAA, if it is
implemented, would result in increased activities in both laboratory
analysis, field testing, baghouse monitoring and other aspects of ETS and
ETSAS' business.  There can be no assurance of stricter enforcement of the
CAAA.
<PAGE>

Patents, Licenses And Trademarks

ETS currently holds various U. S. patents and licenses covering certain
aspects of its proprietary products that it considers material to present
sales and further development and marketing of such products.

Features of the Dry Reactor involve a process subject to U. S. Patent No.
4,273,750, expiring in 1998, the rights to which were acquired by ETS in
1982.

ETS is the assignee of U.S. Patent No. 4,663,136, issued to Dale A. Furlong
on May 5, 1987, for an invention which is the process basis of the LEC.  ETS
was also assigned another patent on another apparatus utilized in the sulfur
dioxide and particulate removal process (U.S. Patent No. 4,764,348) which was
issued to Dale A. Furlong on August 10, 1988.  That patent is the basis of
European patents issued to ETS.

ETS owns two additional patents relating to the LEC. Aspects of the LEC are
also covered by U.S. Patent 4,663,136 and European patents based on it.
Management of ETS believes that the patents relating to the LEC will protect
it from infringing use.  On April 29, 1997, ETS was granted U.S. Patent No.
5,624,644 covering the equipment design aspect of the LEC.

ETS holds U.S. Patent No. 4,481,017, issued to Dale A. Furlong and assigned
upon issuance to ETS, covering the combination of the electrostatic
precipitator and fabric filtration technologies used in the REP.  This patent
was issued on November 6, 1984.

ETS holds U.S. Patent No. 4,719,791, which relates to the BPM system and
claims protection for several unique aspects of the system.  This patent was
issued on January 17, 1988 and assigned to ETS. 

ETS has acquired the non-exclusive license to utilize U. S. Patent No.
4,297,113, which provides a method for eliminating the effect of bag failure
on baghouse operations.  ETSI has no specific plans for the use of such
patent.  The license is nonassignable and will lapse upon termination of John
D. McKenna's employment with ETSI.

ETS Analytical Services, Inc.

ETSAS maintains extensive laboratory facilities and modern mostly automated
and computerized equipment to detect other types of environmental
contamination.  It has established a stringent Quality Assurance/Quality
Control ("QA/QC") Program to insure data reliability.  Although at the end of
the 1995 fiscal year, ETSW was a Superfund Contract Laboratory, its status as
a Superfund Laboratory had not been renewed due to lack of funding for the
program.  It continues, however, to receive contracts from the United States
Environmental Protection Agency ("USEPA") and other governmental agencies. 
ETSAS is also a certified laboratory in the states of Virginia and in North
Carolina for water, waste water, soil and hazardous waste analysis.  In
addition to its laboratory operations, ETSAS offers a wide range of field
services, including sampling of water and soil, infield testing and on-site
monitoring, environmental assessment and monitoring programs.  ETSAS owns a
mobile laboratory which provides on-site analysis for trace organic
compounds.  In January, 1995, Environmental Laboratories, Inc., a Richmond
Virginia - based company, founded in 1980, engaged in water, wastewater, soil
and materials analysis, was merged into ETSAS.  This additional operation is
located in the same city as ETSW.  The merger expands the geographic range of
<PAGE>

ETSAS, enables the Richmond operation to bid on larger and more complex
contracts than it could support prior to the merger and facilitates a closer
working relationship with ETSW.  The acquisition of environmental laboratory
assets located in Fairfax, Virginia enhances the ability of ETSAS to bid on
projects in Northern Virginia.  ETSAS has opened a satellite lab in
Chesapeake, Virginia in order to better serve its clients in the Chesapeake-
Norfolk area.

ETSAS's analytical services include obtaining and isolating samples of
industrial and other waste materials including potentially hazardous wastes,
analyzing samples by identifying and quantifying their toxic components,
electronically archiving data and the delivery of analytical data in a
legally defensible manner.  ETSAS's analyses are used by regulatory
authorities, such as the USEPA and the City of Roanoke, Virginia, and site
owners, such as Exxon, Union Carbide and Columbia Gas Transmission, to report
the risks posed by the potential or actual presence or release of hazardous
substances.

ETSAS performs analyses of waste materials to determine the chemical
compounds present, organizes the data obtained and presents a comprehensive
report of this data.  There may be myriad potentially harmful chemical
compounds present in wastes and multiple tests may be required to determine
the levels of contaminants at even a single site.  Results obtained indicate
only the amount of contaminant at the time of the test.  To assess the
probability of future hazards or the degree of correction of the pollutants
also requires several tests at relatively constant intervals.  There is also
the possibility that the hazardous waste may have migrated from its initial
site.  Additional analysis and remedial action away from the original test
site may be required where the migration of hazardous waste is a possibility.

Samples of the material to be tested are taken by either ETSAS's clients or
its own personnel and forwarded to the laboratory for analysis.  ETSAS is
required to establish the authenticity of the test samples and therefore each
container supplied by clients is accompanied by its chain of custody form.  
ETSAS's technical staff utilizes mobile sampling equipment for the sampling
and testing of hazardous waste sites, monitoring wells or industrial
discharges.

Sample Management.  All incoming samples, whether they are shipped via
courier service or dropped off by local customers, are received by this
section and logged into the ETSAS Laboratory Information Management System
("LIMS") which tracks analyses and reports laboratory data.  The ETSAS LIMS
is an internally developed software system that has received wide recognition
from industry and government.  The Sample Custodian is responsible for all
receiving, storaging, and tracking functions.  All samples must be signed out
by laboratory analysts for processing, thus maintaining a complete chain of
custody within ETSAS.

Atomic Spectroscopy ("AS").  The Atomic Spectroscopy section analyzes all
samples requiring elemental analysis by atomic spectroscopy.  Among the
techniques the AS section employs are the following:

Graphite Furnace AAS determines low levels of toxic elements such as arsenic,
selenium, and thallium.  It can detect and quantify levels less than 1 part
per billion.

Cold Vapor Mercury AAS tests for low level mercury analysis (0.2 parts per
billion in water) in a variety of sample types.
<PAGE>
Air Analysis of multi-metal air trains by Microwave Digestion and AAS
techniques.  Analysis of metals and elements by Inductively Coupled Plasma
Emission ("ICP").

Organics. The Organics section provides laboratory services relating to the
detection and measurement of various organic substances in a variety of
sample types, such as groundwater, RCRA sludges, tissue, oils/waste oils, and
others.  Examples of these include pesticide, herbicide, and fungicide
residues such as chlordane, endrin, toxaphene, silvex, and Ethylene Dibromide
("EDB").  ETSI can detect PCBs (polychlorinated biphenyls) in dielectric
fluids, oils, waste oils, wastewater, and soils, performs high pressure
liquid chromatography for the analysis of explosives and other high molecular
compounds, detects total organic halide ("TOX") and purgable organic halide
("POX") in groundwater and other liquid media; total organic carbon ("TOC")
and purgable organic carbon ("POC") in aqueous samples.  It "fingerprints" by
gas chromatography to identify unknowns and finds benzene, toluene,
ethylbenzene, xylenes ("BTEX") in groundwater by gas chromatography and
photoionization detector ("PID").  Finally it performs analyses of trace
organics by gas chromatography and mass spectrometer ("GC/MS") for volatile
organic compounds ("VOA" or "VOC") and semi-volatile organic compounds in
accounts with certain ETA methods.

Inductively Coupled Plasma Laboratory.  ICP laboratory is used for rapid
analysis of metals/elements.  The ICP laboratory is fully automated and
computerized and is capable of analyzing up to 69 elements per sample in
approximately 5 minutes.  Much of the analysis on the USEPA Superfund and
Office of Water contracts is performed on this instrument.  Raw data is
transferred into the ETSAS LIMS for processing and reporting.  The ICP
laboratory uses "SuperScan," a low cost qualitative scan developed by ETSI
for 69 elements per sample.

Gas Chromatograph/Mass Spectrometry ("GC/MS") involves a three-step process. 
First, a test sample is introduced into the gas chromatograph portion of the
system which separates the individual chemical compounds.  The separated
compound then elutes into the mass spectrometer are often subject to multiple
regulatory requirements.

Quality Assurance/Quality Control.  ETSAS maintains an ongoing QA/QC Program
that is designed to give data of the highest documented quality.  The QA/QC
Program is a continuing system of internal and external checks of data
validity.  The entire program is contained in a 150 page manual which is
available to clients upon request.

ETSAS maintains strict quality control in all facets of testing and analysis
to insure accuracy of results.  Internal quality assurance procedures,
formulated within USEPA guidelines, govern how samples and controls are
handled and are monitored daily.  Standards are used to calibrate the
equipment on a daily basis.  Samples are periodically issued by both the
quality control manager and various federal, state and local certifying
licensing agencies, to determine whether test results from samples furnished
by the agencies fall within acceptable limits.

ETS and ETSAS maintain a network of more than 30 computers for sample log-in,
sample tracking, data handling, data reporting and accounting activities. 
The computers are linked together through a Novell Netware System, and many
of the analytical instruments are on-line to this system which allows for
computerized raw data transfer.  Data reporting can therefore be customized
to a clients individual needs, including the reporting of quality assurance. 
The total hard disk data storage capacity of the Novell system exceeds one
gigabyte.
<PAGE>
Significant ETS and ETSAS Contracts

Examples of some significant environmental contracts executed by ETS and
ETSAS are:

Successfully Completed:

USEPA award for the analysis of multimedia, multi-concentration samples for
selected metals for a one year base period and three additional one year
options (total contract value, $770,000), completed 1995;

USEPA award for source testing and method evaluation for stationary source
emissions for a one year base period with a contract value of $637,629 and
two additional one year options (total base contract value in the event the
options are exercised, $2,300,000), completed 1992; USEPA award for chemical
analytical services for multimedia multi- concentration inorganic (maximum
contract value, $663,000), completed 1995;

KVB/Analect - CEMS certification at major power utilities for equipment
vendor; (contract value, $940,000), completed in fiscal 1996;

Inland Steel Company - designing emissions control system for pulverized coal
facility; (contract value, $291,000), completed May, 1996; and

USEPA Office of Water - analysis of industrial discharges across the United
States, (contract value, $160,000), completed September, 1995.

US NAVY - analysis of water discharges from naval vessels, (contract price
$55,000), completed 1997.

Ongoing:

Westinghouse certification and compliance testing of facilities; multi-year
continuous contract started in 1987 (estimated contract value,
$200,000/year);

Pine Bluff Arsenal field services to test control equipment, five year task
order contract, 13 test schedules in a year; started March 1994, one year
with five option years (maximum contract value, $ 150,000 per year);

Title V permit contracts for various industrial clients; 60% completed as of
the end of fiscal 1996; scheduled completion December, 1997 (estimated value,
$150,000);

Gas Compressor Stations - analysis of PCB's from several stations; ongoing
continuous series of analyses without a determined completion date (estimated
contract value, $150,000);

Ironton Iron, subsidiary of Intermet Corporation - various environmental
engineering and emission control system design projects; 85% completed at end
of fiscal 1997 (estimated contract value, $750,000);

USEPA Engineering and Analysis Division - analysis of trace metals and
elements in wastewater, sludges and hazardous wastes; one year with four one
year option period; contract value $1,594,000 if fully exercised; and

USEPA Engineering and Analysis Division - wet chemistry analysis of
wastewaters and sludges from the same sites for cyanides, phenols, fluorides
and other substances; one year with four one year option period; contract
value $1,026,000 if fully exercised; and
<PAGE>
China Steel, Taiwan - Letter of Intent to design and install three LEC
systems to be completed in fiscal 2000 (estimated contract value,
$7,000,000); contingent upon successful negotiations and ETS posting a
performance bond.

See discussion under "Completion of Contracts by Subsidiaries of ETSI" below.

Sales And Marketing

ETS and ETSAS presently market their services through their sales personnel,
and utilize direct mail, trade exhibitions and promotional literature. 
75-90% of their revenues are realized from commercial clients and 10-25% from
the USEPA and other government agencies.  However, this ratio is anticipated
to change as a result of the receipt by ETS and ETSAS of awards of U.S.
Government contracts under the CAAA.  ETS's extensive sponsorship of seminars
and training programs has resulted in recognition and has secured clients. 
ETS is negotiating with major industry partners for the development,
licensing and sale of its products.  ETS has entered into license agreements
for several of its products.  ETS has begun receiving license fees, but there
is no assurance that substantial license fees will be received in the future.

Representative Clients

Clients of ETS and ETSAS represent the following industries: power generation
(utilities), petrochemical, chemical, tobacco, iron and steel, non-ferrous
metals, gas utilities, heavy manufacturing, engineering, government agent
contractors, municipalities and regional and federal government agencies. 
Representative clients are those in the industrial segments to which ETS and
ETSAS supplies services.  Such clients of ETS and ETSAS include: Kentucky
Power Company and Pennsylvania Power & Light (power generation), EXXON
(petrochemical), Dupont and National Paint and Coating (chemical), Philip
Morris (tobacco), Inland Steel (iron and steel), Reynolds Metals (non-ferrous
metals), Columbia Gas (gas utilities), Westinghouse (heavy manufacturing),
Dames & Moore (engineering), Draper Aden (environmental engineering
consulting); Smith Environmental (environmental engineering); Phillips
Environmental (environmental engineering); Ironton Iron (iron foundry); KVB
(government agency contractors), County of Roanoke, City of Richmond
(municipalities) and USEPA (regional and federal government agencies).

Competition

Although the pollution control industry in general is growing rapidly,
competition is intense.  Marketing resources and expertise are increasingly
important to success.  In addition, the pollution control markets are subject
to rapid change.  Unforeseen technological, legislative and business
developments relating to pollution control outside the scope of ETS and
ETSAS' business may have significant adverse effects upon ETS and ETSAS'
business.  Many of ETS and ETSAS' competitors have substantially greater
resources than ETSI, and the size and reputation of many of these companies
may give them a competitive advantage over ETSI.  However, ETSI has
successfully competed for USEPA contracts against large firms such as General
Electric Company and Bechtel Power Corporation.  Likewise, ETSI has won
utility contracts in competition with firms as Research Cottrell, Inc. and
Gilbert Commonwealth Engineering.
<PAGE>
Major competition for the LEC and Dry Reactor markets come from the U.S.,
Japan and Europe.  In the U.S., primary competitors include Babcock and
Wilcox, General Electric Environmental Service and Research Cottrell. 
Foreign competitors include Chiyoda, Hatachi-Zosen, Mitsui and Fuyikasui
Engineering Co. from Japan and Lurgi, Flakt/ABB, Steinmuller, FLS Miljo,
Snamproqette and Tampella from Europe.  Most of these companies offer both
semi-dry and wet systems.  However, it is management's opinion that the LEC
is the lowest cost, most efficient acid gas removal system.

ETSI is aware of at least two companies that are developing smokestack
chemical removal products which reduce nitrous, as well as sulfur, oxides
which are removed by ETS's LEC process.  In management's opinion, the ETSI's
LEC device is smaller, less complex, simpler to operate and easier to
retrofit than one of the competing products and has a lower waste disposal
cost and its waste is nonhazardous compared to the second competing process. 

In the event the REP technology is developed so that a commercial product
results, the REP's competition is expected to come from the major suppliers
of precipitators and baghouses.  The REP, as proposed, has no present direct
competition as no other firm presently offers a combination of electrostatic
and filtration technologies.  However, it may be possible for competitors to
develop technologies to achieve the same end.  

ETS is presently not aware of any competitors offering products directly
competitive with the BPM.

ETS also has competition in every area of its service market.  The stack
testing service market is sensitive to location.  Over one hundred companies
offer such services in the United States.  The top four companies are
believed to be Entropy (North Carolina), Clean Air Engineering (Chicago,
Pittsburgh, St. Louis), Mullins (Texas) and Engineering Science (North
Carolina).  

Fabric testing presents a smaller market, in which location is less
important.  ETS has a well - equipped independent testing laboratory.  The
majority of customers of the fabric testing market is shared by fewer than
six firms, including Filter Lab Services, Environmental Consulting Company
and Grubb Filtration.

Competition for analytical laboratory services comes from local concerns for
regional business.   National and government services require more
sophisticated analytical techniques for which many laboratories lack
equipment and personnel.  The USEPA has indicated that it will institute a
national certification program.  If and when it does, management believes
that many competing firms may leave this aspect of the business.

ETS competes with universities, equipment manufacturers and other consultants
in the area of contract research and development.  ETSI believes that the key
criteria considered by potential purchasers of its services and products are
service and product quality, the quality of support, the consistency of
marketing and promotion programs, the financial stability of ETSI and
pricing. 
<PAGE>

Government Regulation

The USEPA is the principal federal agency responsible for environmental
matters, including the disposal and discharge of hazardous substances.  State
and local governments are involved in implementing environmental programs on
a state and local level.  USEPA, state and local policies can adversely
affect the demand for ETS and ETSAS' services by relaxing regulations
requiring tests, by delaying the effective date of regulations which require
tests and by relaxing its enforcement efforts.  Furthermore, to the extent
that the budgets of administrating agencies are reduced, or funds are not
made available to them, the demand for ETS and ETSAS' services can also be
adversely affected.  Applicable federal legislation includes the Resource
Conservation Recovery Act ("RCRA"), the Clean Water Act, the Safe Drinking
Water Act, the Clean Air Act and amendments, the Toxic Substances Control
Act, the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA"), and the Superfund Amendments and Reauthorization Act of 1986
("SARA"), which authorized the appropriation of $8.5 billion for Superfund
for the five-year period beginning October 17, 1986 and was refunded in 1990
for an additional five years for $5.1 billion.  Funding for SARA was not
renewed at the termination of the extension of the act.  ETSAS suffered some
loss of revenue as a result.  However, the laboratory has diversified into
serving industrial and commercial clients and receives Federal contracts
which were not funded through SARA.

ETSAS generates small quantities of hazardous waste in processing, certain
samples.  Such hazardous waste is segregated in special containers and
disposed of by licensed waste transporters.  ETSAS reserves the right to
return the unused portions of samples received.  ETSAS is also licensed with
the USEPA and the State of Virginia to generate and properly store small
quantities of hazardous waste.  Such waste may not be stored longer than six
months and must be disposed of through a licensed hazardous waste transporter
to an approved treatment/disposal site.  ETSI believes that its operations
have at all times been in compliance with all federal, state and local
environmental laws and regulations.  ETSW, in its remediation projects, often
removes hazardous waste.

ETS and ETSAS' activities and its facilities are subject to regulation under
federal, state and local laws, ordinances and rules and regulations relating
to the environment, environmental quality and occupational health and safety
including RCRA, the federal Occupational Safety and Health Act ("OSHA") and
similar state laws and regulations promulgated thereunder.  In connection
with ETSAS's business of waste analysis and management, ETSAS believes it is
acting in compliance with applicable environmental laws.

ETSI has obtained certifications from all jurisdictions in which it does
business as required to conduct its laboratory testing.  ETSAS is required to
pass proficiency tests and evaluations which are given on a periodic basis to
retain its certification and to participate in contracts under the Superfund
Program.  ETSAS has never failed a proficiency test and believes, but there
can be no assurances, that it will be able to obtain the required
certifications and approvals in all jurisdictions where it plans to do
business in the future.  The inability of ETSI to retain present, or obtain
new, certifications or approvals where required, would adversely affect its
business.
<PAGE>
Markets

ETSI has targeted utilities, industrial boilers and incinerators as the most
likely users of its air pollution control equipment.  Customers for air
pollution control services and equipment include any organizations which
operate a process that emits pollutants.  Examples of potential customers
include industries that utilize burning processes such as coal-fired utility
and industrial boilers, incinerators for hazardous and municipal wastes,
chemical processes such as printing, paint manufacturing, petrochemical
refining and production, pulp and paper making and dust creating processes
such as cement manufacture, mining and grain handling.  In addition,
governmental agencies are purchasers of the products and services of ETSI. 
The utility industry and users of municipal and hazardous waste incinerators
and resource recovery facilities comprise ETS's principal potential
customers.

Customers for analytical laboratory services include local concerns,
government agencies, resource recovery facilities and national companies. 
ETSAS contacts potential clients through advertising, direct mail and
telephone and competitive bid. 

Employees

ETS and ETSAS have a total of approximately 17 management and supervisory, 55
field and technical and 17 administrative employees.  Employees are not
represented by labor unions and relations are considered good.

Insurance

ETSI, for itself and its subsidiaries, ETS and ETSAS, currently carries
general liability insurance with an aggregate limit of $1,000,000, and
automobile liability insurance with $1,000,000 for each occurrence and 
professional liability insurance of $1,000,000.  It also carries excess 
liability insurance of $1,000,000, as well as workers' compensation and 
liability insurance in statutory amounts.  

ETS Water & Waste Management, Inc.

History and Overview

Stamie E. Lyttle Co., Inc. was established by Stamie Lyttle in 1947 as a
partnership originally known as Lyttle & Barnes.  With two employees, it
installed septic systems for new homes.  In succeeding years, it expanded
into other related environmental and construction areas.  Lyttle Utilities,
Inc. was formed in 1982.  Lyttle Utilities, Inc. contracted water and sewer
installations for municipalities, while Stamie E. Lyttle Co., Inc.
concentrated on residential construction.  In 1985, LPS Corp. was formed as a
leasing company for the affiliated companies.  Stamie E. Lyttle Co. Inc.,
Lyttle Utilities, Inc. and LPS Corp. were merged in June, 1994 into ETSW, a
subsidiary of ETSI.  Business previously conducted individually by the three
companies is now conducted by ETSW under the trade name "Stamie E. Lyttle
Company."  ETSW provides infrastructure services to municipalities throughout
the Commonwealth of Virginia, including the state government, encompassing
installation of water, sewer and storm sewer mains, installation of gas lines
and environmental clean-up.  For the private sector, ETSW provides services
to industrial, commercial and residential developers.  Industrial and
commercial services include installation of and disposal of nonhazardous
waste.  Residential services include hookup of development projects to
<PAGE>
municipal water and waste disposal systems. ETSW also operates ETSL under 
the trade name "Pipe-Liner Installers." Pipe-Liner Installers is primarily
involved in the trenchless rehabilitation of sewer and water lines under 
a license from Ultraliner, Inc. ("Ultraliner") covering most of the State 
of Florida.  ETSW also has a license from Ultraliner covering Northern 
Virginia.  ETSW also has agreed to be a licensee with TRS, Limited, Canada, 
for pipe bursting technology for Virginia, Maryland and Florida.

Municipal Activities

Municipalities, particularly in the area surrounding Richmond, Virginia
traditionally serviced by ETSW, have been growing at an annualized rate of
approximately 5%.  This growth has strained the ability of towns and counties
to deliver water to its industrial and residential base and to handle waste. 
In addition, these same municipalities have had to upgrade their decaying and
inefficient water and waste handling systems though construction, remediation
and clean-up.  The process of installing and upgrading water and waste
disposal facilities is continuous because of on-going population and
industrial growth, aging infrastructure and compliance with federal and state
environmental regulations.

In order to bid for municipal water, sewer and storm sewer main contracts,
ETSW must "prequalify" for each job (as in the City of Richmond) or annually
prequalify for each community which it serves.  Prequalification requirements
include a proven track record of successfully completing similar projects,
necessary manpower and equipment to commence and complete the project and
bonding capacity to support the technical and manpower needs.  The bond
required is a "performance and payment bond" issued by a surety company based
on contractor competence and financial backing.  ETSW has successfully
prequalified for every job for which it has bid and is prequalified by all
the municipalities in which it works.

Municipalities and the state governments must, by law, advertise in local
newspapers and public bulletin boards and through the Dodge Report.  The
Dodge Report is distributed weekly to subscribers and contains all material
information on municipal construction projects, including description, scope
of work, requirements for the contractor, estimated amount of bid and
availability of plans and specifications, thus enabling contractors to decide
which projects to pursue and to formulate bids.  ETSW not only bids on the
basis of the specifications contained in the Dodge Report, but is also often
invited by the municipalities themselves to bid on specific projects.  ETSW
selects the projects that it desires to bid based on its computer analyses of
present and future work requirements and its anticipation of profitability of
the project based on the cost of past similar projects.  It then prepares and
submits bids on appropriate projects.  Bidding is generally closed.  Bids are
opened in a public place and the low qualified bidder is awarded the
contract.  In some instances, specifically projects for the City of Richmond,
Virginia and the Commonwealth of Virginia, minority participation is required
to complete the project and is set forth in the requirements and in the bid. 
Because of its size and experience, ETSW has developed an excellent
relationship with qualified minority contractors who ably perform their tasks
as part of the contracting team.  

The municipality notifies the low bidder contract awards in writing, stating
the time frame in which the project must be completed.  If ETSW is the low
bidder, ETSW must submit a profile called the "Critical Path Method" or "CPM"
setting forth the time frame in which it intends to complete the project so
that the designated representative of the municipality can follow the project
as outlined in the CPM.  Projects generally run in phases with progress
billing on a monthly basis until completion.
<PAGE>
Typical Recent Municipal Projects:

City of Richmond, awarded September, 1995, estimated completion in October,
1997 represents construction of a concrete drainage channel and the
reconstruction of a storm drain system and related work.  Total award is
approximately $1,900,000.

York County, awarded June, 1995, involved installation of 16" water;
completed in February, 1996.  Total award was $625,000.

County of Henrico, awarded in August, 1996 is a contract valued at $268,696
to furnish two water lines.  Completion is expected in October, 1996

VDOT, awarded July, 1997, is a contract valued at $1,168,492 for the
installation of water and gas main lines.  Completion is expected by June 30,
1998.  

Commercial Construction

ETSW performs services for developers, corporations and homeowners.  For
residential and commercial developers, ETSW provides the interface between
the developer and the local zoning authorities for site development plan,
sewer and water main hookup and soil conditions.  For commercial and
industrial customers, ETSW provides the technical expertise required to
maintain the plant conditions in an environmentally safe fashion.  For
example, a factory or office building owner often will establish its own
sewer system but will later discover that the installation does not meet the
needs for adequate holding tank capacity.  ETSW, in such a situation, will
design and modify the equipment to meet legal and environment requirements. 
It also maintains such equipment.   

Thus, it can uniquely provide reliable and timely service without the
problems of job overload which afflict smaller competitive firms.  ETSW was
often the original installer of the equipment for the developer and maintains
records of each facility indefinitely and thus knows which equipment was
installed and when so that it can often assess problems before arrival of its
employees on site.

Typical ETSW Commercial Projects

The following is representative of commercial projects undertaken by ETSW:

Stonehouse, Inc., a wholly-owned subsidiary of Chesapeake Corporation,
involved the installation of 36" water line; this contract was the first
phase of a 20-year development project.  The first phase was successfully
completed in March, 1996.  Total contract amount was $770,000.

In December, 1996, ETSW was awarded a major contract with DPR Construction
Corporation for construction of water and sanitary server lines at The White
Oak Semiconductor facility in Henrico County, Virginia for $1,800,000, which
was subsequently increased to $3,600,000 with an expected completion date of
October 1997.

Ultraliner

In February, 1996, ETSI acquired certain assets of Olympic Industries, Inc.,
Pompano Beach, Florida, for 539,130 Shares of Common Stock.  The assets were
placed in a newly-formed corporation, ETSL, a Virginia corporation, and a
wholly-owned subsidiary of ETSW. 
<PAGE>
Through the purchase of these assets, ETSW entered the trenchless
rehabilitation business throughout Florida (except the "Panhandle" area) and
in Northern Virginia.  ETSW believes that the trenchless rehabilitation
market will be a major growth area as the sewer and water lines in most urban
areas throughout the world are wearing out.  Over time, pipes get old and
brittle causing breaks which lead inevitably to water leaks and the seepage
of ground water into the pipes.  In many cases, roots grow into pipes and
entire sections of pipe are frequently missing.  

The traditional method of repairing such pipe is by digging a trench above
the pipe, removing the old pipe and replacing it with new pipe.  The cost and
time spent in avoiding environmental damage is great; and the disruption
caused by digging up the old damaged lines and replacing them can be major. 
Since most older pipe is found in downtown areas, the adverse effects on
traffic, air quality and the creation of ear splitting noise from jack
hammers and earth moving equipment are exacerbated by the surrounding foot
and vehicular traffic.

The "Ultraliner" technology used by ETSW and ETSL is expected to permit
rehabilitation of such lines on a faster, cheaper and cleaner basis without
the necessity of digging trenches.  First, a robotic vehicle with lights and
video cameras traverses the damaged lines to detect blockage, offset joints
or other impediments.  Then, any remedial work is performed within the
existing lines either through a point repair from the surface or through a
remote device.  Installation of Ultraliner requires only one insertion point. 
At the job site, liner which is constructed specifically for the job and
which is folded to fit within the existing sewer or water line is inserted so
that it extends through the damaged length.  The length of each pipe is at
least the distance from manhole to manhole.  Insertion is made with a power
winch and steel cable connected to the end of the liner.  Then, through
application of heat and pressure, the liner expands to fit within the
existing line.  The fit is so tight that it leaves no annular space for
unwanted water migration between the Ultraliner and the old pipe.  The new
smooth interior maintains peak flow and inhibits buildup of foreign material. 
The life of the replacement liner is the same as new pipe.   

ETSL has been awarded a contract with an estimated value of $650,000 by the
City of Fort Lauderdale to install 8" Ultraliner for rehabilitation of old
sewer lines.  Installation under the contract commenced in March, 1996;
estimated completion in September, 1996.  The City of Orlando has awarded ETS
Liner, Inc. a one-year maintenance contract with a value up to $500,000.

In October, 1996, ETSW received over $2.3 millon in new contracts, on which
work commenced in the second quarter of fiscal year 1997.  These contracts
include:  two Ultraliner projects with the County of Henrico which are valued
at a combined total of $455,255 for the installation of 5315 linear feet of
8" Ultraliner PVC alloy TM pipeliner and related repairs and new line work;
additional Ultraliner work totaling $215,000, including a City of Richmond
Demonstration Project; the Little Tomahawk Creek Project awarded by the
County of Chesterfield, Virginia for $989,412 to furnish and install
approximately 15,113 Linear Feet of 24, 21, 18, 16, 15 and 10 inch sanitary
sewer; and orders for installation of new water, sewer and irrigation
projects with a combined value of $715,884.

In July, 1997, ETSL received five contracts totaling close to $1,000,000, of
four of which contracts required the Ultraliner to be used for storm lines
and sanitary sewer repairs in the cities of Ft. Lauderdale, Hollywood and
Orlando, Florida and the Hurlhurt Air Force Base in Cocoa, Florida.  ETSL's
slipliner will be implemented for use in the replacement of sewer lines in
Melbourne, Florida.  
<PAGE>
ETSW has successfully completed two demonstration projects in Virginia.  The
first one was in Fairfax County, Virginia, in November, 1995 of lining 1,438
linear feet of existing eight inch concrete sewer pipe, including
reinstatement of 22 sewer services for existing homes, which was witnessed by
personnel from the engineering community and municipalities from the Richmond
and Northern Virginia areas.  The other project is located in Stafford
County, Virginia involving the lining of 390 linear feet of eight inch sewer
pipe and the reinstatement of five sewer laterals which was completed in
June, 1996.  Although both of these projects were small, they demonstrated
both the effectiveness of the Ultraliner technology and the ability of ETSW
to implement the technology.  During the first part of fiscal 1997, ETSL
encountered some minor technical problems associated with new materials from
the manufacturer, which materials were experimental.  However, with
improvement of the product, ETSL currently believes that the technical
problems have been resolved.  

ETSW Future Plans

ETSW began in the Spring of 1995 and continued in fiscal 1997 to expand the
services it offers into Northern and Western Virginia in the areas of
plumbing, sprinkler irrigation and fencing.  ETSW also has begun to bid for
projects through Virginia and into Maryland and New Jersey.  It plans to
increase its geographical reach through steady and organized growth. 

ETSW has begun to tap the growth of Northern Virginia by providing similar
municipal services there as it does in the Richmond area.  In April, 1994, it
opened an office in Fairfax, Virginia, from which it is bidding on municipal
construction projects.  It was awarded a major contract with the Fairfax
County Water Authority as a subcontractor to Branch Highways which is
presently under construction.  It desires to acquire companies in similar
businesses, although no such acquisition candidates have been located and
there is no assurance that any will be found.  ETSW intends to focus on
commercial construction projects and on projects involving the Ultraliner
technology or other technology-based construction techniques.

ETSW is working with ETS and ETSAS to provide turnkey construction projects
utilizing its construction expertise and ETS's LEC and Dry Reactor
technologies and ETSAS's chemical and water analyses of pollutants.  The
advantage of proposed joint ventures with the other ETSI subsidiaries is that
previously ETS could only offer its technologies on a royalty only basis,
whereas with ETSW it can now offer both the technology and the construction
of devices employing a given technology or clean up of environmental
problems.  Thus, ETS need not market its technologies through contractors,
but directly to end-users, specifically, hospitals for Dry Reactor and
utilities and manufacturing companies for the LEC system.

ETSW Personnel

In fiscal 1997, ETSW had approximately 160 employees, 30 in residential
service, 100 in construction and 30 in supervisory and administration
service.  ETSW employees are not represented by any union.  Management
considers its relationship with its employees to be good.  Some of its
personnel are third generation employees. 

ETSW Insurance

ETSW carries $2,000,000 of general liability, $1,000,000 of product
liability, $1,000,000 per occurrence of bodily injury and automobile and a
$5,000,000 umbrella insurance policy.  ETSW also is covered by a surety bond.
<PAGE>
ETSW Government Regulation

ETSW's activities are regulated by Federal and state statutes.  In general,
Federal statutes are enforced on the state level by the Virginia Department
of Labor and Safety for OSHA safety standards and by the Department of Health
or Department of Public Works for sewer, septic and water systems.  ETSW has
never been cited for a safety violation.

ETSW Competition

ETSW's competition comes from many smaller and narrowly focused companies in
its geographical region.  ETSW's market share of each of its business
activities exceeds 50% in the Richmond, Virginia area.  In the trenchless
sewer and water main rehabilitation business, its major competitor is
Insituform, Inc.  ETSW believes that its technology is superior and that it
can underbid Instituform on projects and still provide adequate margins. 
However, Insituform has been completing projects for municipalities for over
a decade and Ultraliner must first prove itself to municipalities through
successful completion of small contracts before it could be chosen on larger
programs.  Progress in these areas has been achieved in fiscal 1997.

Completion of Contracts by Subsidiaries of ETSI

Most of ETSI's subsidiaries' contracts are of a short-term duration and are
completed within a few months of the order or award.  Certain contracts, such
as those from utilities, are annual and are completed in stages against task
orders.  Government agencies often issue open orders for which task orders
are issued.  There are no conditions precedent to the issuance of task
orders, and they are issued pursuant to the specific orders of the client for
the services.  The Company's backlog consists of contracts and task orders,
already given but not yet completed and does not include open orders which
may or may not result in task orders.  In general, it has been ETSI's
experience over the past three fiscal years that substantially all open
orders ultimately result in task orders.  Task orders have, from time to
time, exceeded the amount of open orders due to needs of the client which
developed subsequent to the contract date.  However, the dates when open
orders result in task orders, subject to the length of the contract and the
possibility that certain open orders will not result in task orders, depends
on both the needs of the client throughout the contract period and, in the
case of federal agencies, the availability of funding.  There can be no
assurance that existing contracts or future contracts containing open orders
will result in task orders covering the entire contractual amounts.  In
addition, ETSI is not aware of any significant unrecognized cost to complete
any open contract. 

Unfavorable weather conditions can cause postponement and delays in executing
contracts, which may adversely affect the profitability of such contracts. 
ETSI's construction activities, in particular, are materially affected by
adverse weather conditions.  

Item 2.     Properties

ETSI occupies approximately 45,000 square feet of office and laboratory space
in a modern commercial building in Roanoke, Virginia, under lease agreements
of its subsidiaries, ETS and ETSAS, effective as of February 1, 1991, which
expire on December 31, 2000, from PDJ Associates, a partnership in which John
D. McKenna, President of ETSI and Roberta Greiner, widow of Gary P. Greiner,
formerly an officer and director of ETSI, are partners.  ETSI believes that
the leases with PDJ Associates are on terms as favorable as those which would
have been available from a non-affiliated third party.
<PAGE>

The analytical capabilities of ETS and ETSAS consist of three entities: a) a
fixed-location state of the art automated and computerized comprehensive
analytical laboratory for the analysis of contaminated air, water and solid
waste samples; b) mobile laboratories which provide the capability for field
analysis of toxic air emissions; and c) a fixed location fabric testing
laboratory which provides specialized filter bag (fabric) testing and
evaluations.  Management believes that the laboratory and office premises are
adequate for ETS and ETSAS' present and anticipated needs.

On June 1, 1994, ETSW entered into a lease of its premises which are owned by
the estate of Stamie E. Lyttle at $10,500 per month for two years.  On June
1, 1997, the lease was renewed for a one-year term with three one-year
renewal options.  11,500 square feet is allocated for office space; 20,000
square feet for warehouse and 10,000 for service and maintenance.  Outside
storage exists for materials storage and for parking of vehicles.  The
premises are located on 13 acres on the south side of Richmond, two miles
from Interstate 95.  ETSW maintains its own fleet of vehicles and equipment. 
The premises and equipment are considered adequate for the needs of ETSW.  In
addition, subsidiaries of ETSI lease regional office and/or laboratory space
in Orlando, Florida, Fairfax, Richmond, Norfolk and Chesapeake, Virginia and
Huntington Valley, Pennsylvania.

Item 3.     Legal Proceedings.

No material legal proceedings are pending to which the Company or any of its
property is subject, nor to the knowledge of the Company are any such legal
proceedings threatened.

Item 4.     Submission of Matters to a Vote of Security Holders. 

None.

Executive Officers and Significant Employees of the Registrant
--------------------------------------------------------------

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on October 24, 1997.  

The names, ages and position of all of the executive officers and significant
employees of ETSI as of May 31, 1997 are listed below with their business
experience for the past five years.  Officers are appointed annually by the
Board of Directors at the meeting of directors immediately following the
Annual Meeting of Shareholders.  There are no family relationships among
these officers, nor any agreement nor any understandings between any officer
and any other person pursuant to which the officer was selected.

John D. McKenna (57 years old) has been President of ETSI since 1988, and
serves as Chief Executive Officer of ETS and ETSAS.  He was President of ETS
from 1978 to 1991 and has been a Director of ETS since its incorporation in
1973.  Dr. McKenna received his B.S. in Chemical Engineering from Manhattan
College in 1961 and undertook graduate studies in mechanical engineering at
the University of Bridgeport in 1962 and 1963.  He received his M.S. in
Chemical Engineering from Newark College of Engineering in 1968 and his
M.B.A. from Rider College in 1974.  In 1991, Dr. McKenna received his Ph.D.
from Walden University, Minneapolis, MN.  Dr. McKenna's expertise in air and 
<PAGE>
water pollution control applications includes economic evaluation
applications, pilot plant and fall scale studies of alternative pollution
control techniques.  He has written a textbook on air pollution technology
and has authored or co-authored 31 publications on the subject of air
pollution control.  On May 1, 1992, Dr. McKenna was chosen by the Centennial
Committee to Select Outstanding Engineering Graduates of Manhattan College
School of Engineering as one of Manhattan College's Outstanding Engineering
Graduates.  He is a member of Tau Beta Pi, the National Honor Society of
Engineering; the National Association of Environmental Professionals; and is
listed in Who's Who in Engineering, Environmental Registry, Finance and
Industry, the World and Science and Engineering.  He is Past Chairman of the
State of Virginia Advisory Board on Air Pollution.

John C. Mycock (58 years old) has been an Officer and Director of ETSI since
1988 and serves as Secretary/Treasurer of ETS and Secretary of ETSAS.  He has
been an Officer and Director of ETS since 1979.  He has had over twenty years
experience in the field of air pollution control.  Mr. Mycock currently is
responsible for all preorder sales and marketing activities of ETS.  He has
been involved in start-up and testing of scrubbers, precipitators and fabric
filters.  His experience has been heavily oriented to utility boiler control
systems for both particulate and sulfur oxide emissions.  He is the author of
a handbook of air pollution control, engineering and technology and the
author or co-author of fifteen publications, primarily on the subject of
fabric filters and baghouses.  Mr. Mycock attended Mercer County Junior
College and Trenton State College.  

Coleman S. Lyttle (44 years old) has served as President of Lyttle since
June, 1994. From 1982 to 1994, he was President of Stamie E. Lyttle Company,
Inc. and Lyttle Utilities, Inc.  From 1975 to 1982, he was Senior Estimator
and Project Manager of Stamie E. Lyttle Company, Inc.  Mr. Lyttle received
his B.S. in Business Administration from Virginia Polytechnic and State
University in 1975.

Navin D. Sheth (51 years old) has served as Executive Vice-President of
Lyttle since June, 1994 and, since May, 1996, also served as Chief Operating
Officer.  From 1972 to May, 1994, he was associated with Stamie E. Lyttle
Company, Inc. in the following capacities:  from 1982 to 1994 - Vice
President-Finance; from 1979 to 1982 - Controller; from 1972 to 1979 -
Operations Analyst.  Mr. Sheth was Assistant Professor, Virginia College,
Lynchburg, Virginia from 1971 to 1972.  He received his B.S. in Chemistry in
1967 from Bombay University and his MBA in 1971 from Atlanta University,
Atlanta, Georgia.

Arthur B. Nunn (45 years old), President of ETS, served as President of Air
Compliance, Inc. until the acquisition of its assets by ETS in April, 1995. 
From 1981 to 1991, he was Vice-President of Scott Environmental Technology,
Inc.; from 1978 to 1981, Department Manager, Environmental Engineering
Division of TRW, Inc.; from 1977 to 1978, Monitoring Engineer for the Fairfax
County Air Pollution Control Board; and from 1976 to 1977, Regional Chemist,
Northern Virginia for the Virginia State Air Pollution Control Board.  Mr.
Nunn served in the Air Force from 1975 to 1976.  His experience in the fields
of air pollution control include consulting, modeling, engineering,
permitting, regulatory development, sampling, analysis and impact evaluation. 
He is the author of numerous articles in the field of air toxics management
and monitoring.  Mr. Nunn received his B.S. in Chemistry from the Virginia
Military Institute in 1975 and his M.S. in Environmental Science from George
Washington University in 1978.  
<PAGE>

David F. Tompkins (49 years old) has been President of ETSAS since its
formation in 1990.  Form 1978 to 1990, he was employed by Centec, for which
he served as President from 1985.  In his positions with ETSAS and,
previously with Centec since 1985, he has been responsible for technical
administration of the Inorganic Analytical section, as well as strategy,
policy and financial planning and control of business operations.  From 1978
to 1985, his responsibilities included technical and administration of the
laboratory operations as well as strategy, policy and financial operations. 
Mr. Tompkins received his B.S. in Geology from Kent State University in 1971,
his B.A. in Chemistry from Kent State University in 1973 and his M.Ad. from
Lynchburg College in 1985.  He holds a patent and was the recipient of an IR
100 Award for 1984 on the PCB Field Test Kit of which he was a co-inventor.

Significant Employees

James B. Quarles (44 years old), Senior Vice President ETSI, was formerly
employed as Chief Executive Officer of ENVIROS, Inc., Seattle, Washington, a
position he held for ten years as founder until the company's recent sale to
a British firm.  Mr. Quarles began his career twenty-five years ago with the
U.S. Navy in Panama and was appointed by former Chief of Naval Operations,
Admiral Elmo Zumwalt, Jr.  After building a solid science and engineering
foundation for the research, development and commercialization of
biotechnology-based pollution control products and services, Quarles expanded
his former organization to include a network of subsidiaries, allowing for
the successful delivery of the systems to the public and private sectors in
the U.S., Mexico, Canada and France.  

James W. Raulston (69 years old), President ETSL, has extensive project
management and broad construction expertise, as well as experience and a keen
interest in the sewer relining and rehabilitation field.  He is a graduate of
Auburn University where he studied both Building Technology and Civil
Engineering.  His foreign experience has included project engineering in
Pakistan and cost engineering management of a $250 million project in West
Africa.  His domestic experience includes executive management of firms
engaged in construction of sewer, water and gas pipeline facilities.  His
career also includes working as an independent consultant in Sewer System
Evaluation Survey work and conducting seminars in Infiltration and Inflow
Management.

Edward D. Handel, Ph.D. (47 years old) has, since 1990, served as Manager,
Regulatory Assistance.  He received his B.A. in Chemistry from Youngstown
(Ohio) State University in 1972 and his Ph.D. in Chemistry from North Dakota
State University in 1977.  From 1981 to 1990, he was employed by Centec where
he was responsible for the technical administration of the Organic Analytical
and research and development section.  From 1979 to 1981, he was an Assistant
Professor at Virginia Polytechnic Institute on the Faculty of Chemistry.  Dr.
Handel directs activities related to environmental permitting, including
performing air dispersion modeling using both measurement and computer
techniques and the establishment of meteorological stations on plant sites
required to collect data for modeling purposes.  Dr. Handel also directs
environmental audits and risk assessments.
<PAGE>

PART II

Item 5.     Market for Registrant's Common Equity an Related Stockholder
            Matters.

      ETSI' s common stock trades on the American Stock Exchange - Emerging
Company Marketplace ("AMEX-ECM") under the symbol "ETS.EC."  The following
table summarizes the market price information for ETSI's Shares on the AMEX-
ECM during fiscal 1996 and 1997.

<TABLE>
<CAPTION>
                                     High         Low
                                     ----         ---
<S>                                <C>         <C>
Year Ended May 31, 1997

      First Quarter                  $1.19       $0.69

      Second Quarter                 $1.00       $0.69

      Third Quarter                  $1.06       $0.63

      Fourth Quarter                 $0.81       $0.50


Year ended May 31, 1996

      First Quarter                  $2.06       $1.50

      Second Quarter                 $1.81       $1.25

      Third Quarter                  $1.56       $1.31

      Fourth Quarter                 $1.38       $0.94


</TABLE>

      As of May 31, 1997, there were approximately 1,600 stockholders of
record of ETSI.

      No dividends have been declared or paid by ETSI and it is anticipated
that, for the foreseeable future that all profits will be reinvested in the
business of ETSI.
<PAGE>
In addition to the registrant's shares of common stock, there were issued and
outstanding as of May 31, 1997 warrants and options to purchase shares of
common stock as follows:
<TABLE>
<CAPTION>
      Number           Type       Exercise         Termination
                                   Price              Date
<S>		   <C>		 <C>	     <C>
       5,000         Warrants      $2.20       December 28, 1999
      10,000         Warrants      $2.20       December 31, 1999
       1,000         Warrants      $2.20       January 3, 2000
      25,000         Warrants      $2.20       January 17, 2000
      10,000         Warrants      $2.20       March 31, 2000
      33,350         Warrants      $1.00       November 27, 2002
     142,858         Warrants      $1.00       February 10, 1999
     142,858         Warrants      $1.00       February 9, 1999
     175,809         Warrants      $1.00       February 23, 1999
   1,000,000         Warrants      $ .76       February 27, 2002
     258,000         Options       $2.35*      November 4, 1997
     350,000         Options       $1.50       July 13, 1998
     100,000         Options       $1.37       July 19, 1998 
      23,200         Options       $1.38       August 20, 1998
      15,000         Options       $1.75       October 28,  1998
     147,200         Options       $1.06       April 11, 1999
     355,000         Options       $1.69       June, 17, 1999
      75,000         Options       $1.81       September 29, 1999
      14,000         Options       $1.88       January 12, 2000
       4,000         Options       $1.88       January 16, 2000
      31,000         Options       $1.75       January 31, 2000
       8,000         Options       $2.06       March 1, 2000
     160,000         Options       $1.75       May 8, 2000
      22,000         Options       $1.68       August 10, 2000
      10,000         Options       $1.06       May 20, 2001
     200,000         Options       $1.06       May 24, 2001
       4,000         Options       $1.00       May 24, 2001
      31,000         Options       $1.00       May 24, 2001
      10,000         Options       $1.00       May 24, 2001
      14,000         Options       $1.00       May 24, 2001
       6,000         Options       $1.00       May 24, 2001
      77,000         Options       $1.00       May 24, 2001
     135,000         Options       $ .75       July 25, 2001
      47,000         Options       $ .75       July 25, 2001
      30,500         Options       $ .75       July 24, 2001
      93,000         Options       $ .75       July 24, 2001
      82,000         Options       $ .75       July 24, 2001
      31,000         Options       $ .75       July 24, 2001
      20,000         Options       $ .75       July 24, 2001
      20,000         Options       $ .75       July 24, 2001
      50,000         Options       $ .75       October 14, 2001
      15,000         Options       $ .75       October 14, 2001
      10,000         Options       $ .75       October 20, 2001
      10,000         Options       $ .75       October 20, 2001
      20,000         Options       $ .75       October 20, 2001
      10,000         Options       $ .75       October 20, 2001
     100,000         Options       $ .75       February 4, 2002
      20,000         Options       $ .75       February 4, 2002
      25,000         Options       $ .75       February 4, 2002
      50,000         Options       $ .75       February 4, 2002
     700,000         Options       $ .75       February 4, 2002
</TABLE>
*Canadian dollars<PAGE>
The table below sets out a summary of all securities of ETSI sold by ETSI
within the past three fiscal years which were not registered under the
Securities Act of 1933.  Securities are shares of common stock of ETSI unless
otherwise indicated.  Price is cash consideration in United States dollars
received by ETSI unless otherwise indicated.

<TABLE>
<CAPTION>

                                        ETS INTERNATIONAL INC. STOCK TRANSACTIONS

  DATE        PURCHASER                                           EXEMPTION                 SHARES        PRICE
  ----        ---------                                           ---------                 ------        -----
 <S>        <C>                                                 <C>                     <C>            <C>
   6/01/94    Stamie E. Lyttle Estate                                                        450,000 
              Coleman S. Lyttle                                                              109,334 
              Navin D. Sheth                                                                 532,208 
              David C. Paulette                                                              532,208 
              Mitchell A. Thomas                                                             124,250 
                Total                                             Statutory Merger         2,730,000     251,613 
   9/27/94    Navin T. Parekh                                     Private Placement           32,680      50,000 
              Francis A. & Christine DeSio                        Private Placement            8,571      12,000 
              Gilbert LeDesma                                     Private Placement            6,428       9,000 
   1/19/95    Steven R. Pond                                                                 200,000 
              Charles W. Albertson                                                             2,000 
              William R. Anderson                                                              2,000             
                Total                                             Merger                     204,000      55,350 
   2/01/95    Ruth H. Zelitch                                     Private Placement           10,000      20,000 
              Eugene M. Downs                                     Private Placement            5,000      10,000 
              Samuel N. Malkind                                   Private Placement            1,000       2,000 
              Dr. Allen Kahn                                      Private Placement           25,000      50,000 
   4/03/95    Air Compliance                                      Asset Purchase             113,000     219,220 
   4/12/95    Euro Securities, Ltd.                               Private Placement           10,000      20,000 
   1/30/96    Olympic Industries                                  Asset Purchase             539,130     775,000 
                - Olympic Industries - 226,087 Shares
                - R. Snyder          - 313,043 Shares
   8/22/96    Watergaard Publishing Conf.                         Services involved            7,500       6,000 
                                                                  with Advertising/Public
                                                                  Relations
   11/22/96   Thomas W. Marmon                                    Payment of Notes Payable   833,333     500,000 
   2/07/97    Dr. Allen Kahn                                      Private Placement          142,858     100,000 
   2/07/97    Jonathan & Salley Kahn                              Private Placement          142,858     100,000 
   2/20/97    Chih-Ting Kuo (Marketing International)             Regulation S/Services       20,000      10,000 
                                                                  for raising capital
   2/24/97    Dr. Allen Kahn                                      Private Placement          175,809     100,000 
   5/21/97    Lionhart Investments                                Regulation S               145,335      50,776 
</TABLE>
<PAGE>
Item 6.     Selected Financial Data

Selected Financial Data as of and for the Years Ended May 31
<TABLE>
<CAPTION>
                                  1997          1996           1995           1994           1993
<S>                        <C>             <C>            <C>           <C>            <C>           
Total Revenue                 $24,125,260     $20,539,261    $19,911,906  $17,090,109   $17,408,201 
Gross Profit                    4,519,763       1,983,500      3,535,181    2,383,846     2,550,313 
Operating
  Income (Loss)                   557,410     (1,638,564)        496,616    (588,525)      (767,711)
Net Income
  (Loss)                          148,435     (1,998,791)        502,666    (701,392)      (865,419)
Total Assets                   12,304,549       9,835,016      9,658,611    7,672,962     6,987,982 
Long-term Debt, net 
  of current portion            1,063,131       1,260,133        867,817    1,002,234       243,667 
Total Stock-
  holders' Equity               3,162,635       1,488,306      3,329,664    2,436,151     2,974,101 

Earnings (Loss) Per Share:

Primary                              $.01         $(0.16)          $0.04      $(0.06)        $(0.07)
Fully Diluted                        $.01         $(0.16)          $0.04      $(0.06)        $(0.07)
</TABLE>

Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations

Forward Looking Statements

      This document contains, and the Company may from time to time publish,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters.  The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements.  In order to comply with the terms of the safe harbor,
the Company notes that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. 
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's business include the following:  (i)
changes in legislative enforcement and direction, (ii) unusually bad weather
conditions, (iii) unanticipated delays in contract execution, and (iv) abrupt
changes in market opportunities.
<PAGE>

Result of Operations

Introduction

      A few relatively large contracts in any one business segment in any
fiscal year can make any  segment generate relatively large revenues in that
year.  Because disproportionate generation of income has occurred
periodically throughout the existence of ETSI, the Company's strategy has
been to offer a variety of services and maintain a flexible staff capable of
executing different tasks. Services are tied to different markets, such as
new pollution control equipment expenditures by industry, government funding
or legislative enforcement.  In addition, ETSI continually markets its
services through brochures, seminars and attendance to trade shows and
conferences and by telemarketing.  ETSI attempts to increase its business in
the aggregate.  As the United States experiences economic and legislative
cycles, the demand for each of the Company's services fluctuates accordingly. 
Likewise economic cycles in countries such as Taiwan and South Korea can
influence the foreign demand for ETSI's products and services.

      On June 1, 1994, ETSI merged with three related Richmond, Virginia
firms, Stamie E. Lyttle Company, Inc., Lyttle Utilities, Inc. And LPS
corporation, and consolidated them into ETSW, a wholly owned subsidiary of
ETSI.  The combination was effected through the issuance of 2,730,000 shares
of ETSI common stock and has been accounted for as a pooling of interest.  On
January 19, 1995, ETSI merged a Richmond, Virginia firm, Environmental
Laboratories, Inc., with its subsidiary, ETSAS, which increased ETSAS size by
about 50% and makes ETSAS the largest environmental contract laboratory in
the state of Virginia.  This combination was effected through the issuance of
183,600 shares of ETSI common stock and has also been accounted for as a
pooling of interests.  On April 3, 1995, ETSI purchased, through the issuance
of 113,000 shares of ETSI common stock, the assets of Air Compliance, Inc., a
Pennsylvania Corporation, and incorporated these assets into the business of
ETS.  On February 5, 1996, ETSI acquired certain assets of Olympic
Industries, Inc. in exchange for 539,130 shares of ETSI's common stock and
incorporated these assets into a new wholly owned subsidiary of ETSW, ETS
Liner, Inc.  On April 18, 1996, ETSI acquired certain laboratory assets of
Dewberry and Davis, Inc. in exchange of 65,617 shares of ETSI's common stock
and incorporated these assets into ETSAS.  These transactions are discussed
further in Note 2 to the audited consolidated financial statements for the
year ended May 31, 1997 (fiscal 1997").  The transactions are anticipated to
broaden the revenues and asset base of ETSI in coming years. The results of
operations for the fiscal years presented include the pooling of interests
transactions as if they had been consummated at the beginning of the earliest
period presented while purchase transactions are reflected since the date of
acquisition.

      ETSI has divided its revenues into four meaningful categories; (a)
services - encompassing field and analytical testing, regulatory assistance
and monitoring; (b) consulting /engineering - encompassing consulting and
engineering services and educational areas; (c) products; and
(d) construction. 
<PAGE>
                 Fiscal Year 1997 Compared to Fiscal Year 1996

      Revenues for fiscal year 1997 were $24,125,260 compared to $20,539,261
for the year ended May 31, 1996 ("fiscal 1996") for a 17% increase.

      Total testing service revenues were $4,733,727 compared to $5,957,008
for fiscal 1996 for a 20% decrease.  Decreases  were experienced in the stack
field testing, regulatory assistance, monitoring, and the laboratory market
areas during fiscal 1997 mainly due to market dynamics.  Intense competition
and reduce pricing played a role in the reduced revenues, however the primary
factor has been the reduction in the quantity of services contracted out by
industrial clients.  This is largely related to significantly relaxed
environmental enforcement in the geographic area serviced by ETS.  Although
revenues during fiscal 1997 were down from fiscal 1996, income was
significantly increased because of cost reductions that were put into place
at the end of fiscal 1996 and increased margins generated from engineering
services. With the expansion of the engineering service, ETS has several long
term projects that will carry throughout all or most of fiscal year 1998
which includes the proposed China Steel LEC design and installation project,
as well as an air pollution control system upgrade design and an installation
program for a medical waste incineration facility.

      Field testing service revenues for fiscal 1997 were $1,905,206 compared
to $2,356,553 for the prior year for a 19% decrease. Competitive pricing
pressures resulted in reduced stack testing whereas the overall customer base
was broad and consisted primarily of private industries. Major customers
included three municipal waste incinerator plants, a petroleum refinery, an
electric utility power plant and the Department of Defense Government Agency. 
Efforts are underway to increase the business base for stack testing services
to compensate the loss of revenue related to the withdrawal of services from
a fortune 500 company from the municipal waste-to-energy business. 

      Regulatory assistance revenues for fiscal 1997 were $175,688 compared
to $534,889 for fiscal 1996.  Due to an overall weakness in the market and a
significant reduction in enforcement of environmental regulations, regulatory
assistance revenues continued to be very soft as was expected.  The market is
extremely flat, with very little opportunity for new work.  Major customers
for fiscal 1997 included a waste-to-energy facility, an electronic testing
equipment manufacturer, a limestone manufacturer, a railroad company and a
paper manufacturer for 56% of the regulatory assistance revenues.

      Revenues for monitoring services were $91,018 compared to $160,914 for
the prior year for a decrease in revenues of 43% which was mainly due to
decrease in services for a printing company.  The single largest customer
included a chemical plant for ongoing services, accounting for 87% of the
monitoring revenues.

      Revenues for analytical laboratory services were $2,561,815 compared to
$2,904,652 for fiscal 1996 for a 12% decrease. The environmental laboratory
market continued to decline during fiscal 1997 and prices continued to fall. 
The winter season decline in remediation activities was extremely severe and
this, coupled with the general market decline, resulted in a reduction in
revenues from the prior year sales. The major source of revenues for fiscal
1997 continue to be sample analysis of contaminated soils and waters at
remediation sites.  No single area of service significantly changed in terms
of relative proportion, and overall revenues were down in comparison to the
prior fiscal year. The major customers continued to be the USEPA Office of
Water, and several well established remediation and environmental  companies.
<PAGE>

      Consulting/engineering revenues, which included the sale of books and
training seminars, for the current year were $665,915 compared to $354,484
for the prior year for a 88% increase.  The consulting portion of these
foregoing revenues were $242,454 compared to $112,033 for fiscal 1996 for an
increase of 116%.  A significant portion of this revenue was derived from
reimbursement of cost expended on contracts with the U.S. Environmental
Protection Agency as a result of the completion of an audit performed on
these contracts.  Revenues for engineering services portion for fiscal 1997
were $353,748 compared to $116,278 for fiscal 1996 for an increase of 204%. 
An increase in sales effort has been placed in the engineering area because
it is believed to be the single most attractive option for increasing sales
to offset the reduction in regulatory assistance and stack testing.  The
single largest customer for engineering services was an iron foundry which
made up 62% of the total engineering revenues.

      In-house projects revenues for fiscal 1997 which consist of sales of
books were $21,219 compared to $38,213 for fiscal 1996.  Seminar revenues
were $48,494 for the current year compared to $87,960 for the prior year. 
The current year seminars included a contract for the development and
performance of an air pollution control technology training  program  in
Brazil  and a stack testing training program for attendees from Singapore.
These seminars represented 70% of the seminar revenues.

      Revenues for products for fiscal 1997 were $64,782 compared to $8,430
for fiscal 1996 for an increase of 668%. This increase include BPM equipment
sold to a bag house supplier for 26% of the total products and a licensing
fee paid by E & C Engineering for licensing agreement associated with the
Limestone Emission Control (LEC) equipment in the amount of $40,000.

      Revenues for construction services for the current year were
$18,660,836 compared to fiscal 1996 revenues of $14,219,339 for a 31%
increase.  The Company showed a substantial increase in revenues and an
increase in income for the current year as a result of an increase in the
construction division with a greater activity in the Richmond, Virginia area
compared to the previous year.  The major customer was DPR Construction,
Inc., the general contractor for the White Oak Semiconductor project.  The
Company expects to replace this work for fiscal 1998 with similar projects. 
The service area revenues remain the same as fiscal 1996 while the irrigation
business was lower than the previous year due to a changed focus from
residential irrigation to commercial irrigation.  The major area of
improvement was the rehabilitation work where the market is getting stronger
and the Company sees the opportunity to increase the overall profit margin.   

      Cost of goods and services were $19,605,497 or 81% of total revenues
for the current year compared to $18,555,761 or 90% of total revenues for the
prior year.  This decrease in cost as a percentage of revenues were due to
1) an effort of cutting cost, 2) an effort to sell contracts that are more
profitable and 3) the reimbursements of approximately $225,000 of cost
expended for engineering service as a result of completion of an audit by EPA
on completed contracts.

      Gross profits for the year were $4,519,763 or 19% of revenues compared
to $1,983,500 or 10% of revenues.  This increase in gross profits reflects
the increase in sales and the lower cost of those sales plus the additional
revenues from the EPA.
<PAGE>
      Selling, general and administrative expenses for fiscal 1997 were
$3,962,353 or 16% of the revenues compared to $3,622,064 or 18% of the fiscal
1996 revenues. This decrease in cost as a percentage of revenues was the
result of controlling cost.

      Interest income from savings on deposit for fiscal 1997 was $20,024
compared to $21,107 for fiscal 1996.  Interest expense for the current year
of $572,829 compared to $392,131 for fiscal 1996.  The increase is due to
interest costs associated with the convertible debentures.  Other income was
$143,830 for fiscal 1997 compared to $10,797 for fiscal 1996 and consisted of
gain on the sale of equipment and scrap. 

      Net income for the current year was $148,435 compared to a loss of
$1,998,791 for fiscal 1996.  In 1997, the construction company experienced a
substantial increase in revenues of $4,441,497 which resulted in net income
of $760,666 which was enough to overcome the substantial loss of $612,231
created by the environmental operations.  In 1996, the construction company
experienced a net loss of $1,370,844 and the environmental operations
experienced a net loss of $627,947.

                 Fiscal Year 1996 Compared To Fiscal Year 1995

      Revenues for fiscal 1996 were $20,539,261 compared to $19,911,906 for
the year ended May 31, 1995 ("fiscal 1995") for a 3% increase.

      Total testing service revenues were $5,957,008 for the current year
compared to 6,122,207 for fiscal 1995 for a 3% decrease.  This decrease was
due to several factors.  The unfavorable weather conditions caused
postponements and delays in executing contracts.  There was also a decline in
bidding opportunities for the testing service area as a number of customers
had budget constraints and the state and federal government still at odds in
the pollution control area led to the delay of awarding and state-up of
government contracts for the analytical laboratory.

      Field testing service revenues were $2,356,553 compared to $2,778,032
for fiscal 1995 for a 15% decrease.  This decrease was due in part to the
decrease in services for a pollution control monitoring system supplier for
stack testing particularly related to continuous emission monitors for
electric utilities which was a major part of the fiscal 1995 field testing
services.  Although the number of contracts serviced in fiscal 1996 were
about the same as the previous year, the dollar amounts of the contracts were
somewhat lower.  Major customers for fiscal 1996 included two electric power
utility plants, an air pollution control product manufacturer and two
municipal waste incinerator plants representing 31% of field testing
services.

      Revenues for analytical laboratory services were $2,904,652 for the
year compared to $2,769,169 for fiscal 1995 for an increase of 5%. 
Commercial revenues were up 10% and included increases in groundwater
monitoring and CERCLA soil remedition activities.  Government revenues were
down 56% for the current year due to the U.S. congressional budget impasse.
This not only caused delays in the incremental funding of existing contracts
but produced delays in awarding several new contracts for which the
laboratory had negotiated a best and final status.  Because of the severe
winter weather the commercial and government projects scheduled during the
third quarter were delayed and re-scheduled up to three months later.
<PAGE>

      Regulatory assistance revenues were $534,889 compared to $490,531 for
an increase of 9% over the fiscal 1995 revenues.  Major customers comprising
59% of the total included a paper manufacturer, a chemical manufacturer, an
iron foundry and a railroad company.  Revenues for monitoring services were
$160,914 for fiscal 1996 compared to $84,475 for fiscal 1995 for an increase
of 91%.  Two customers, a printing company and a chemical plant, accounted
for 93% of the total monitoring service revenues.

      Revenues for consulting/engineering services for fiscal 1996 were
$354,484 compared to $492,490 for fiscal 1995 for a 28% decrease.  Consulting
services revenues were $112,033 which was an increase of 58% over the prior
years' revenues of $70,761 with major customers being a government contractor
consultant and research firm for 54% and an electric utility plant for 27% of 
the total consulting revenues.  The increase was due largely to the increased
services for the same government contractor over fiscal 1995.  Revenues for
engineering were $116,278 for fiscal 1996 compared to $349,395 for fiscal
1995 for a 67% decrease.  Major customers for the current year consisted of
two steel manufacturers for 89% of the total engineering.  The decrease in
revenues was due to a decrease in services from fiscal 1995 for one of these
steel manufacturers.

      Revenues for in-house projects which consist of sale of books were
$38,213 compared to $17,916 for fiscal 1995 for an increase of 113%. 
Additional tutorials have been added to the line of books.  To educate the
public on the availability of our books, promotional material is being
included with the seminar materials and some promotional mailings are been
made. Seminar revenues were $87,960 compared to $54,418 a year ago for a 62%
increase.  The current year included revenues from a seminar sponsored by the
United States Agency for International Development (USAID) for an Air
Pollution Control Technologies course which commenced in the third quarter
and provided 76% of fiscal 1996 seminar revenues and the increase for the
year.

      Product revenues were $8,430 for fiscal 1996 compared to $17,737 for a
decrease of 52% and included both the Baghouse Performance Monitoring (BPM)
hardware and software products.  Anew clear air regulation includes a section
that will require baghouse operators to provide more exact monitoring with a
record of the problems and the corrective actions taken.  ETS has proposed to
the Environmental Protection Agency (EPA) that the BPM be considered as an
acceptable protocol for logging and monitoring this information.

      Construction revenues for fiscal 1996 were $14,219,339 compared to
$13,279,472 for fiscal 1995 for a 7% increase.  The current year experienced
growth in some areas of business while some areas showed a decline in the
sales.  Construction activities in general were slow due to higher interest
rate and a severe winter.  Irrigation showed a significant growth and this
growth pattern is expected to continue in fiscal 1997.  However, the utility
and septic construction experienced a decline in overall activities in terms
of sales and bidding.  Fortunately, toward the end of year, both of these
areas showed improvements in bidding inquiries which will result in sales
growth for the future. Even with the increase in sales for fiscal 1996, the
construction business had a large loss for the year. The nature and cost of
projects during the fiscal 1996 were heavily weighted toward materials rather
than labor and equipment components.  The local area economy was slow and
market competitive pressures kept prices of projects at lower levels thereby
further reducing gross profit margins.  Adverse weather conditions brought
construction to a standstill during the third quarter and the first part of
fourth quarter, thereby delaying work until late fourth quarter of fiscal
1996.
<PAGE>
      Cost of goods and services for fiscal 1996 were $18,555,761 or 90% of
revenues compared to $16,376,725 or 82% of revenues during fiscal 1995.  This
increase was attributed to price erosions due to competitive pricing
resulting in higher cost in executing the work, the delays experienced with
the unfavorable weather conditions and the nature and cost of projects
heavily weighted toward materials rather than labor and equipment.

      With a 3% increase in revenues and an increase of 13% in the cost of
goods and services, the gross profit for the year ended at $1,983,500 or 10%
of revenues for the current year compared to a gross profit of $3,535,181 or
18% of revenues for fiscal 1995.

      Selling, general and administrative expenses for the current year were
$3,622,064 or 18% of revenues compared to $3,038,565 or 15% of revenues for
fiscal 1995. The increase is the result of additional legal expense and added
facilities relating to acquisitions and an overall general increase in office
operations.

      Interest income from savings on deposit for fiscal 1996 was $21,107
compared to $26,610 for fiscal 1995.  Interest expense representing the
interest for utilization of the credit line and interest paid in financing of
capital equipment was $392,131 for the current year compared to $348,870 for
fiscal 1995.  Other income representing the sale of miscellaneous scrap
materials was $10,797 compared to $22,266 for fiscal 1995.

      Net loss for fiscal 1996 was $1,998,791 compared to net income of
$502,666 for fiscal 1995.  The current year loss was a result of several
factors.  All the subsidiaries were affected by the unfavorable weather
conditions causing delay, a decline in bidding opportunities due to budget
constraints of customers, competition pressure keeping margins low, and the
state and federal government still at odds delaying awarding of contracts.

      Liquidity And Capital Resources As Of The end of Fiscal Year 1997 

      During fiscal 1997, the Company issued $160,881 of common stock and
options for services ($131,440 in prepaid expenses at May 31, 1997).  As of
May 31, 1997, there were 3,382,900 stock options outstanding to employees,
directors and consultants with expiration dates of November 4, 1997 through
February 4, 2002 and 1,545,875 outstanding warrants to various persons with
expiration dates of December 28, 1999 through February 27, 2002.

      In the second quarter of fiscal 1997, the Company sold shares of its
common stock, no par value, to Thomas W. Marmon, a member of the Company's
Board of Directors, in connection with the conversion by Mr. Marmon of
$500,000 of ETS debt securities.  The sale was made pursuant to a private
placement under Section 4(2) of the Securities Act of 1933, and the shares
acquired are deemed "restricted securities" subject to the holding period and
other requirements of Rule 144 under the Securities Act.
 
      In the third quarter, the Company's bank line of credit was replaced
with a secured note of up to $2,500,000.  The initial advance under the note
was $2,000,000.  The note which establishes the facility calls for a fixed
monthly interest of $25,000 over a two year term, subject to call by the
holder upon 60 days notice and is secured by the assets of the Company and it
subsidiaries.  The $2,000,000 was used to payoff the bank credit line, a note
with a bank and a note due Mr. Thomas W. Marmon, a member of the Company's
Board of Directors.  The $25,000 fixed interest is equivalent to a 15% annual
interest rate.  The Company may repay the note at any time without penalty
<PAGE>
upon 60 days notice and the lender may call the note at any time upon 60 days
notice.  The Company may borrow an additional $500,000 at the lender's
discretion upon review of the Company's financial condition and the value of
the collateral.  The credit facility is provided by a trust for the benefit
of an ETSI investor and director, Thomas W. Marmon. 

      Pursuant to a Regulation S Convertible Debentures Purchase Agreement
dated as of February 28, 1997, and a Regulation S Warrants Purchase Agreement
dated as of February 28, 1997, the Company placed $750,000 of its 7%
Convertible Debentures due February 27, 2002 and issued warrants to purchase
1,000,000 shares of the Company's common stock, no par value.  The debentures
are convertible into the Company's common stock at the lower of $.76 or 65
percent of the average closing bid price of the common stock for the five
trading days immediately preceding the conversion date. The offering was made
under the Securities registration set forth in Regulation S under the 1933
Act to a foreign institutional investor and/or agents associated with the
transaction.  The holder of the Debentures is entitled to convert the
Debentures initially issued to such holder beginning forty-five days after
the closing date into that number of fully paid and nonassessable shares of
the Company's common stock.

      Major components of cash flow used in operating activities included an
increase in accounts receivable of $1,235,534, an increase in costs and
estimated earnings in excess of billings on uncompleted contracts of $447,606
and an increase in amortization of deferred gain on sale/leaseback of
$304,308 which was offset by depreciation and amortization and increase in
accounts payable resulting in  net cash used in operating activities of
$1,064,865. Net cash used in investing activities of $995,928 included
purchases of property, plant and equipment of $820,374. Net cash provided by
financing activities included the following major components:  notes payable
to stockholder of $1,900,000, proceeds from convertible debentures of
$750,000,  proceeds from long-term debt of $507,382 and proceeds from
issuance of common stock of $304,993 which was  offset by decrease in notes
payable to banks and payments on long-term debt resulting in net cash
provided of $2,033,814.  Net cash and cash equivalents at May 31, 1997 was
$94,734 compared to $121,713 at May 31, 1996.

      The Company had net income of $148,435 from operations in 1997, a
substantial improvement from a loss of $1,998,791 in 1996.  The Company
currently anticipates continued profitable operations in 1998.  At May 31,
1997, the Company had current assets of $7,814,274 and current liabilities of
$6,955,871.  Subsequent to May 31, 1997, the Company obtained $500,000 of
loans with a one-year maturity for working capital purposes and a commitment
for financing with a one-year maturity for $426,250.  The Company has
earmarked these funds to pay off the debt of $426,250 to repurchase 269,565
shares of common stock under a repurchase agreement.  The Company has
received a proposal from an asset based lender outlining parameters for
proposed financing of up to $5,000,000 to enable the Company to pay off
certain existing debt and to provide future working capital.  The proposal is
not a commitment to fund and any funding is subject to final negotiations,
execution and delivery of legal documentation in form and substance
satisfactory to the lender and its legal counsel, completion of the lender's
due diligence, meeting required terms outlined in the proposal, and
documentation including provisions customary to asset based lending.  The
Company has a letter of understanding based upon the Company's receipt of a
future contract that $600,000 of funds will be provided through an offering
of Regulation S 7% preferred stock and the Company will grant warrants to
<PAGE>
purchase 750,000 shares of its common stock, no par value, for $.80 per share
for a period of three years.  In addition, as part of the letter of
understanding the 1,000,000 of warrants for common stock issued with the 7%
convertible debentures will have a strike price of $.50.  As stated above the
proposal for additional debt financing of up to $5,000,000 is subject to a
number of future conditions the Company will need to comply with to
successfully complete the financing.  The letter of understanding relating to
the $600,000 of equity financing is subject to the Company receiving the
China Steel LEC contract.  There can be no assurance that such conditions
will be satisfied or that such financing will be obtained.  

      Stockholders' equity has increased to $3,162,635 in 1997 from
$1,488,306 in 1996.  This increase has resulted from net income of $148,435,
proceeds from sale of stock of $304,989, issuance of common stock for
services of $160,881, conversion of debt to stock of $550,776, issuance of
warrants of $173,334 and discount on issuance of convertible debentures of
$410,914.  Repurchase of common stock amounted to $75,000.

      Backlog at May 31, 1997 was $7,983,921 compared to $6,844,851 at May
31, 1996. ETS  and ETSAS held open orders from various clients, including
commercial clients as well as federal and state government agencies. If all
the work under these open orders is authorized, the Company estimates that
its backlog would increase by $662,966 to a total of $8,646,887 compared to
open orders at May 31, 1996 of $1,181,866 to a total backlog of $8,026,717. 
This increase in total backlog reflects increase in the construction and
rehabilitation areas of the construction company.    

      Most of ETSI's contracts are of short-term duration and are completed
within a few months of the order or award.  Certain contracts such as those
from utilities  are annual and are completed in stages against task orders. 
Government agencies often issue open orders for which subsequent task orders
are issued.  There are no conditions precedent to the issuance of task orders
and they are issued pursuant to the specific orders of the client for the
services.  Experience shows that substantially all open orders ultimately
result in task orders and at times have exceeded the amount of the open
order.  There can be no assurance that existing contracts or future contracts
containing open orders will result in task orders covering the entire
contractual amounts.  ETSI is not aware of any significant unrecognized cost
to complete any open contract.

      New orders received for fiscal 1997 amount to $24,919,489.  Since the
close of the fiscal year, ETS was selected by China Steel in Taiwan to supply
three of the Company's LEC systems for a value of approximately $7,000,000. 
In fiscal 1997, ETSI consummated a license agreement with E & C Engineering,
a subsidiary of one of Taiwan's largest and most prominent engineering firms. 
They provide full range engineering and construction services to utility and
industrial power users throughout Asia. This agreement enables E & C to
exclusively market and supply the LEC to those end-users in Taiwan.  ETSW,
since the close of the fiscal year, received two major contracts for
installing water mains.  One from the Virginia Department of Transportation
totaling $1,168,492 and one from the City of Petersburg in the amount of
$635,000.   

      Preliminary proposals for the LEC have also been submitted in Poland,
Czech Republic and India.  LEC licensing activities continue in Korea and
separate confidentiality agreements have been signed with Jindo and Hyundai
Heavy Industries.  A letter of intent from Hyundai is expected in September,
1997 and a memorandum of understanding with Jindo for ETSI air pollution
<PAGE>
control services is anticipated during fiscal 1998.  Marketing efforts for
ETSI air pollution control products and services continue in the Pacific Rim,
Asia, Eastern Europe and Mexico.  Similar activities are scheduled for Brazil
and other select South American countries in fiscal 1998. 

                        Recent Accounting Developments

      Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 Earnings Per Share, Statement of
Financial Accounting Standards No. 129 Disclosure of Information about
Capital Disclosure, Statement of Financial Accounting Standards No. 130
Reporting Comprehensive Income, and Statement of Financial Accounting
Standards No. 131 Disclosures about Segments of an Enterprise and Related
Information.  These statements are effective for fiscal years beginning after
December 15, 1997.  The Company does not anticipate the adoption of these
statements to have a material effect on its financial position or it results
of operations.


Item 8.     Financial Statements and Supplementary Data.

            See Financial Statements starting on page F-1 for this
            information.

Item 9.     Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure.

            No disagreements exist with respect to accounting and financial
            disclosure.

Part III

Item 10.    Directors and Executive Officers of the Registrant. 

For information with respect to the executive officers and significant
employees of the registrant, see "Executive Officers and Significant
Employees of the Registrant" at the end of Part I of this Report.  For
information with respect to the directors of the registrant, see "Election of
Directors" in the Proxy Statement for the Annual Meeting of Shareholders to
be held on October 24, 1997, which is incorporated herein by reference. 
Information with respect to Section 16 compliance is incorporated herein by
reference to "Section 16(a) Beneficial Ownership Compliance" in the Proxy
Statement for the Annual Meeting of Shareholders to be held on October 24,
1997.  

Item 11.    Executive Compensation.

The information set forth under the caption "Executive Compensation" of the
Proxy Statement for the Annual Meeting of Shareholders to be held on October
24, 1997, is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management.

The information pertaining to stockholders beneficially owning more than 5%
of registrant's common stock and the security ownership of management, which
is included in registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on October 24, 1997 under the headings "Voting
Securities" and "Election of Directors," is incorporated herein by reference.

<PAGE>
Item 13.    Certain Relationships and Related Transactions.

For information with respect to certain transactions with directors of the
registrant, see "Transactions with Management" in the Proxy Statement for the
Annual Meeting of Shareholders to be held on October 24, 1997, which is
incorporated herein by reference.  

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)   Documents filed as part of this Annual Report on Form 10-K:

      (1)   Financial Statements.

See "Index to Consolidated Financial Statements" on page F-Index herein.

      (2)   Financial Statement Schedules Required to be Filed by Item 8 on
this Form.
            None.

      (3)   Exhibits

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

      3 (a)             Articles of Incorporation as amended (incorporated by
                        reference to Exhibit 3(a) to the Registration
                        Statement on Form S-18 filed 9-18-97 File No. 33-
                        17326 (the "Registration Statement"))

      3 (b)             Articles of Amendment to the Articles of
                        Incorporation dated as of December 24, 1996

      3 (c)             Restated By-Laws (incorporated by reference to
                        Exhibit 3(d) to the Registration Statement on Form
                        10, filed 11-22-91, File Number 0-19678 ("Form 10"))

      4 (a)             Stock Certificate (incorporated by reference to
                        Exhibit 4(b) to the Registration Statement on Form
                        S-18 filed 9-18-87 File No. 33-17326)

      10 (a)            Lease between ETS, Inc. and PDJ Associates re:  1401
                        Municipal Road, NW, Roanoke, VA 24012 (incorporated
                        by reference to Exhibit 28(y) to the Form 10)

      10 (b)            Lease between ETS Analytical Services, Inc. and PDJ
                        Associates re: 1401 Municipal Road, NW, Roanoke, VA
                        24012 (incorporated by reference to Exhibit 28(z) to
                        the Form 10)

      10 (c)            Lease between ETS Water and Waste Management, Inc.
                        and the Estate of Stamie E. Lyttle (incorporated by
                        reference Exhibit 10(g) of the Company's Form 10-K
                        filed for the fiscal year ending 1996 (the "1996 Form
                        10-K))

      10 (d)            U.S. Patent No. 4,481,017 and assignment to ETS, Inc.
                        (incorporated by reference to the Registration
                        Statement on Form S-18 filed 9-18-87 File No. 33-
                        17326)
<PAGE>
      10 (e)            U.S. Patent No. 4,273,750 (incorporated by reference
                        to the Registration Statement on Form S-18 filed 9-
                        18-87 File No. 33-17326)

      10 (f)            U.S. Patent No. 4,2663,136 and assignment to ETS,
                        Inc. (incorporated by reference to the Registration
                        Statement on Form S-18 filed 9-18-87 File No. 33-
                        17326)

      10 (g)            License Agreement with Addenda, between ETS, Inc. and
                        Louis Theodore, for U.S. Patent No. 4,297,113
                        (incorporated by reference to the Registration
                        Statement on Form S-18 filed 9-18-87 File No. 33-
                        17326)

      10 (h)            U. S. Patent No. 4,719,791 (incorporated by reference
                        to Post Effective Amendment No. 1 to Registration
                        Statement on Form S-18 filed November 4, 1987 File
                        No. 33-17326)

      10 (i)            U. S. Patent No. 4,764,348 (incorporated by reference
                        to Post Effective Amendment No. 1 to Registration
                        Statement on Form S-18 filed November 4, 1987 File
                        No. 33-17326)

      10 (j)            Employment Agreement dated as of April 3, 1995,
                        between ETS, Inc. and Arthur B. Nunn

      10 (k)            Contract License Agreement dated September 14, 1995,
                        between Uniliner, Inc. and ETS Water and Waste
                        Management, Inc.

      10 (l)            Contract License Agreement dated July 12, 1995,
                        between Ultraliner, Inc. and Richard H. Snyder

      10 (m)            Agreement to Transfer License dated February 5, 1996,
                        among Olympic Industries, Inc., Richard H. Snyder,
                        ETS Liner, Inc. and Ultraliner, Inc.

      10 (n)            Repurchase Agreement dated February 5, 1996, among
                        Olympic Industries, Inc., Richard H. Snyder and ETS
                        International, Inc.

      10 (o)            Contract dated as of January 13, 1997 between DPR
                        Construction Corporation, Stamie E. Lyttle Co. (ETS
                        Liner, Inc.) and White Oak Semiconductor

      10 (p)            Purchase order dated as of November 18, 1996 from
                        Chesterfield County to Stamie E. Lyttle Co.  Inc.
                        (ETS Liner, Inc.)

      10 (q)            Promissory Note dated March 17, 1997 from ETS
                        International, Inc. to Thomas W. Marmon as trustee of
                        the Thomas W. Marmon Trust in the original face
                        amount of $2,500,000
<PAGE>
      10 (r)            Guaranty Agreement dated as of March 17, 1997 by ETS
                        Water and Waste Management, Inc., ETS Analytical
                        Services, Inc., ETS, Inc. and ETS Liner, Inc. in
                        favor of Thomas W. Marmon, Trustee of the Thomas W.
                        Marmon Trust

      10 (s)            License Agreement dated as of November, 1996 by and
                        between E & C Engineering Corporation and ETS
                        International, Inc.

      10 (t)            Letter of Intent dated as of July 8, 1997 by and
                        between China Steel Corporation and ETS
                        International, Inc.

      27                Financial Data Schedule

      (b)               Reports on Form 8-K

                        Current Report on Form 8-K dated February 28, 1997,
                        filed with the Commission on March 13, 1997, relating
                        to the sale under Regulation S of convertible
                        debentures and warrants
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

May 31, 1997

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

                                                                Page

Independent Auditors' Report                                    F-1

Consolidated Balance Sheets as of May 31, 1997 and 1996         F-2 and F-3

Consolidated Statements of Income (Loss) - Years Ended May 31, 
      1997, 1996 and 1995                                       F-4

Consolidated Statements of Stockholders' Equity - Years Ended
      May 31, 1997, 1996 and 1995                               F-5

Consolidated Statements of Cash Flows - Years Ended May 31,
      1997, 1996 and 1995                                       F-6 and F-7

Notes to Consolidated Financial Statements - May 31, 1997, 1996
      and 1995                                                  F-8 to F-22

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







                                   F-Index
<PAGE>

Independent Auditors' Report 



The Board of Directors and Stockholders
ETS International, Inc. and subsidiaries:


We have audited the accompanying consolidated balance sheets of ETS
International, Inc. and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated statements of income (loss), stockholders' equity and
cash flows for each of the years in the three-year period ended May 31, 1997. 
These consolidated financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ETS
International, Inc. and subsidiaries as of May 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1997, in conformity with generally accepted
accounting principles.


                                   KPMG Peat Marwick LLP


August 4, 1997


                                     F-1
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

May 31, 1997 and 1996
========================================================================================

Assets                                                          1997             1996
----------------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Current assets:
   Cash and cash equivalents                            $     94,734          121,713
   Accounts receivable:
      Trade (net of allowance of $119,424 in 1997 and
         $95,100 in 1996)                                  4,809,128        3,749,040
      U.S. Government agencies                                79,661           48,299
      Other                                                  151,341           82,564
----------------------------------------------------------------------------------------
                                                           5,040,130        3,879,903

   Costs and estimated earnings in excess of billings on
      uncompleted contracts                                1,325,954          878,348
   Notes receivable from officers                             64,694           65,222
   Inventories                                               771,788          550,728
   Prepaid expenses                                          516,974          225,943
----------------------------------------------------------------------------------------
Total current assets                                       7,814,274        5,721,857

Property, plant and equipment:
   Furniture and fixtures                                    984,463          943,685
   Laboratory equipment                                    2,829,277        2,651,970
   Tools and equipment                                     3,138,372        2,773,615
   Vehicles                                                1,845,518        1,539,868
   Leasehold improvements                                    788,051          757,555
----------------------------------------------------------------------------------------
                                                           9,585,681        8,666,693
   Less accumulated depreciation and amortization          6,505,254        5,753,152
----------------------------------------------------------------------------------------
Property, plant and equipment, net                         3,080,427        2,913,541

Other assets:
   Goodwill (net of accumulated amortization of $28,091
      in 1997 and $11,048 in 1996)                           227,155          244,198
   Notes receivable from officers                            344,152          326,577
   Prepublication costs (net of accumulated amortization
      of $322,646 in 1997 and $296,008 in 1996)              208,890          129,615
   Cash surrender value of life insurance, net               142,728          116,283
   Patents granted (net of accumulated amortization of
      $33,190 in 1997 and $26,319 in 1996)                    77,546           74,107
   Patents pending                                            65,905           21,870
   Other                                                     343,472          286,968
----------------------------------------------------------------------------------------
                                                           1,409,848        1,199,618
----------------------------------------------------------------------------------------
                                                        $ 12,304,549        9,835,016
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
                                           F-2<PAGE>
<TABLE>
<CAPTION>
========================================================================================
Liabilities and Stockholders' Equity                           1997             1996
----------------------------------------------------------------------------------------

<S>                                                     <C>             <C>
Current liabilities:                                                
   Bank overdraft                                      $     44,560            8,746 
   Notes payable to banks                                    89,837        1,071,427 
   Note payable to stockholder                            2,000,000                - 
   Notes payable to affiliates                              289,159          348,625 
   Current portion of long-term debt                        493,012          378,779 
   Accounts payable                                       3,198,194        2,837,386 
   Accrued expenses and other liabilities                   431,467          626,894 
   Common stock to be repurchased (including 
      interest of $22,142), 269,565 shares;
      issued and outstanding                                409,642                - 
----------------------------------------------------------------------------------------
Total current liabilities                                 6,955,871        5,271,857 

Long-term debt                                              861,673          660,133 
Note payable to stockholder                                       -          600,000 
Notes payable to affiliates                                 201,458                - 
Deferred gain on sale/leaseback                             735,412        1,039,720 
-----------------------------------------------------------------------------------------

Total liabilities                                         8,754,414        7,571,710 
-----------------------------------------------------------------------------------------

Common stock subject to repurchase agreement,
   269,565 shares; issued and outstanding                   387,500          775,000 

Stockholders' equity:
   Preferred stock, no par value; authorized
      5,000,000 shares; none issued and outstanding               -                - 
   Common stock, no par value; authorized 
      30,000,000 shares; issued and outstanding
      14,215,823 and 12,580,733 at May 31,
      1997 and 1996, respectively                         5,002,129        3,476,235 
   Retained earnings (accumulated deficit)               (1,839,494)      (1,987,929)
----------------------------------------------------------------------------------------
Total stockholders' equity                                3,162,635        1,488,306 






Commitments and contingencies
----------------------------------------------------------------------------------------

                                                       $ 12,304,549        9,835,016 
========================================================================================
</TABLE>
                                     F-3
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Loss)

Years Ended May 31, 1997, 1996 and 1995
========================================================================================

                                                      1997         1996          1995
----------------------------------------------------------------------------------------

<S>                                         <C>            <C>           <C>
Contract revenues:
   U.S. Government agencies                  $    480,080       487,257       520,037 
   Commercial                                  23,645,180    20,052,004    19,391,869 
----------------------------------------------------------------------------------------
                                               24,125,260    20,539,261    19,911,906 

Cost of goods and services                     19,605,497    18,555,761    16,376,725 
Selling, general and administrative expenses    3,962,353     3,622,064     3,038,565 
----------------------------------------------------------------------------------------
                                                  557,410    (1,638,564)      496,616 

Interest income                                    20,024        21,107        28,610 
Interest expense                                 (572,829)     (392,131)     (348,870)
Gain (loss) on sale of equipment                  101,037       (13,474)            - 
Insurance proceeds                                      -             -       304,044 
Other, net                                         42,793        24,271        22,266 
----------------------------------------------------------------------------------------
Income (loss) before income taxes                 148,435    (1,998,791)      502,666 

Income tax expense                                      -             -             - 
----------------------------------------------------------------------------------------

Net income (loss)                            $    148,435    (1,998,791)      502,666 
========================================================================================

Net income (loss) per common share:
   Primary                                   $        .01          (.16)          .04 
   Fully diluted                                      .01          (.16)          .04 

Average shares of common stock used for above
   computation:
      Primary                                  13,279,039    12,479,167    12,841,256 
      Fully diluted                            13,695,706    12,479,167    12,841,256 
========================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.
                                     F-4
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years Ended May 31, 1997, 1996 and 1995
============================================================================================

                                                                                  Retained
                                                           Common Stock           Earnings
                                                    ------------------------ (Accumulated
                                                        Shares        Amount      Deficit)
--------------------------------------------------------------------------------------------
<S>                                                <C>         <C>            <C>
Balances at May 31, 1994                            11,989,123   $ 2,927,955     (491,804)

Proceeds from issuance of common stock                  98,679       167,390            - 
Repurchase of common stock                            (216,809)     (437,000)           - 
Issuance of common stock in connection with 
   asset acquisition                                   113,000       219,220            - 
Proceeds from exercise of employee stock options       185,629       219,650            - 
Proceeds from exercise of stock warrants               267,794       221,587            - 
Net income                                                   -             -      502,666 
--------------------------------------------------------------------------------------------
Balances at May 31, 1995                            12,437,416     3,318,802       10,862 

Issuance of common stock in connection with 
   asset acquisition                                    65,617        75,000            - 
Proceeds from exercise of employee stock options        77,700        82,433            - 
Net loss                                                     -             -   (1,998,791)
--------------------------------------------------------------------------------------------
Balances at May 31, 1996                            12,580,733     3,476,235   (1,987,929)

Proceeds from issuance of common stock                 461,525       300,000            - 
Proceeds from exercise of vendor options               212,000         1,060            - 
Proceeds from exercise of employee stock options         5,014         3,929            - 
Repurchase of common stock                             (65,617)      (75,000)           - 
Issuance of common stock and options for services       43,500       160,881            - 
Issuance of common stock for payment of note
   payable to stockholder                              833,333       500,000            - 
Issuance of warrants with convertible debentures to
   acquire 1,000,000 shares of common stock                  -       173,334            - 
Discount on issuance of convertible debentures               -       410,914            - 
Conversion of convertible debentures                   145,335        50,776            - 
Net income                                                   -             -      148,435 
--------------------------------------------------------------------------------------------

Balances at May 31, 1997                            14,215,823   $ 5,002,129   (1,839,494)
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
                                     F-5
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended May 31, 1997, 1996 and 1995
==============================================================================================

                                                             1997          1996        1995
----------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>          <C>
Cash flows from operating activities:
   Net income (loss)                                  $   148,435    (1,998,791)    502,666 

   Adjustments to reconcile net income (loss) to
      net cash used in operating activities:
         Depreciation and amortization                    830,687       873,214     892,960 
         Provision for bad debts                           75,307        56,350       8,000 
         Amortization of convertible debentures discount  139,152             -           - 
         Professional services received in exchange for
            common stock                                   29,437             -           - 
         Amortization of deferred gain on 
            sale/leaseback                               (304,308)     (177,512)          - 
         (Gain) loss on sale of equipment                (101,037)       13,474           - 
         Other                                              7,844             -           - 

   Increase or decrease in operating assets and
      liabilities:
         Accounts receivable                           (1,235,534)     (310,839)   (714,591)
         Costs and estimated earnings in excess of
            billings on uncompleted contracts            (447,606)      153,528    (546,400)
         Inventories                                     (221,060)        2,095    (155,871)
         Prepaid expenses                                (159,591)        2,235     (97,862)
         Cash surrender value of life insurance, net      (26,445)      (20,596)    (14,139)
         Accounts payable                                 360,808     1,078,599    (117,020)
         Accrued expenses and other liabilities          (193,441)       41,790     (17,178)
         Other                                             32,487       (65,000)     20,926 
----------------------------------------------------------------------------------------------
Net cash used in operating activities                  (1,064,865)     (351,453)   (238,509)

Cash flows from investing activities:
   Purchases of property, plant and equipment            (820,374)     (334,065)   (940,898)
   Prepublication costs                                  (105,913)            -      (7,490)
   Patent costs incurred                                  (54,345)      (16,417)    (15,649)
   Cash received in acquisitions                                -             -         915 
   Proceeds from sale/leaseback of equipment                    -     1,660,900           - 
   Proceeds from sale of equipment                          1,751        36,940           - 
   Notes receivable from officers (increase) decrease     (17,047)       83,815      (1,188)
----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities      (995,928)    1,431,173    (964,310)
</TABLE>
                                                                  (Continued)
                                F-6
<PAGE>
<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows    

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

                                                           1997          1996          1995
----------------------------------------------------------------------------------------------
<S>                                                <C>            <C>           <C>
Cash flows from financing activities:
   Bank overdraft increase (decrease)               $    35,814       (48,520)       57,266 
   Notes payable to banks increase (decrease)          (981,590)     (179,237)      197,901 
   Notes payable to affiliates increase                 140,006        47,466       101,347 
   Proceeds from note payable to stockholder          1,900,000       600,000             - 
   Proceeds from convertible debentures                 750,000             -             - 
   Proceeds from long-term debt                         507,382       344,465     1,731,291 
   Principal payments on long-term debt                (547,791)   (1,869,789)   (1,301,056)
   Proceeds from issuance of common stock               304,993        82,433       608,627 
   Repurchase of common stock                           (75,000)            -      (437,000)
----------------------------------------------------------------------------------------------

Net cash provided by (used in) financing activities   2,033,814    (1,023,182)      958,376 
----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents        (26,979)       56,538      (244,443)

Cash and cash equivalents at beginning of year          121,713        65,175       309,618 
----------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year            $    94,734       121,713        65,175 
==============================================================================================

Supplemental disclosures of cash flow information and noncash investing activities:
      Interest paid on notes payable and long-term debt was $392,126, $382,233 and
      $361,794 for the years 1997, 1996 and 1995, respectively.  Capital lease obligations
      of $94,210, $88,269 and $399,572 were incurred during 1997, 1996 and 1995,
      respectively, under leases entered into for vehicles, furniture and fixtures, and
      laboratory equipment.

      During 1997, the Company issued $160,881 of common stock and options for services
      ($131,440 in prepaid expenses at May 31, 1997), issued $500,000 in common stock in
      repayment of note payable to stockholder, issued $173,334 of warrants for common
      stock with convertible debentures, recognized a discount of $410,914 on issuance of
      convertible debentures and converted 50,776 of convertible debentures to common
      stock (see note 5).

      During 1996, the Company acquired certain assets of two entities (see note 2) in
      exchange for 604,747 shares of its common stock. 

      During 1995, the Company acquired the net assets of Air Compliance, Inc. (see note
      2) in exchange for 113,000 shares of its common stock.

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

                                                         F-7
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 1997, 1996 and 1995

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

(1)   Significant Accounting Policies

      Currency

      All references to dollars ($) are United States dollars unless
      otherwise denoted as Canadian (CDN).

      Principles of Consolidation

      The consolidated financial statements include the accounts of ETS
      International, Inc. and its wholly-owned subsidiaries, ETS, Inc., ETS
      Analytical Services, Inc. and ETS Water and Waste Management, Inc.
      ("the Company").  Significant intercompany accounts and transactions
      have been eliminated in consolidation.

      Cash Equivalents

      The Company considers all highly liquid investments with a maturity of
      three months or less when purchased to be cash equivalents.

      Inventories

      Inventories, consisting of raw materials ($351,856 in 1997 and $330,754
      in 1996) and supplies ($419,932 in 1997 and $219,975 in 1996), are
      stated at the lower of cost (first-in, first-out method) or market.

      Long-term Contracts

      Revenues on uncompleted long-term contracts are recorded using the
      percentage-of-completion method.  Provisions are made for estimated
      losses at the time the losses are determinable.  Revenues related to
      certain government contracts are subject to adjustments upon audit of
      costs by the government, with any such adjustments reflected in the
      accounting period in which determined.  For the year ended May 31,
      1997, the Company recognized approximately $225,000 in income from
      adjustments to prior year contracts.  Billings are prepared according
      to specific terms of individual contracts.  Contracts will generally
      provide for periodic payments as work is completed with final amounts
      due upon completion and acceptance of the project by the customer.

      Property, Plant and Equipment

      Property, plant and equipment are stated on the basis of cost. 
      Property and equipment under capital leases are stated at the present
      value of minimum lease payments at the inception of the lease.


                                                                (Continued)
                                     F-8
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(1)   (Continued)

      Provisions for depreciation and amortization have been calculated using
      the straight-line method over the following estimated useful lives of
      the assets:
<TABLE>
<CAPTION>
                <S>                               <C>
                  Furniture and fixtures             5 - 10 years
                  Laboratory equipment               5 - 10 years
                  Tools and equipment                5 - 10 years
                  Vehicles                           3 - 5 years
                  Leasehold improvements             5 - 10 years
</TABLE>

      Property and equipment under capital leases are amortized on the
      straight-line basis over the shorter of the lease term or the estimated
      useful life of the asset.  Leasehold improvements are amortized on the
      straight-line basis over the shorter of the lease term or the estimated
      useful life of the improvement.

      Patents

      The Company has incurred costs related to patent applications which
      have been or will be made.  Costs related to patents granted are being
      amortized over a period of 17 years using the straight-line method. 
      Costs relating to patents pending are deferred until the patent is
      granted.

      Prepublication Costs

      Prepublication costs related to the Company's production of textbooks
      and other training materials are stated at the lower of cost or market. 
      These deferred costs are amortized over a period of 5 years from
      publication date using the straight-line method.

      Goodwill

      Goodwill, which represents the excess of purchase price over fair value
      of net assets acquired, is amortized on a straight-line basis over
      periods not exceeding 15 years.  The Company assesses the
      recoverability of this intangible asset by determining whether the
      amortization of the goodwill balance over its remaining life can be
      recovered through undiscounted future operating cash flows of the
      acquired operations.  The amount of goodwill impairment, if any, is
      measured based on projected discounted future operating cash flows
      using a discount rate reflecting the Company's average cost of funds.

      Research and Development

      Research and development costs are charged to operations as incurred.
<PAGE>

      Income Taxes

      Income taxes are accounted for under the asset and liability method. 
      Deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases.  Deferred tax assets and liabilities are measured
      using enacted tax rates expected to apply to taxable income in the
      years in which those temporary differences are expected to be 

                                                                (Continued)
                                     F-9
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(1)   (Continued)

      recovered or settled.  The effect on deferred tax assets and
      liabilities of a change in tax rates is recognized in income in the
      period that includes the enactment date.

      Earnings Per Share

      Earnings per share have been computed on the basis of weighted average
      number of shares outstanding.  Stock options and warrants have been
      excluded for the years ended May 31, 1997, 1996 and 1995, due to their
      antidilutive effect on earnings per share.

      Licensing Agreements

      The Company has licensing agreements with certain customers to sell
      proprietary products developed by the Company, including the Limestone
      Emission Control (LEC) System and the Dry Reactor.  The Company is to
      receive amounts ranging from five percent to eight percent of gross
      sales as royalties for the sale of these proprietary products.  Minimum
      royalty fees are recognized when due from the licensee based on product
      sales, training completion and terms of the license agreements.  These
      agreements contain certain restrictive clauses requiring the licensees
      to meet minimum sales targets or the license agreement may be revoked
      at the Company's option.  The LEC system incorporates some claims of a
      patent issued to the U.S. Department of Energy (DOE).  Under terms of
      an agreement with the DOE, the Company is required to pay the DOE a
      royalty fee of one percent.  No royalty fees or expenses were
      recognized by the Company for the years ended May 31, 1997, 1996 and
      1995.

      Stock Options and Warrants

      Prior to June 1, 1996, the Company accounted for its stock options and
      warrants in accordance with the provisions of Accounting Principles
      Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
      and related interpretations.  As such, compensation expense was
      recorded on the date of grant only if the current market price of the
      underlying stock exceeded the exercise price.  On June 1, 1996, the
      Company adopted Statement of Financial Accounting Standards No. 123,
      Accounting for Stock-Based Compensation (Statement 123), which permits
      entities to recognize as expense over the vesting period the fair value
      of all stock-based awards on the date of grant.  Alternatively,
      Statement 123 also allows entities to continue to apply the provisions
      of APB Opinion No. 25 and provide pro forma net income or loss and pro
      forma net income or loss per common share disclosures for stock option
      and warrant grants made in 1996 and future years as if the
      fair-value-based method defined in Statement 123 had been applied.  The
      Company has elected to continue to apply the provisions of APB Opinion
      No. 25 and provide the pro forma disclosure provisions of Statement
      123.
<PAGE>

      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 the 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 these estimates.

                                                                (Continued)
                                    F-10
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(1)   (Continued)

      Reclassifications
 
      Certain reclassifications have been made to the 1996 financial
      statements to conform to classifications used in 1997.

(2)   Business Combinations

      On June 1, 1994, ETS International, Inc. acquired the common stock of
      Stamie E. Lyttle, Inc., Lyttle Utilities, Inc. and LPS, Inc. (the
      "Lyttle Companies") in exchange for 2,730,000 shares of ETS
      International, Inc.'s common stock.  On January 19, 1995, ETS
      International, Inc. acquired the common stock of Environmental
      Laboratories Incorporated (ELI) in exchange for 183,600 shares of ETS
      International, Inc.'s common stock.  These acquisitions were accounted
      for by the pooling-of-interests method and, accordingly, the
      consolidated financial statements include the operations of the Lyttle
      Companies and ELI for all periods presented.  There were no material
      adjustments of the net assets of the Lyttle Companies or ELI as a
      result of adopting the same accounting practices as ETS International,
      Inc. and its subsidiaries.

      On April 3, 1995, ETS International, Inc. acquired the net assets of
      Air Compliance, Inc. in exchange for 113,000 shares of ETS
      International, Inc.'s common stock.  On February 5, 1996, ETS
      International, Inc. acquired certain assets of Olympic Industries, Inc.
      in exchange for 539,130 shares of ETS International, Inc.'s common
      stock (see note 8).  On April 18, 1996, ETS International, Inc.
      acquired certain laboratory assets of Dewberry and Davis, Inc. in
      exchange for 65,617 shares of ETS International, Inc. common stock. 
      These acquisitions were accounted for as purchases; accordingly, the
      results of operations of the acquired entities are included in the
      consolidated financial statements only from the date of acquisition. 
      Proforma results of operations are not presented because the effect is
      not material to the consolidated financial statements.  The goodwill
      arising as a result of the excess of the purchase price over the fair
      value of net assets acquired is being amortized on a straight-line
      basis over periods not exceeding 15 years.
<PAGE>
      The following table summarizes these acquisitions:
<TABLE>
<CAPTION>
                                                        1996        1995
----------------------------------------------------------------------------
<S>                                              <C>          <C>
Purchase price (604,747 and 113,000 shares of
   stock issued in 1996 and 1995, respectively)   $  850,000     219,220 
============================================================================

Accounts receivable                                    2,000     130,230 
Equipment                                            529,200      16,397 
Franchise fee                                        200,000           - 
Other assets                                          72,816       3,344 
Accounts payable and other liabilities              (100,000)    (40,013)
-----------------------------------------------------------------------------
Net assets acquired (estimated fair value)        $  704,016     109,958 
=============================================================================
Excess of purchase price over fair value of net
   assets acquired (goodwill)                     $  145,984     109,262 
=============================================================================
</TABLE>
                                                                (Continued)
                                    F-11
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(3)   Business Segment Information

      ETS International, Inc. and its wholly-owned subsidiaries provide
      environmental and infrastructure products and services.  The Company
      specializes in toxic emission measurement and control as well as
      infrastructure design, construction and maintenance.

      The Company currently derives its primary contract revenues from
      domestic customers.  During 1997, 1996 and 1995, there were a limited
      number of customers in Mexico, Canada and Taiwan.  The Company is
      currently expanding its international sales efforts.

      For the year ended May 31, 1997, the Company had contract revenues from
      one customer, which accounted for more than 5 percent of contract
      revenues, aggregating approximately $2,337,000 or 10 percent of
      contract revenues.  At May 31, 1997, four customers had accounts
      receivable balances which exceed 5 percent of total stockholders'
      equity.  The accounts receivable balances of these customers totaled
      approximately $1,326,000.

      No single customer accounted for more than 5 percent of contract
      revenues for the year ended May 31, 1996.  At May 31, 1996, one
      customer had an accounts receivable balance which exceeded 5 percent of
      total stockholders' equity.  The accounts receivable balance of this
      customer was $273,562.

      For the year ended May 31, 1995, the Company had contract revenues from
      two customers, each of which accounted for more than 5 percent of
      contract revenues, aggregating approximately $3,479,000 or 17 percent
      of contract revenues.  These two customers had accounts receivable
      balances which exceeded 5 percent of total stockholders' equity.  The
      accounts receivable balances for these customers totaled $755,004.
<PAGE>
      Information related to the environmental and infrastructure operations
      follows:

<TABLE>
<CAPTION>
                                 Environmental   Infrastructure
                                    Operations       Operations      Eliminations     Consolidated
                                 -------------------------------------------------------------------
<S>                            <C>                  <C>               <C>             <C>
1997:
   Total assets                   $  4,660,039        7,644,510                 -       12,304,549 
   Total liabilities                 3,361,085        5,393,329                 -        8,754,414 
   Contract revenues                 5,607,133       18,660,836          (142,709)      24,125,260 
   Depreciation and amortization       537,373          293,314                 -          830,687 
   Interest income                           -           20,024                 -           20,024 
   Interest expense                    296,711          276,118                 -          572,829 
   Net income (loss)                  (612,231)         760,666                 -          148,435 
   Capital expenditures                156,605          663,769                 -          820,374 

1996:
   Total assets                      3,981,132        5,853,884                 -        9,835,016 
   Total liabilities                 2,068,784        5,502,926                 -        7,571,710 
   Contract revenues                 6,496,457       14,219,339          (176,535)      20,539,261 
   Depreciation and amortization       639,357          233,857                 -          873,214 
   Interest income                           -           21,107                 -           21,107 
   Interest expense                    178,197          213,934                 -          392,131 
   Net loss                           (627,947)      (1,370,844)                -       (1,998,791)
   Capital expenditures                107,568          226,497                 -          334,065 
</TABLE>
                                                                (Continued)
                                                  F-12
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(3)   (Continued)


<TABLE>
<CAPTION>
                                 Environmental   Infrastructure
                                    Operations       Operations      Eliminations     Consolidated
                                 -------------------------------------------------------------------
<S>                            <C>                  <C>               <C>             <C>
1995:
   Total assets                   $  5,003,603        4,655,008                 -        9,658,611 
   Total liabilities                 2,328,711        4,000,236                 -        6,328,947 
   Contract revenues                 6,739,764       13,279,286          (107,144)      19,911,906 
   Depreciation and amortization       602,858          290,102                 -          892,960 
   Interest income                           -           28,610                 -           28,610 
   Interest expense                    145,541          203,329                 -          348,870 
   Insurance proceeds                  304,044                -                 -          304,044 
   Net income                          390,551          112,115                 -          502,666 
   Capital expenditures                555,624          385,274                 -          940,898 
-----------------------------------------------------------------------------------------------------
</TABLE>

(4)   Accounts Receivable

      A summary of the changes in the allowance for doubtful accounts
      follows:

<TABLE>
<CAPTION>
                                        Years Ended May 31,
                               ----------------------------------
                                    1997        1996       1995
------------------------------------------------------------------
<S>                          <C>           <C>         <C>
Balances, beginning of year    $  95,100      99,500     91,500 
Provision for bad debts           75,307      56,350      8,000 
Accounts written off             (50,983)    (60,750)         - 
------------------------------------------------------------------
Balances, end of year          $ 119,424      95,100     99,500 
==================================================================
</TABLE>

<PAGE>

(5)   Notes Payable to Banks and Long-term Debt

      Notes payable to banks consists of the following:

<TABLE>
<CAPTION>
                                                                         May 31,
                                                               ------------------------
                                                                   1997           1996
-----------------------------------------------------------------------------------------
<S>                                                       <C>            <C>
$1,500,000 revolving line of credit, due on demand, 
   bearing interest at the bank's prime rate plus 1/4%, 
   paid in full during 1997                                   $       -        981,590

$90,000 line of credit, due on demand, bearing interest
   at prime plus 2%, which approximated 10.25% at May 31,
   1997, secured by certain equipment                            89,837         89,837
-----------------------------------------------------------------------------------------

                                                              $  89,837      1,071,427
=========================================================================================
</TABLE>

                                                                (Continued)
                                    F-13
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(5)   (Continued)

      Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                        May 31,
                                                           -----------------------------
                                                                 1997            1996
-----------------------------------------------------------------------------------------
<S>                                                      <C>               <C>
7% convertible debentures due February 2002, net of 
   unamortized discount of $438,028                       $   261,972               - 

$400,000 term note payable to bank, due February 2001, 
   bearing interest at 11%, payable in monthly 
   installments of $10,322 including interest, secured
   by certain vehicles                                        379,851               - 

$250,000 term note payable to bank, due February 1998, 
   bearing interest at prime plus 1%, paid in full 
   during 1997                                                      -         154,889 

$185,806 term note payable to finance company, due 
   December 1999, bearing interest at 19.47%, payable
   in monthly installments of $6,350 including interest, 
   secured by certain vehicles and equipment                  103,133         153,761 

$100,000 term note payable to finance company, due 
   February 2001, bearing interest at 12.5%, payable
   in monthly installments of $2,658 including interest,
   secured by certain vehicles                                 73,906          95,100 

Installment loans with maturities to 1999, bearing 
   interest at varying interest rates from 6.65% to 9.25%,
   payable in varying monthly installments of $402 to 
   $3,397 including interest, secured by vehicles and 
   equipment                                                  197,312         175,175 

Capital lease obligations, with maturities to 2001 
   (see note 6)                                               338,511         459,987 
-----------------------------------------------------------------------------------------
                                                            1,354,685       1,038,912 
   Less current maturities                                    493,012         378,779 
-----------------------------------------------------------------------------------------
                                                          $   861,673         660,133 
=========================================================================================
</TABLE>

      Aggregate debt maturities for each of the next four years ending on May
      31 is as follows: 1998, $493,012; 1999, $315,054; 2000, $189,358; and
      2001, $95,289, respectively.  The $700,000 of 7 percent convertible
      debentures due February 2002 are automatically converted into common
      stock at maturity.  See following paragraph for additional information.
<PAGE>
      On February 28, 1997, the Company issued $750,000 of 7 percent
      convertible debentures due February 27, 2002.  The holder of the
      debentures is entitled to convert them into common stock at his option. 
      The Company may at its option force conversion after one year from
      February 28, 1997.  The Company is not required to pay cash to retire
      the debentures and the accrued interest.  The debentures are
      convertible into the Company's common stock at the lower of $.76 or 65
      percent of the average closing bid price of the common stock for the
      five trading days immediately preceding the conversion date.  Since the
      conversion rate was lower than the market price of the common stock on
      the date of issuance, a discount of $403,846 was recognized on the
      debentures.  In addition, 1,000,000 warrants for common stock were
      issued with the convertible debentures.  The fair value of these
      warrants, $173,334, was recorded as part of the discount.  The total
      discount of $577,180 is being amortized as interest expense over a year
      using the interest rate method.

      On May 20, 1997, the Company issued 145,335 shares of common stock upon
      the conversion of $50,776 of the convertible debentures, which includes
      $776 of accrued interest.

                                                                (Continued)
                                    F-14
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(6)   Leases

      Property, plant and equipment included the following amounts of assets
      under capital lease obligations:

<TABLE>
<CAPTION>
                                                May 31,
                                    ---------------------------
                                          1997          1996
---------------------------------------------------------------
<S>                              <C>            <C>
Furniture and fixtures             $   221,057       221,057 
Laboratory equipment                   987,960       987,960 
Tools and equipment                     94,210             - 
Vehicles                                68,727        68,727 
Leasehold improvements                  30,437        30,437 
---------------------------------------------------------------
                                     1,402,391     1,308,181 
   Less accumulated amortization      (823,178)     (640,925)
---------------------------------------------------------------
                                   $   579,213       667,256 
===============================================================
</TABLE>

      The capital lease payments were $243,536 in 1997, $246,527 in 1996 and
      $219,418 in 1995.  Lease amortization is included in depreciation
      expense ($182,252 in 1997, $171,125 in 1996 and $129,146 in 1995).

      Future minimum payments under capital and operating leases are as
      follows:

<TABLE>
<CAPTION>
                                                   Capital        Operating
                                                    Leases           Leases
-----------------------------------------------------------------------------
<S>                                          <C>              <C>
1998                                            $  198,397        1,104,481
1999                                               118,212          970,068
2000                                                57,292          668,631
2001                                                 6,321          377,989
2002                                                     -            8,560
-----------------------------------------------------------------------------
                                                   380,222     $  3,129,729
                                                                 ==========
Less amounts representing interest (rates
  9.6% - 16.5%)                                     41,711
-------------------------------------------------------------
Present value of lease payments (including
  $192,700 classified as current)               $  338,511
=============================================================
</TABLE>
<PAGE>

      Rent expense for operating leases of approximately $1,302,000,
      $1,407,000 and $682,000 was recognized for the years ended May 31,
      1997, 1996 and 1995, respectively.

      On October 25, 1995, the Company entered into a sale/leaseback
      agreement which provided for the sale and leaseback of certain
      equipment.  This equipment, with a net book value of $443,668, was sold
      for $1,660,900 and was leased back to the Company for a 48-month period
      at $39,015 per month.  The resulting gain of $1,217,232 on the sale of
      equipment is being amortized over the life of the operating lease and
      has a remaining balance of $735,412 at May 31, 1997.

                                                                (Continued)
                                    F-15
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(7)   Income Taxes

      The Company is in a net operating loss position, accordingly, no income
      tax expense has been recognized for the years ended May 31, 1997, 1996
      and 1995.

      Income tax expense differs from the amount computed by applying the
      statutory corporate tax rate of 34 percent to income (loss) before
      income taxes as follows:

<TABLE>
<CAPTION>
                                                          1997        1996        1995
-----------------------------------------------------------------------------------------
<S>                                                  <C>        <C>         <C>
Expected federal income tax expense (benefit)         $  50,468   (679,588)    170,906 
Increase (decrease) resulting from:
  State income tax, net of federal income tax impact      8,588    (75,939)     12,112 
  Life insurance proceeds                                     -          -    (103,375)
  Meals and entertainment                                12,897     22,075      30,104 
  Utilization of net operating loss carryforwards             -          -    (105,085)
  Change in the beginning of the year balance of the
    valuation allowance for deferred tax assets         (60,482)   736,696     (89,150)
  Other                                                 (11,471)    (3,244)     84,488 
-----------------------------------------------------------------------------------------
Income tax expense                                    $       -          -           - 
=========================================================================================
</TABLE>

      The significant components of deferred income tax expense (benefit) for
      the years ended May 31, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                          1997        1996        1995
-----------------------------------------------------------------------------------------
<S>                                                  <C>        <C>         <C>
Deferred tax expense (benefit) exclusive of the 
  components listed below                             $  82,395   (727,936)     11,021 
Utilization of net operating loss carryforwards               -          -     105,085 
Expiration of investment tax credit carryforwards       (21,913)    (8,760)    (26,956)
Increase (decrease) in beginning of the year 
  balance of the valuation allowance for deferred
  tax assets                                            (60,482)   736,696     (89,150)
-----------------------------------------------------------------------------------------
                                                      $       -          -           - 
=========================================================================================
</TABLE>
                                                                (Continued)
                                    F-16
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

=============================================================================
(7)   (Continued)

      The tax effects of temporary differences that give rise to significant
      portions of the deferred tax assets and deferred tax liabilities at May
      31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
                                                             1997           1996
-----------------------------------------------------------------------------------
<S>                                                <C>              <C>
Deferred tax assets:
  Net operating loss and tax credit carryforwards     $   883,791        887,260 
  Deferred gain on sale/leaseback transaction due
    to accrual versus cash basis of accounting
    for financial reporting and tax purposes              279,162        394,678 
  Other                                                   176,069        164,478 
-----------------------------------------------------------------------------------
Total gross deferred tax assets                         1,339,022      1,446,416 
  Less valuation allowance                             (1,063,264)    (1,123,746)
-----------------------------------------------------------------------------------
Net deferred tax asset                                    275,758        322,670 
-----------------------------------------------------------------------------------

Deferred tax liabilities:
  Accounts receivable and accounts payable,
    principally due to accrual versus cash
    basis of accounting for financial reporting
    and tax purposes                                      157,110        209,480 
  Property, plant and equipment, principally due
    to difference in depreciation for financial
    reporting and tax purposes                            101,801         94,800 
  Other                                                    16,847         18,390 
-----------------------------------------------------------------------------------
Total gross deferred tax liabilities                      275,758        322,670 
-----------------------------------------------------------------------------------

Net deferred tax                                      $         -              - 
===================================================================================
</TABLE>
      In assessing the realizability of deferred tax assets, management
      considers whether it is more likely than not that some portion or all
      of the deferred tax assets will not be realized.  The ultimate
      realization of deferred tax assets is dependent upon the generation of
      future taxable income during the periods in which those temporary
      differences become deductible.  Management considers the scheduled
      reversal of deferred tax liabilities, projected future taxable income
      and tax planning strategies in making this assessment.  Based upon the
      level of historical taxable losses and projections for future taxable
      income over the periods which the deferred tax assets are deductible,
      management believes it is more likely than not the Company will not
      realize the benefits of these deductible differences and loss
      carryforwards in excess of the amount which can be offset by the
      reversal of future taxable items.

                                                                (Continued)
                                    F-17<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(7)   (Continued)

      At May 31, 1997, the Company has loss carryforwards for income tax
      purposes of 2,254,455 available to offset future taxable income.  
      If not utilized, these loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
                  Expiration
                  Date
                  -------------------------------
                 <S>               <C>
                  2003              $   555,174
                  2008                1,000,451
                  2011                  582,048
                  2012                  116,782
                  -------------------------------
                                    $ 2,254,455
                  ===============================
</TABLE>
      In addition, the Company has various tax credit carryforwards of
      approximately $28,000 which will expire between the years 1997 and
      2000.


(8)   Common Stock Subject to Repurchase Agreement

      In connection with the Olympic Industries, Inc. asset acquisition (see
      note 2), the Company entered into a common stock repurchase agreement
      (the "repurchase agreement").  Under the repurchase agreement, the
      Company is obligated to repurchase at the stock price set forth in the
      Asset Purchase Agreement ($1.43 per share) up to one-half of the issued
      shares on the first anniversary of the acquisition and up to one-half
      of the issued shares on the second anniversary of the acquisition. 
      Accordingly, the 539,130 shares issued in connection with the asset
      acquisition have been classified as common stock subject to repurchase
      at their aggregate repurchase price of $775,000.  As security for the
      Company's obligation to repurchase the shares, the Company granted the
      seller a security interest in the assets purchased.  The Company may
      satisfy its obligation related to the shares (269,565 shares) subject
      to repurchase on the second anniversary in February 1998 upon the
      successful registration of the issued shares with the Securities and
      Exchange Commission (SEC).  It is the Company's intention to complete
      this registration; however, upon completion, it will be subject to
      final SEC approval.  If the stock is not registered and the Company is
      requested to repurchase the stock on the second anniversary, the
      Company can pay a fee of $38,750 and extend the repurchase date until
      September 1998. 

      In February 1997, Olympic Industries, Inc. elected to have the Company
      repurchase one-half of the issued shares (269,565 shares) at the first
      anniversary of the acquisition.  Accordingly, this obligation of
      $409,642 including interest of $22,142 is shown as current.  The
      Company elected to defer the repurchase until September 1997.
<PAGE>

(9)   Stock Options and Warrants

      Pursuant to various stock option and stock warrant agreements, the
      Company has granted nontransferable options and warrants to acquire the
      Company's common stock to certain officers, directors, investors,
      vendors and employees of the Company and its subsidiaries.

                                                                (Continued)
                                    F-18
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(9)   (Continued)

      Options and warrants are generally granted at approximate fair market
      value based on the higher of the most recent ten-day average price of
      the stock or the last day's closing price of the stock on the date of
      the grant.

      The aggregate amount of shares under option pursuant to these
      agreements were as follows:

<TABLE>
<CAPTION>
                                              Number            Weighted Average
                                           of Shares              Exercise Price
-----------------------------------------------------------------------------------
<S>                                    <C>             <C>
Options outstanding at May 31, 1994        1,495,068      $ 1.88 CDN and 1.32 US

Granted                                      972,000      $ 1.72 US

Exercised                                   (185,629)     $  .79 CDN and 1.25 US

Expired                                       (3,350)     $ 2.35 CDN and 1.37 US
------------------------------------------------------
Options outstanding at May 31, 1995        2,278,089      $ 1.91 CDN and 1.56 US

Granted                                      448,000      $ 1.07 US

Exercised                                    (77,700)     $ 1.30 CDN and 1.07 US

Expired                                     (178,816)     $ 2.34 CDN and 1.66 US
------------------------------------------------------
Options outstanding at May 31, 1996        2,469,573      $ 1.90 CDN and 1.46 US

Granted                                    1,716,000      $  .66 US

Exercised                                   (217,014)     $ 1.05 CDN and .005 US

Expired                                     (585,659)     $ 1.50 CDN and .42 US
------------------------------------------------------

Options outstanding at May 31, 1997        3,382,900      $ 2.35 CDN and 1.12 US
======================================================
</TABLE>

      In 1997, 212,000 options were granted and exercised at $.005.  At the
      time the options were granted the common stock of the Company had a
      fair value of $.63.  These options were granted in exchange for
      services.  The services were recorded at the difference between the
      option price and fair value of the common stock.  
<PAGE>

      Options exercisable at May 31, 1997 and 1996 approximated 2,998,000 and
      1,800,000, respectively.  At May 31, 1997, the range of exercise prices
      for options was $2.35 CDN and $.75 to 2.06 US.  Options generally
      become exercisable over a period not exceeding five years from the date
      of grant and warrants are exercisable upon issuance.

                                                                (Continued)
                                    F-19
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(9)   (Continued)

      The aggregate amount of shares under warrant pursuant to these
      agreements were as follows:

<TABLE>
<CAPTION>
                                              Number            Weighted Average
                                           of Shares              Exercise Price
-----------------------------------------------------------------------------------
<S>                                    <C>             <C>
Warrants outstanding at May 31, 1994         310,223      $ 1.62 US and 1.13 CDN

Granted                                       98,679      $ 2.04 US

Exercised                                   (267,794)     $ 1.13 CDN
------------------------------------------------------
Warrants outstanding at May 31, 1995         141,108      $ 1.92 US

Expired                                      (42,429)     $ 1.62 US
------------------------------------------------------
Warrants outstanding at May 31, 1996          98,679      $ 2.04 US

Granted                                    1,494,875      $ 0.84 US

Expired                                      (47,679)     $ 1.87 US
------------------------------------------------------

Warrants outstanding at May 31, 1997       1,545,875      $  .88 US
======================================================
</TABLE>

      The per share weighted-average fair values of stock options and
      warrants granted during 1997 and 1996 were $.29 and $.18 on the various
      dates of grant using the Black-Scholes option-pricing model with the
      following weighted-average assumptions:  1997 - expected dividend yield
      of 0 percent, risk-free interest rate of 6.29 percent, expected
      volatility of 20 percent and an expected life of 2 to 4 years; 1996 -
      expected dividend yield of 0 percent, risk-free interest rate of 6.36
      percent, expected volatility of 20 percent and an expected life of 4
      years.

      The Company uses the intrinsic value method of APB Opinion No. 25 for
      recognizing stock-based compensation in the financial statements.  Had
      the Company determined compensation cost based on the fair value at the
      grant date for its stock options and warrants under the provisions of
      Statement 123, the Company's net income (loss) and net income (loss)
      per common share would have been increased to the pro forma amounts
      indicated below:
<PAGE>

<TABLE>
<CAPTION>
                                                 Years Ended May 31,
                                           ----------------------------
                                                1997             1996
------------------------------------------------------------------------
<S>                                    <C>              <C>
Net income (loss):
   As reported                            $  148,435       (1,998,791)
   Pro forma                                (340,489)      (2,032,923)

Net income (loss) per common share:
   Primary, as reported                         0.01            (0.16)
   Primary, pro forma                          (0.03)           (0.16)
   Fully diluted, as reported                   0.01            (0.16)
   Fully diluted, proforma                     (0.02)           (0.16)
------------------------------------------------------------------------
</TABLE>
                                                                (Continued)
                                    F-20
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(9)   (Continued)

      Pro forma net income (loss) reflects only options granted in 1997 and
      1996.  Therefore, the full impact of calculating compensation cost for
      stock options under Statement 123 is not reflected in the pro forma net
      income (loss) amounts presented above because compensation cost is
      reflected over the options' vesting periods and compensation cost for
      options granted prior to June 1, 1995 is not considered.


(10)  Related Party Transactions

      The Company and its subsidiaries lease various office space and
      laboratories from entities whose members include certain officers and
      directors of the Company.  Rent expense under these operating leases
      approximated $417,000, $405,000 and $399,000 for 1997, 1996 and 1995,
      respectively.

      Other accounts receivable consists primarily of advances to officers,
      directors and other employees.  At May 31, 1997 and 1996, $91,381 and
      $76,265, respectively, were the result of these advances.

      The Company has notes receivable from officers of $408,846 and $391,799
      as of May 31, 1997 and 1996, respectively.  The notes bear interest at
      six percent.  As of May 31, 1997, $64,694 is due on demand and $344,152
      is due in July 1998.

      The Company has notes payable to affiliates of $490,617 and $348,625 as
      of May 31, 1997 and 1996, respectively.  These affiliates include
      certain partnerships and individuals whose members are officers and
      directors of the Company.  The balance at May 31, 1997 includes
      $289,159 classified as current.  The remaining balance of $201,458 is
      due in fiscal 1999.  The notes bear interest at rates between six and
      twenty percent.

      In March 1997, the Company borrowed $2,000,000 from a stockholder.  The
      note is due March 17, 1999, however, the stockholder has the option to
      accelerate the entire principal and interest owed and demand payment in
      full upon sixty days notice.  Due to this acceleration clause, the
      entire amount is shown as current.  The note bears interest at fifteen
      percent which is payable monthly.  The Company may borrow an additional
      $500,000 from the stockholder at his discretion upon review of the
      Company's financial condition and the value of the collateral.  The
      note is collateralized by accounts receivable, inventories and property
      and equipment.  At May 31, 1996, the Company had a note payable to
      stockholder of $600,000, which was paid in full during 1997.

      During 1995, the Company received $304,044 of life insurance proceeds
      as a result of the death of one of its officers.  Subsequent to the
      officer's death, the Company repurchased 216,809 shares from the estate
      of the officer.  The shares repurchased included 100,000 shares
      exercisable under available options.  The shares were repurchased at
      their approximate fair market value at the date of the officer's death.

<PAGE>
(11)  Other Matters

      The Company does not receive hazardous waste during the normal course
      of business.  The Company does receive environmental samples for
      analysis; and, occasionally, in the process of analysis, small
      quantities of hazardous waste are generated.  Such waste is stored in
      designated

                                                                (Continued)
                                    F-21
<PAGE>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

(11)  (Continued)

      areas, lab packed for disposal, picked up by licensed hazardous waste
      contractors and transported to licensed disposal facilities.  In
      addition to its laboratory activities, the Company is engaged in field
      testing.  It is the Company's intention to conduct its operations in an
      effective, safe and prudent manner, and to ensure against potential
      risks.  The Company carries workers' compensation insurance for its
      employees and insurance for any personal liability and injury which
      could occur to nonemployees and/or the property of others.

      The Company is involved from time to time in litigation and
      environmental matters; however, it is the opinion of management that
      there are no matters currently existing which would have a material
      impact on the financial position or results of operations of the
      Company.


(12)  Fair Value of Financial Instruments

      Statement of Financial Accounting Standards No. 107, Disclosures about
      Fair Value of Financial Instruments (SFAS 107), requires the Company to
      disclose estimated fair values of its financial instruments.  SFAS 107
      defines the fair value of a financial instrument as the amount at which
      the instrument could be exchanged in a current transaction between
      willing parties.

      The following methods and assumptions were used to estimate the fair
      value of each class of financial instruments:  The carrying amounts
      reported in the consolidated balance sheets for cash and cash
      equivalents, notes receivable, notes payable and long-term debt
      approximate fair value.  The fair value of notes receivable is
      estimated by discounting the future cash flows at rates the Company
      would currently receive for similar notes receivable.  The fair values
      of notes payable and long-term debt is estimated by discounting the
      future cash flows of each instrument at rates currently offered to the
      Company for similar debt instruments of comparable maturities by the
      Company's bank.


(13)  Fourth Quarter Adjustments

      Significant adjustments to the fourth quarter for the year ended May
      31, 1997 included a charge of approximately $75,000 as a provision for
      bad debts based on specific reviews of customer accounts and a $95,000
      charge to correctly state costs and earnings in excess of billings.

<PAGE>

(14)  New Accounting Standard

      In February 1997, the Financial Accounting Standards Board issued
      Statement of Financial Accounting Standards No. 128, Earnings per Share
      (SFAS 128).  SFAS 128 establishes standards for computing and
      presenting earnings per share.  The Company is required to adopt this
      statement in fiscal 1998.  The adoption of this statement by the
      Company is not anticipated to have a material effect on earnings per
      share presented in the current or prior years.


=============================================================================
                                    F-22
<PAGE>
                                 SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.

                        ETS INTERNATIONAL, INC.
                              (Registrant)

                        By:   s/John D. McKenna
                              John D. McKenna
                              President and Principal
                              Executive Officer
                                                                       
            
                        By:   s/John C. Mycock
                              John C. Mycock
                              Secretary/Treasurer and
                              Principal Financial Officer

Dated:  September 12, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated as of September 12,
1997.

s/John D. McKenna 
------------------------
  John D. McKenna             Director         

s/John C. Mycock
------------------------
  John C. Mycock              Director         

s/David F. Tompkins
-----------------------
  David F. Tompkins           Director         

s/Coleman S. Lyttle
-----------------------
  Coleman S. Lyttle           Director         

s/Navin D. Sheth
-----------------------
  Navin D. Sheth              Director         

s/Lee A. Raver
-----------------------
  Lee A. Raver                 Director         

s/Thomas W. Marmon
-----------------------
  Thomas W. Marmon            Director         

s/Arthur B. Nunn
-----------------------
  Arthur B. Nunn              Director
<PAGE>