<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                             ---------------------
 
                                   FORM 10-K
(MARK ONE)
     [X]         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
     [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                         OF THE SECURITIES ACT OF 1934
 
                         COMMISSION FILE NUMBER 1-9307
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                              <C>
                    DELAWARE
        (State or other Jurisdiction of                             22-2731074
         Incorporation or Organization)                (I.R.S. Employer Identification No.)
 
               19103 GUNDLE ROAD
                 HOUSTON, TEXAS                                       77073
    (Address of Principal Executive Offices)                        (Zip Code)
</TABLE>
 
       Registrant's telephone number, including area code: (281) 443-8564
 
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
                                            NAME OF EACH EXCHANGE ON
    TITLE OF EACH CLASS                         WHICH REGISTERED
    -------------------                     ------------------------
<S>                                         <C>
Common Stock, $.01 Par Value                New York Stock Exchange
</TABLE>
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                                     NONE.
 
     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.  Yes [X]  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]
 
     The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $45,430,000 as of March 3, 1998. All share amounts
included herein have been restated to reflect all previous stock splits.
 
     The number of shares outstanding of the issuer's common stock, $.01 par
value, as of March 3, 1998, was 13,294,880 shares.
 
     The Registrant's proxy statement to be filed in connection with the
Registrant's 1998 Annual Meeting of Stockholders is incorporated by reference
into Part III of this report.
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<PAGE>   2
 
                          1997 FORM 10-K ANNUAL REPORT
 
                               TABLE OF CONTENTS
 
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                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
 
Item 1.   Business....................................................    1
Item 2.   Properties..................................................    8
Item 3.   Legal Proceedings...........................................    9
Item 4.   Submission of Matters to a Vote of Security Holders.........    9
 
                                  PART II
 
Item 5.   Market for the Registrant's Common Equity and Related
            Stockholder Matters.......................................    9
Item 6.   Selected Financial Data.....................................    9
Item 7.   Management's Discussion and Analysis of Results of
            Operations and
            Financial Condition.......................................   10
Item 8.   Consolidated Financial Statements and Supplementary Data....   14
Item 9.   Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure..................................   36
 
                                  PART III
 
Item 10.  Directors and Executive Officers of the Registrant..........   36
Item 11.  Executive Compensation......................................   36
Item 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................   36
Item 13.  Certain Relationships and Related Transactions..............   36
 
                                  PART IV
 
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
            8-K.......................................................   36
</TABLE>
<PAGE>   3
 
                                     PART I
 
ITEM 1. BUSINESS.
 
INTRODUCTION
 
     Gundle/SLT Environmental, Inc. (the "Company") is the world leader in
providing geosynthetic lining solutions, products, and services to satisfy
customers' needs for protecting the environment.
 
     The Company is a Delaware corporation formed in 1986. The Company's
principal executive offices are located at 19103 Gundle Road, Houston, Texas
77073. The Company's telephone number is (281) 443-8564.
 
GENERAL
 
     The Company manufactures, sells and installs synthetic lining systems and
products on a worldwide basis principally for the prevention of groundwater
contamination from municipal and industrial sources, and for the containment of
water and industrial liquids and solids. The Company markets its lining systems
primarily to waste management, industrial and mining companies, municipalities
and other governmental agencies that own or operate waste, material processing,
water treatment or containment facilities, as well as to engineering firms and
construction contractors that serve these industries. During the three year
period ended December 31, 1997, the Company sold nearly 2 billion square feet of
polyethylene membrane to customers in the United States and more than 70 other
countries.
 
     The Company's four primary manufacturing facilities located in the United
States, Germany, and the United Kingdom, generate revenue from the direct sale
of its products to customers, as well as from the installation of liner systems
that incorporate the liners and other products manufactured by or distributed
through the Company. On July 27, 1995, the Company merged with SLT
Environmental, Inc. (SLT) thereby obtaining additional manufacturing facilities
in Houston, Texas, and Rechlin, Germany. Other products include drainage nets,
geotextiles, geocomposites, geosynthetic clay liners, vertical barrier walls,
geogrids, and specialty concrete attachment products.
 
     The Company sells and installs its products through its worldwide
distribution system consisting of its own sales and installation personnel, as
well as a worldwide dealer and distributor organization.
 
     Geosynthetic lining systems installed by the Company or its independent
installers are designed by its customers or third-party engineering firms to
meet their particular containment requirements, ranging from a single lining to
more complex systems consisting of several liners interlayered with drainage
materials, geotextiles, and geogrids. The principal components of the Company's
lining systems are geomembranes, manufactured by the Company primarily from
polyethylene resins and certain chemical additives comprising a proprietary
formula designed to resist weathering and ultraviolet degradation for extended
periods of time in an exposed environment. The Company's sheets are generally
welded together on the customer's job site using a hot wedge or extrusion
welding method. The welded seams are tested as part of its quality assurance
program.
 
     The Company believes that its manufacturing capabilities, quality control
procedures, welding processes, and use of high quality resins enable it to
produce and install lining systems of the highest quality. The Company provides
its customers with a single source for the manufacture, installation, and
testing of complete lining systems.
 
SYNTHETIC LINER INDUSTRY
 
     The Company manufactures flexible geomembrane liners ("FMLs") that compete
directly in some cases with coated textiles and clay soils, as well as FMLs made
from other resins. The principal types of FMLs presently available are: high
density polyethylene ("HDPE") and other variations of polyethylene, such as very
flexible polyethylene ("VFPE"), polyvinyl chloride ("PVC"), ethylene propylene
diene terpolymer ("EPDM"), scrim-reinforced chlorosulphonated polyethylene
("Hypalon"), and polypropylene or combinations or variations of these
synthetics. Polyethylene membranes have several physical advantages over PVC
 
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<PAGE>   4
 
and other FMLs that include chemical resistance characteristics (e.g., their
resistance to various acids, alkalis, aromatic solvents and oils), and certain
strength characteristics (e.g., their relative impermeability, puncture
resistance and tendency to stretch rather than tear in response to certain types
of pressure). HDPE sheeting represents a major portion of the synthetic liner
market, particularly for municipal solid waste and other environmentally
critical applications. The Company believes the market for synthetic liners in
general and polyethylene liners in particular, continues to expand as engineers
throughout the world become more familiar with the quality, utility and breadth
of product options involving liners manufactured from HDPE and VFPE.
 
     The Company believes that significant factors in the growth of the world
market for FMLs include: laws and regulatory requirements relating to the
storage of hazardous and nonhazardous substances (see "Regulatory Background");
increasing public concern for the environment and for protecting groundwater;
cost benefits of synthetic liners when compared to more traditional containments
such as clay soil, concrete and steel; the inert, sanitary characteristic of
polyethylene liners that makes them usable for potable water containment or
conveyance and aquaculture ponds; and the increasing use of polyethylene liners
in leach pads associated with large scale mining operations.
 
REGULATORY BACKGROUND -- UNITED STATES
 
     In the past two decades, substantial regulations have been enacted
worldwide relating to the management, treatment, storage, and disposal of waste
materials. The Company believes that these regulations have enhanced the market
for the Company's lining systems and helped establish the quality, utility, and
breadth of product options of HDPE and VFPE lining systems in general.
 
     The principal U.S. federal statute that has influenced the market for the
Company's products is the Resource Conservation and Recovery Act of 1976
("RCRA") as amended. RCRA provides a comprehensive scheme for the regulation of
waste facilities and the storage, treatment, and disposal of wastes. The
Environmental Protection Agency (the "EPA"), which is charged with implementing,
administering and enforcing RCRA, has adopted regulations under RCRA governing
the management and disposal of wastes, including standards for storage areas,
incinerators, and landfills.
 
     RCRA legislation is divided into a number of subtitles, including "Subtitle
C -- Hazardous Waste Management" and "Subtitle D -- State or Regional Solid
Waste Plans". Regarding synthetic liners, Subtitle D impacts the disposal of all
municipal solid waste ("MSW") at roughly 2,700 MSW active landfill sites in the
country by providing minimum national standards for the protection of human
health and the environment. Regulations adopted under Subtitle D govern the
methods by which MSW landfills are sited, designed, built, operated and closed,
and impose strict compliance standards with regard to groundwater protection.
 
     Subtitle D regulations are generally enforced at the state level as a
majority of states have created their own regulations that meet or exceed the
federal guidelines. EPA approved state programs can permit facilities using
alternatives to the federally specified criteria, but alternative liner designs
must be proven to be as effective as the minimum design standard. The Subtitle D
regulations specify use of a composite liner system consisting of highly
impermeable clay plus a geomembrane. The geomembrane must be at least 30 mils
(one mil equals 1/1000 of an inch) thick. HDPE liners have been installed in
landfills in every state. The Company believes that a broad range of factors
favor use of HDPE geomembranes in landfills, including material properties,
extensive experience and history.
 
     The Hazardous and Solid Waste Amendments of 1984 (the "1984 Amendments")
require that all new hazardous waste landfills use approved lining systems
composed of two or more liners with leachate collection and drainage systems
above and between each liner (a "Double Liner System"). The 1984 Amendments also
require the use of a Double Liner System for all surface impoundments or ponds
used in the containment of certain hazardous liquids. The welds joining
individual sections of synthetic lining systems must also be tested in
compliance with EPA procedures. The Company believes that, of the lining systems
for hazardous waste landfill sites that have received EPA approval under RCRA
since 1984, HDPE lining systems have been the most widely used.
 
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<PAGE>   5
 
     The Comprehensive Environmental Response, Compensation and Liability Act of
1980 (commonly known as "CERCLA" or the "Superfund" legislation), was enacted in
response to the dangers of uncontrolled hazardous waste sites. The Superfund
legislation authorizes the EPA to compel owners and operators to clean up
hazardous waste sites and, if they fail to do so, authorizes the EPA to perform
the cleanup work, using funds appropriated for that purpose by Congress, and
then pursue owners or operators for reimbursement.
 
     The EPA published a presumptive remedy that the use of a liner cap in
closed MSW landfills will prevent groundwater contamination and contain
subterranean waste plumes. The Company believes its products directly address
this application.
 
     EPA published regulations and some state regulations also require that
gypsum waste, a by-product of phosphate mining, be stored in lined facilities.
In addition, all states have enacted statutes and issued regulations regulating
the handling and storage of hazardous substances, specifically petroleum
products and other chemicals contained in tanks or lagoons. The Company's
products directly address these applications.
 
REGULATORY BACKGROUND -- FOREIGN
 
     Similar laws and regulatory requirements exist in other countries
throughout the world, particularly in the European Community, Japan, and Central
and South America, relating to projects that involve intensive water use or that
can have an impact on groundwater quality. These activities include agricultural
irrigation, livestock feedlots, aquaculture facilities, industrial stormwater
runoff containment areas, canals, mining, and tunnels.
 
PRODUCTS AND SERVICES
 
     The Company produces a variety of FML products that are used in lining
systems. The Company's principal product is a smooth finished HDPE sheet. The
sale and installation of HDPE smooth sheeting accounted for approximately 61% ,
65% and 55% of the Company's sales in 1997, 1996 and 1995 respectively. The
Company manufactures HDPE sheet in thicknesses from 20 to 240 mil (one mil
equals 1/1000 of an inch) in varying seamless widths up to 34.5 feet. Sheet
width, and consequently, the number of seams required for installation is
critical. Seaming represents the major technical difficulty for liner
installation. A greater number of seams requires more technical labor and more
testing. The Company also manufactures and sells textured HDPE sheet for use on
sloping terrain, or where a high friction interface is required.
 
     The Company manufactures sheeting using low density resins. The Company
markets these products as a very flexible polyethylene ("VFPE") membrane with
chemical compatibility and temperature tolerance characteristics superior to PVC
and other FML products. Applications include landfill caps, mining heap leach
pads, and floating covers.
 
     The Company utilizes its co-extrusion capability to produce sheets with
layers consisting of different materials. When co-extruded, these layers become
molecularly integrated such that they cannot delaminate. The Company has been
awarded a patent for its white-surfaced sheet for use in landfills and waste
containment applications. By reflecting radiant heat, the white surfaced sheet
reduces the expansion/contraction (wrinkling/bridging) of the liner during
installation and protects subgrade soils from desiccation. Under identical
exposure conditions, white-surfaced sheets have recorded temperatures as much as
50% lower than standard black geomembranes. In addition, white-surfaced sheets
greatly improve installation damage detection and quality by revealing scoring
and abrasion as black marks exposed against the white surface. The Company also
manufactures this product with a textured surface.
 
     A patent has been awarded for the Company's electrically conductive sheet
product that incorporates a proprietary conductive layer and allows for 100%
electric spark testing of the installed liner. Unlike traditional electric leak
detection surveys, the Company's conductive sheet spark testing does not require
flooding of the containment system with water, which can be expensive and time
consuming.
 
     The Company manufactures a high density polyethylene drainage net,
consisting of two sets of HDPE strands intertwined to form a net along which
fluid may be conveyed for drainage. The Company bonds
 
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geotextiles to one or both sides of the drainage net, which allows one-step
installation of drainage media for primary leachate collection where soil is
placed directly on top of the drainage layer.
 
     The Company, under non-exclusive agreements, markets and installs other
third-party products such as high-flow net, geogrids, piping, and geotextiles.
 
     The Company operates four primary geomembrane manufacturing facilities: two
in Houston, Texas, one in Rechlin, Germany, and one in Soham, England, using two
different extrusion manufacturing technologies for its primary sheeting
products: flat cast and round die film. The Company operates a total of thirteen
continuous flow extrusion lines, ten for sheeting products and three for its
drainage net products. Raw materials are delivered by railcar or truck, and
pneumatically transported into storage silos or directly to a production line
where it is extruded into sheet or net. Material handling equipment moves the
rolls of finished product to a storage yard prior to inspection and final
shipment to the customer. The Company's production facilities normally operate
continuously throughout the year.
 
     The Company's joint venture in Egypt utilizes a flat cast continuous flow
extrusion line for producing sheet. It manufacturers smooth FML products in
thicknesses from 20 mil to 120 mil.
 
     The Company often provides its customers with completely installed and
tested lining systems. The Company employs trained technicians and supervisors
who travel to customer job sites and install the lining materials. It also
offers installation services on a worldwide basis through a network of trained
distributors and subcontractors. In many applications, the Company furnishes a
technical supervisor to monitor and provide quality assurance technical advice
during the installation process. The sheets are joined in the field using hot
wedge or extrusion welders. The hot wedge welder operates by propelling itself
along the sheets that are to be joined drawing a hot metal wedge between them.
The heated sheets are then fed between pressure rollers, creating a dual track
seam. The extrusion welder operates by extruding heated resin through the dual
head of the welder, and integrating such material with the resin of the sheets
that are to be joined. Both the hot wedge and the extrusion weld result in a
homogeneous bond between the sheets, thereby offering the same chemical
resistance as the sheet. Because of the homogeneous bond created with the sheet,
the Company believes its welding methods are superior to other methods, such as
gluing.
 
     The Company manufactures and sells a geosynthetic clay liner (GCL) that
combines the Company's various sheet products with highly expansive sodium
bentonite clay. The benefit of the clay layer is that its high swelling capacity
seals small punctures accidentally made in an overlaying FML. In addition, the
Company manufactures its Studliner product at its Rechlin, Germany, facility,
which is used in tunnels and foundations for concrete protection.
 
     In addition, the Company conducts its own laboratory and onsite testing of
its manufactured products. The laboratory tests monitor the quality of incoming
raw materials and satisfy all routine tests on the finished product required by
the customer's specification. The Company tests the strength and adequacy of the
welds on the liners it installs by some combination of the following methods:
cutting samples from the liners and destructively testing the weld seam;
pressure testing an air channel created in the length of the weld during hot
wedge welding; performing vacuum testing for the airtightness of the extrusion
weld seam, and electric spark testing of its conductive sheet product. The
Company considers the testing of its products and the maintenance of high
quality standards essential to the successful operation of its business.
 
     The Company's research and development efforts focus on the development of
new products, new quality control procedures, and new or more efficient
manufacturing and installation techniques. Concepts are generated by the
Company's internal research efforts, as well as through contacts with potential
customers and professionals in the field. The Company's research and
development, and quality control expenditures during 1997, 1996 and 1995 were
$1,469,000, $1,675,000 and $1,705,000 respectively.
 
RAW MATERIALS
 
     The principal raw materials used by the Company are various high grade
polyethylene resins. The Company conducts initial screening tests of the resins
upon delivery as part of its quality control program. Each of the Company's
manufacturing units purchase polyethylene resins from two primary suppliers. The
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Company uses different types of polyethylene resins utilizing proprietary
formulations of stabilizers and antioxidants to manufacture various products.
 
     Polyethylene resins are occasionally in short supply and are subject to
substantial price fluctuation in response to market demand. The Company has not
encountered any significant difficulty to date in obtaining raw materials in
sufficient quantities to support its worldwide operations at current or expected
near-term future levels. But, any significant interruption in raw material
supplies or abrupt increases in raw material prices could have an adverse effect
upon the Company's operations. The Company has ongoing programs of working with
its suppliers to ensure quality, supply, and new product development.
 
APPLICATIONS
 
     The following table sets forth the principal applications of the Company's
lining systems, the dollar amounts (in thousands), and the percentages of net
sales for each application for the past three years.
 
                          SALES BY MARKET APPLICATION
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                              ------------------------------------------------
                                                1997      %      1996      %      1995      %
                                              --------   ---   --------   ---   --------   ---
<S>                                           <C>        <C>   <C>        <C>   <C>        <C>
Solid Waste Containment.....................  $122,681    62%  $121,624    58%  $148,738    60%
Mining......................................    21,844    11     32,729    16     40,680    16
Hazardous Waste Containment.................    14,765     7      6,003     3      4,282     2
Liquid Containment..........................    23,059    12     19,980     9     22,067     9
Other Applications..........................    16,969     8     29,036    14     32,296    13
                                              --------   ---   --------   ---   --------   ---
Total Net Sales.............................  $199,318   100%  $209,372   100%  $248,063   100%
                                              ========   ===   ========   ===   ========   ===
</TABLE>
 
     Solid Waste Containment. Solid waste containment applications for synthetic
liners include the lining of new landfill sites, or new cells within existing
landfill sites, to be used for the disposal or storage of non-hazardous waste.
 
     Synthetic liners are used to cover or "cap" unlined landfill sites to
prevent rainwater from creating excessive leachate that may seep into the
underlying groundwater, and to cap lined landfill cells to meet federal and
state guidelines. Synthetic liner covers also are used in the systems to collect
methane gas that is naturally produced as waste decays for use as fuel or to
meet regulatory requirements.
 
     Mining. Synthetic liners are employed for various purposes in the mining
industry. Liners are used for the containment of chemicals used in the mining of
gold, silver, copper and phosphate. These minerals are dissolved or "leached"
from the ore by chemical solutions that are circulated through ore-bearing
crushed rock deposited on top of a liner pad. The synthetic liner acts as a
collection and drainage system for the mineral-bearing solution. Demand for
synthetic liners for the mining industry is a direct result of the introduction
of leaching processes in gold, silver and copper mines. Leaching is a lower cost
recovery technique, as compared with traditional, capital-intensive mining
techniques for the separation of minerals from ore, and also permits the
extraction of minerals from low-grade ore that previously were not processed.
Synthetic liners are also used in various mining applications to contain the
spent ore, or tailings, and for containment of the various chemical solutions
after the leaching process. Gypsum, a byproduct of the phosphate mining
industry, is regulated to require containment systems, as it becomes acidic
during the mining process. The Company believes the gypsum market represents an
important segment of the overall mining application market.
 
     Hazardous Waste Containment. Synthetic liners are used for containment of
both solid and liquid hazardous waste. The Hazardous and Solid Waste Amendments
of 1984 mandate the use of synthetic lining systems at all new hazardous waste
landfill sites, and at all new ponds containing certain hazardous liquids.
 
     Liquid Containment. Applications such as aquaculture ponds, wastewater
ponds for municipal sewage treatment, industrial process liquid containment,
tank lining, stormwater runoff containment, potable water
 
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reservoirs, irrigation canals, erosion control along banks, and decorative ponds
often require the use of liners to contain liquids or protect concrete. A
growing application in the agriculture market is the use of synthetic liner for
the cost effective containment of organic wastes in commercial pig and cattle
feed lot operations.
 
     Other Applications. Synthetic liners are used in various other industrial
and non-industrial applications, including secondary containment, tunnel
waterproofing and prefabricated products. Synthetic liners also are used as
floating covers on liquid or semi-solid surfaces to protect the covered elements
from water and other elements in the environment, control odor, promote
anaerobic digestion of organic wastes and capture the resultant methane gas
produced. The Company is continually evaluating other industries in which its
lining systems might have commercially viable applications.
 
MARKETING AND SALES
 
     The Company conducts a worldwide direct sales effort focused on engineers,
general contractors, facility owners, and government officials who are
responsible for designing projects and awarding construction contracts involving
the installation of synthetic lining systems. It has sales personnel located in
the United States, France, Germany, the United Kingdom, Italy, the Netherlands,
Singapore, Australia, Egypt and the United Arab Emirates. The Company also sells
material to a select group of domestic installation companies and through a
network of independent commercial agents and distributors throughout the world.
In 1997 the Company entered into a joint-venture arrangement to sell its
products in the United Arab Emirates. The joint-venture commenced operations by
opening a warehouse and sales office in the duty free zone in the Jebel Ali Free
Zone in Dubai.
 
     The Company advertises in specialized trade publications and by direct mail
to its customers and potential customers, and participates in trade conventions
and conducts industry seminars domestically and abroad. The Company also gives
presentations to government administrators regarding the available technology
for the containment of waste materials and the advantages offered by the
Company's products.
 
     In the United States, the Company sells liners generally through
construction contracts awarded on the basis of a competitive bidding process or
directly to independent installers. When the Company sells pursuant to
construction contracts, the customer's bid proposal specifies the design and
performance criteria for the lining system to be constructed. If the Company is
awarded the contract, the remainder of the contractual terms are negotiated with
the customer, or with the customer's general contractor. The contract price
covers the cost of manufacturing the lining material, other third party
products, and the labor and other costs involved in installation, welding and
testing. The Company also may indemnify the site owner or general contractor for
certain damages resulting from the negligence of the Company's employees. The
Company often is required to post bid and performance bonds covering the full
amount of an installation contract. In most contracts, the Company provides the
customer with specified limited warranties as to material quality and
workmanship. These limited warranties may last for up to 20 years, but are
generally limited to repair or replacement by the Company of the defective liner
or installation up to the dollar amount of the contract involved, on a prorated
basis.
 
     The Company's foreign manufacturing subsidiaries generally sell liners to
independent installers on the basis of a competitive bidding process. In some
foreign contracts, the Company provides the customer with specified limited
warranties as to material quality. Some of the Company's foreign subsidiaries
also sell through construction contracts.
 
     In 1997, 1996 and 1995, respectfully, 52%, 54% and 51% of the Company's net
sales were to customers in the United States.
 
     During 1997, 1996 and 1995, no single customer accounted for 10% or more of
the Company's net sales. The Company believes that the loss of any one customer
would not have a material adverse effect on the Company's financial position or
results of operations.
 
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PRODUCT LIABILITY AND INSURANCE
 
     Although the Company is not exposed to the type of potential liability that
might arise from being in the business of handling, transporting, or storing
hazardous wastes or materials, the Company could be susceptible to liability for
environmental damage or personal injury resulting from defects in the Company's
products, or negligence by Company employees in the installation of its lining
systems. Such liability could be substantial because of the potential that
hazardous or other waste materials might leak out of their containment system
into the environment. The Company maintains liability insurance, which includes
pollution coverage in amounts that it believes to be prudent. However, there is
no assurance that this coverage will remain available to the Company. The
Company has experienced no material losses from defects in products and
installations. But, the Company's claims experience to date may not be a
meaningful measure of its potential exposure for product liability.
 
BACKLOG
 
     The backlog of unfilled orders at December 31, 1997, was $59.6 million
compared with $57.2 million at December 31, 1996. It is anticipated that,
subject to weather and other construction-related delays, the majority of the
value of construction contracts and customer purchase orders included in backlog
at December 31, 1997, will be completed or filled prior to December 31, 1998.
Contracts and commitments for products and services are occasionally varied,
modified, or canceled by mutual consent.
 
SEASONALITY AND OTHER BUSINESS CONDITIONS
 
     The Company's operations are subject to seasonal fluctuation with the
greatest volume of product deliveries and installations typically occurring
during the summer and fall. In addition, scheduled deliveries are often subject
to delay at the customers' request to correspond with customers' annual
budgetary and permitting cycles. With the Company's manufacturing facilities in
the United States, Germany, England, and Egypt, the Company is attempting to
mitigate the seasonal fluctuation on its delivery and installation schedules.
See Supplementary Data.
 
COMPETITION
 
     The Company believes that there are approximately 30 companies engaged in
the production of various synthetic liners worldwide. At least 12 of these
companies compete directly with the Company throughout the world. The principal
competitive factors within the synthetic liner market are performance of the
lining system, installation capability and price. The Company believes that it
has been able to maintain its position within the synthetic lining market
because of the performance advantages of the Company's lining systems over other
types of liners available, the convenience to the customer of having the Company
take sole responsibility for the manufacture, installation and testing of its
lining systems, and by being price competitive. Although the Company is a
leading supplier of synthetic lining systems, certain of the Company's existing
competitors are subsidiaries of larger companies that have greater financial
resources than the Company. The possibility exists that other companies with
more significant resources than the Company could enter the synthetic lining
market.
 
EMPLOYEES
 
     As of December 31, 1997, the Company had 851 employees, of whom 622 were
employed in the United States and 229 in foreign locations. During peak
construction periods in the summer and fall months, the Company's workforce
increases. During the winter months, the Company's workforce is maintained at
levels somewhat below the peak staffing levels experienced during the summer and
fall months. Some of the Company's full-time employees in foreign locations are
unionized, but, the Company has never experienced a strike or walkout. The
Company believes its employee relations are satisfactory.
 
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<PAGE>   10
 
PATENTS AND PROPRIETARY INFORMATION
 
     The Company has been awarded patents for the "GSE White(TM)", "GSE
Conductive(TM)" and "GSE CurtainWall(R)" products, as well as the
"FrictionFlex(R)" texturing process. The Company has other patents and pending
applications. The Company's manufacturing, welding and testing processes also
involve proprietary information and know-how. See "Products and Services". The
Company has registered its new trademark and logo ("GSE") with the U.S. Office
of Patent and Trademark and is in the process of registering this new trademark
in select foreign countries.
 
ITEM 2. PROPERTIES.
 
UNITED STATES
 
     The Company's corporate headquarters and one of its manufacturing
facilities are situated on a 21.5-acre tract of Company-owned land located in an
industrial park in north Houston. This location has 31,400 square feet of office
space in two buildings, housing executive, administrative, marketing, and
accounting personnel. The manufacturing plant is a 67,000 square foot building
of metal skin over steel frame construction that contains seven continuous flow
liner extrusion lines. This manufacturing facility also houses one continuous
flow drainage net extruder. In addition, fabrication services and equipment are
housed in a 12,000 square foot facility located on the premises.
 
     A second manufacturing facility in Houston occupies 16.9 acres with 3,300
square feet of office space, and 83,000 square feet of manufacturing facilities.
A continuous flow extrusion line operates on this site, as well as geonet,
geocomposite and texturing lines.
 
     The Company has a manufacturing facility located in Spearfish, South
Dakota, that manufactures the Company's GCL. This 16,000 square foot facility
contains one production line.
 
GERMANY
 
     The administrative offices of GSE Lining Technology GmbH, the Company's
German subsidiary, are located in Hamburg, Germany. The manufacturing facility,
located in Rechlin, Germany, on 8.2 acres, supplies polyethylene sheet to
customers in Europe. The Company operates a continuous flow extrusion line and
two texturing lines on this site.
 
UNITED KINGDOM
 
     The administrative offices of SGS Geosystems Limited (SGS(TM)) and GSE
Lining Technology Ltd., two of the Company's United Kingdom subsidiaries, are
located on a .75 acre leased site in Soham, England. This location has 2,433
square feet of office space and 10,652 square feet of manufacturing facilities.
SGS operates a continuous flow extrusion line on this site.
 
EGYPT
 
     The Company owns a 50% interest in two joint ventures, Hyma/GSE
Manufacturing Co. (Hyma/GSE) and Hyma/GSE Lining Technology Co., a manufacturing
company and a trading company, respectively. The administrative offices for
these ventures are in a small leased facility in Cairo. Hyma/GSE's manufacturing
facilities are located on a 1.1 acre leased site located outside of Cairo.
Located on this site are two buildings totaling 34,262 square feet that house
the manufacturing equipment. A single continuous flow extrusion line is operated
on this site.
 
OTHER
 
     The Company also leases sales or installation offices located in the United
Kingdom, Singapore, Australia, and Dubai.
 
                                        8
<PAGE>   11
 
ITEM 3. LEGAL PROCEEDINGS.
 
     For information concerning various legal proceedings involving the Company,
see Note 17 of the Notes to the Consolidated Financial Statements.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     Not applicable.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
 
     The common stock of the Company trades on the New York Stock Exchange
(NYSE) under the symbol GSE. The following table shows the range of high and low
sale prices for the common stock on the New York Stock Exchange through December
31, 1997 for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                              --------------------------------------------
                                                                      1997                    1996
                                                              --------------------    --------------------
                                                                HIGH        LOW         HIGH        LOW
                                                                ----        ---         ----        ---
<S>                                                           <C>         <C>         <C>         <C>
First Quarter...............................................     9 1/4       6 1/2       6 1/2       5 1/4
Second Quarter..............................................     7 7/8       4 5/8       7 1/2       5 1/4
Third Quarter...............................................     5 7/8       4 1/2       6 7/8       5 1/2
Fourth Quarter..............................................     5 7/8       4 5/8       7 7/16      5 5/16
</TABLE>
 
     The approximate number of record holders of the Company's common stock at
March 3, 1998, was 420. Management estimates that the aggregate number of
beneficial holders exceeds 3,500.
 
ITEM 6. SELECTED FINANCIAL DATA.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                           ----------------------------------------------------
                                             1997       1996       1995       1994       1993
                                           --------   --------   --------   --------   --------
<S>                                        <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
  Net sales..............................  $199,318   $209,372   $248,063   $223,328   $185,805
  Gross profit...........................    36,101     49,871     47,690     46,572     34,120
  Nonrecurring charges...................        --         --     15,270         --         --
  Operating income.......................    10,613     22,562      3,727     14,805      5,349
  Interest expense, net..................     2,191      3,230      5,350      4,521      4,710
  Income (loss) before income taxes......     7,846     20,080     (1,296)    10,775        425
  Net income (loss)......................     4,550     11,646     (2,231)     7,545      1,874
  Basic and diluted earnings (loss) per
     common share........................       .29        .67       (.13)       .44        .11
BALANCE SHEET DATA:
  Working capital........................  $ 60,461   $ 86,585   $ 79,546   $ 61,680   $ 43,384
  Total assets...........................   177,961    204,046    196,021    211,182    177,753
  Total debt.............................    43,395     49,740     55,573     60,834     57,981
  Stockholders' equity...................    86,110    109,513     97,550     98,478     81,925
</TABLE>
 
                                        9
<PAGE>   12
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
 
RESULTS OF OPERATIONS
 
  General
 
     On July 27, 1995, the Company merged (the Merger) with SLT Environmental,
Inc. (SLT). SLT manufactured and installed synthetic lining systems and operated
manufacturing facilities in Rechlin, Germany, and Houston, Texas. The
stockholder of SLT received 7,000,000 shares of the Company's common stock for
all issued and outstanding shares of SLT common stock. The Merger was accounted
for as a pooling of interests. Accordingly, the Company's financial statements
have been restated to include the results of SLT for all periods presented.
 
     On January 23, 1997, the Company purchased 2,071,656 shares of its common
stock at a price of $7.00 per share for a total cost of $14,502,000. On December
16, 1997, the Company purchased 2,200,000 shares of its common stock at a price
of $5.40 per share for a total cost of $11,880,000. Both of these transactions
were funded from the Company's available cash. At December 31, 1997, the Company
had 13,279,655 shares outstanding.
 
  Year Ended December 31, 1997, Versus Year Ended December 31, 1996
 
     The Company's net sales of $199,318,000 decreased $10,054,000, or 5%, in
1997 from the $209,372,000 reported in 1996. Seventy percent of this net
decrease resulted from the cumulative decrease in the US dollar value of the
functional currencies of the Company's foreign operating units. The balance of
the decrease is net changes in product and service prices and a one percent
increase in units sold. Sales to the North American market were $104,022,000 in
1997 compared with $114,339,000 in 1996. North American sales, in units, were
down 9% from 1996. Sales to foreign markets were $95,296,000 in 1997 compared
with $95,033,000 in 1996. Sales, in units, to foreign markets were up 12% from
1996.
 
     Gross profit was $36,101,000 in 1997 compared to $49,871,000 in 1996. This
28% decrease of $13,770,000 was primarily driven by excess market capacity. 1997
selling prices of product were held slightly lower than 1996's by the
competitive markets. At the same time, the average cost of raw material,
polyethylene, increased approximately 22%. Higher costs on lower sales volume
resulted in a drop in gross profit margin to 18% of sales in 1997 from 24% of
sales in 1996.
 
     Selling, general and administrative expenses of $24,107,000 were $2,113,000
lower in 1997 than in 1996. Expenses were down in the Company's foreign
operating units by nearly $2,000,000. Approximately $800,000 of this reduction
resulted from the net lower US dollar value of the foreign units' functional
currencies. The balance of this reduction was spread about equally between the
Company's major foreign operations.
 
     Interest expense was $828,000 lower in 1997 than in 1996. This reduction
was the result of a lower level of average debt outstanding and a lower
effective interest rate. During 1997 the company repaid $5,000,000 of 11.17%
interest rate debt. Interest expense was also reduced by the Company's cross
currency debt and interest rate swap completed late in 1996 discussed in Note 9
of the Notes to Consolidated Financial Statements.
 
     Interest income of $1,796,000 in 1997 compared with $1,585,000 in 1996.
This increase was the result of higher levels of short term investments in 1997.
Short term investments were reduced $11,880,000 in December 1997 to repurchase
2,200,000 shares of the Company's common shares.
 
     Foreign exchange losses of $334,000 were recorded in 1997 compared with
foreign exchange gains of $683,000 in 1996. These gains and losses result from
the Company's foreign operating units entering into sales and purchases in
currencies other than their functional currency.
 
     Other expense, net was $242,000 in 1997 compared with $65,000 of income in
1996. In 1996 approximately $200,000 of income was recorded from gains on
hedging transactions.
 
     The Company's provision for income taxes was $3,296,000 in 1997 compared
with $8,434,000 in 1996. The tax provision in both years was provided at
statutory rates adjusted for permanent differences.
 
                                       10
<PAGE>   13
 
  Year Ended December 31, 1996, Versus Year Ended December 31, 1995
 
     The Company's net sales decreased $38,691,000 or 16% in 1996 compared with
1995. This decrease was driven by lower prices as unit sales volume was the same
year to year. Sales price follows raw material cost, which was down considerably
during the first half of 1996. Geographically, unit sales volumes were up
slightly in North America and up over 7% in Europe. These increases were offset
by the lower unit sales in Latin and South America and the Middle East/Africa.
 
     Gross profit increased $2,181,000 or 5% despite the lower sales level. The
improvement in gross profit was generated by the Company's North American and
European operations. The increase in gross profit on lower sales volume was
generated from a reduction in the Company's overall cost structure enhanced by
the Merger in 1995. This margin improvement on lower sales increased gross
profit margins from 19% in 1995 to 24% in 1996.
 
     Selling, general and administrative expenses declined $1,565,000 or 6% in
1996 compared with 1995. Expenses in the United States declined nearly
$2,500,000, but this decrease was offset by increased expenses in Europe. The
increase in expenses in Europe was due to the acquisition of SGS Geosystems
Limited in 1996. Excluding this acquisition, expenses outside the U.S. were
comparable with the prior year.
 
     Interest expense declined $1,141,000 or 19% from 1995 to 1996. This
reduction was the result of a lower level of average debt outstanding during
1996 combined with lower interest rates due to the debt restructuring in
conjunction with the Merger.
 
     Interest income increased to $1,585,000 in 1996 from $606,000 in 1995. This
increase was the result of significantly higher levels of short term investments
in 1996.
 
     Foreign exchange gains of $683,000 were recorded in 1996 compared with a
foreign exchange loss of $120,000 in 1995. The majority of the gain was recorded
in the Company's German operations and was driven by gains on receivables that
were denominated in currencies other than the Deutsche Mark.
 
     Other income declined from $447,000 in 1995 to $65,000 in 1996. In 1995,
approximately $500,000 of other income was recorded in connection with the
receipt of a development grant for the Company's investment in its German
manufacturing facility.
 
     The Company's provision for income taxes was $8,434,000 in 1996 compared
with $935,000 in 1995. The tax provision in both years was provided at the
statutory rates adjusted for permanent differences. The 1995 provision, on a
pretax loss of $1,296,000, was due to the nondeductibility of certain expenses,
particularly merger and meals and entertainment expenses and goodwill
amortization.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At December 31, 1997, the Company had working capital of $60,461,000 of
which $24,844,000 was cash and cash equivalents. The Company's cash, inventory
and receivable balances fluctuate from quarter to quarter due to the seasonality
of sales. The Company's capital structure consisted of $43,395,000 in debt and
$86,110,000 in stockholders' equity at December 31, 1997.
 
     The Company has a $35,000,000 multi-currency revolving credit facility (the
"Revolver") with NationsBank of Texas, N.A. as agent bank. The Revolver, as
amended, matures on September 30, 1999 and bears interest, at the Company's
option, at the bank's prime rate or LIBOR plus an applicable margin based on the
ratio of funded debt to total capitalization. An annual commitment fee of up to
3/8% is payable on any unused portion of the facility. Under the terms of the
revolving line of credit agreement, the Company is required to maintain certain
financial ratios and a specific level of consolidated tangible net worth. At
December 31, 1997, and December 31, 1996, there was no balance outstanding on
the Revolver. However, at December 31, 1997, letters of credit issued under this
facility totaled $1,125,000 thereby reducing the balance available to
$33,875,000 (see Note 8 of the Notes to Consolidated Financial Statements). The
letters of credit issued under this facility secure performance of installation
projects and self-insurance programs.
 
     On June 15, 1998, the Company will make a $5,000,000 principal payment on
its 11.17% Notes. The Company believes that its cash balance, cash generated by
operations and the balance available under the Revolver are adequate to meet any
other foreseeable cash requirements during 1998.
 
                                       11
<PAGE>   14
 
     The Company's operations are subject to seasonal fluctuation with the
greatest volume of product deliveries and installations typically occurring in
the summer and fall months. In particular, the Company's operating results are
most impacted in the first quarter as both product deliveries and installations
are at their lowest levels due to the inclement weather experienced in the
Northern Hemisphere.
 
     In connection with sales and installation projects outside of the United
States, principally Europe and Australia, the Company may enter into sales or
installation contracts that are denominated in currencies different than the
subsidiary's functional currency. The Company recognizes that its international
operations are subject to the risk of foreign currency fluctuations not present
in domestic operations. Currency losses to date have not been material to the
Company's operations as a whole.
 
     The Company's products are sometimes sold into foreign markets with
extended terms, secured by an irrevocable letter of credit from a customer's
bank. Payment terms may extend up to six months. At December 31, 1997, the
Company had a U.S. dollar receivable of $3,666,000 from an Indonesian customer
secured by an irrevocable letter of credit issued by an Indonesian bank,
maturing in 1998. Indonesia is experiencing economic and currency difficulties
which could create the potential for non-performance under the terms of this
letter of credit by the Indonesian bank. Management has complied with all the
terms of the letter of credit and has requested payment from the bank with the
first payment due in March 1998. There has been no indication that the bank will
not perform under the terms of the letter of credit, and therefore, there has
been no provision made in the financial statements for any possible difficulty
in collecting under this irrevocable letter of credit.
 
     There currently is excess manufacturing capacity in the market place. The
Company was not able to increase its product selling prices in 1997 to cover its
increased cost of raw material, polyethylene, which severely reduced its net
income in 1997 from 1996. The Company does not expect the market's excess
manufacturing capacity to change in 1998, and believes that its product profit
margins may deteriorate further in 1998.
 
     Pricing for the Company's products and services are principally driven by
worldwide manufacturing capacity in the industry and raw material costs. The
Company's primary raw material occasionally is in short supply and is subject to
substantial price fluctuation in response to market demand. Any increase in
worldwide manufacturing capacity, interruption in raw material supply or abrupt
raw material price increase could have an adverse effect upon the Company's
operations. Inflation has not had a significant impact in the Company's
operation.
 
YEAR 2000 COMPLIANCE
 
     The Company has been evaluating and upgrading its computer systems to make
its U.S. operations more efficient since the merger with SLT in 1995. This
evaluation culminated with the Company purchasing the JDEdwards suite of
systems. These systems will replace all of the U.S. legacy systems, which are
not year 2000 compliant, by the end of 1998. Final implementation of all
features of the JDEdwards systems will be made in 1999. The Company has
contracted with JDEdwards to help it install the new software in the U.S. The
approximate cost of the U.S. project is $3,000,000. During 1998, the Company
will be evaluating using the JDEdwards systems in its German operations with
implementation of a new system in 1999. The Company's other foreign operations
are year 2000 compliant.
 
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
 
     This Form 10-K contains certain forward-looking statements as such term is
defined in the Private Securities Litigation Reform Act of 1995, and information
relating to the Company and its subsidiaries that are based on the beliefs of
the Company's management, as well as assumptions made by and information
currently available to the Company's management. When used in this report, the
words, "anticipate", "believe", "estimate", "expect", "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries or
Company management, are intended to identify forward-looking statements. Such
statements reflect the current risks, uncertainties and assumptions related to
certain factors including, without limitations, competitive market factors,
worldwide manufacturing capacity in the industry, general economic conditions
around the world, raw material pricing and supply, governmental regulation and
supervision, seasonality, distribution networks, and other factors described
herein. Based upon changing
                                       12
<PAGE>   15
 
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
 
                                       13
<PAGE>   16
 
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                         REPORT OF INDEPENDENT AUDITORS
 
Board of Directors and Stockholders
Gundle/SLT Environmental, Inc.
 
     We have audited the accompanying consolidated balance sheets of Gundle/SLT
Environmental, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gundle/SLT
Environmental, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
 
ERNST & YOUNG LLP
 
Houston, Texas
January 30, 1998
 
                                       14
<PAGE>   17
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1997       1996
                                                              --------   --------
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $ 24,844   $ 43,122
  Accounts receivable:
     Trade, net.............................................    52,672     51,384
     Other..................................................       934      2,122
  Contracts in progress.....................................     2,189      3,948
  Inventory.................................................    22,000     21,430
  Deferred income taxes.....................................     6,408      6,991
  Prepaid expenses and other................................       913      2,154
                                                              --------   --------
          Total current assets..............................   109,960    131,151
Property, plant and equipment, net..........................    35,283     40,282
Excess of purchase price over fair value of net assets
  acquired, net.............................................    28,118     29,858
Other assets................................................     4,600      2,755
                                                              --------   --------
                                                              $177,961   $204,046
                                                              ========   ========
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................  $ 39,835   $ 33,138
  Advance billings on contracts in progress.................       725        936
  Current portion of long-term debt.........................     5,767      5,648
  Income taxes payable......................................     2,400      2,976
  Deferred income taxes.....................................       772      1,868
                                                              --------   --------
          Total current liabilities.........................    49,499     44,566
Deferred income taxes.......................................     3,297      4,584
Long-term debt..............................................    37,628     44,092
Other liabilities...........................................     1,427      1,291
Stockholders' equity:
  Preferred stock, $1.00 par value, 1,000,000 shares
     authorized, no shares issued or outstanding............        --         --
  Common stock, $.01 par value, 30,000,000 shares
     authorized, 18,087,111 and 17,872,174 shares issued....       180        179
  Additional paid-in capital................................    69,929     69,405
  Retained earnings.........................................    46,350     41,800
  Unearned compensation.....................................    (1,051)    (1,204)
  Cumulative translation adjustment.........................     1,351      3,600
                                                              --------   --------
                                                               116,759    113,780
  Treasury stock at cost, 4,807,456 shares and 500,000
     shares.................................................   (30,649)    (4,267)
                                                              --------   --------
          Total stockholders' equity........................    86,110    109,513
                                                              --------   --------
                                                              $177,961   $204,046
                                                              ========   ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       15
<PAGE>   18
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $199,318    $209,372    $248,063
Cost of sales..............................................   163,217     159,501     200,373
                                                             --------    --------    --------
Gross profit...............................................    36,101      49,871      47,690
Selling, general and administrative expenses...............    24,107      26,220      27,785
Amortization of goodwill...................................     1,381       1,089         908
Nonrecurring charges.......................................        --          --      15,270
                                                             --------    --------    --------
Operating income...........................................    10,613      22,562       3,727
Other expenses:
  Interest expense.........................................     3,987       4,815       5,956
  Interest income..........................................    (1,796)     (1,585)       (606)
  Foreign exchange (gain) loss.............................       334        (683)        120
  Other, net...............................................       242         (65)       (447)
                                                             --------    --------    --------
Income (loss) before income taxes..........................     7,846      20,080      (1,296)
Provision for income taxes.................................     3,296       8,434         935
                                                             --------    --------    --------
Net income (loss)..........................................  $  4,550    $ 11,646    $ (2,231)
                                                             ========    ========    ========
Basic and diluted earnings (loss) per common share.........  $   0.29    $   0.67    $  (0.13)
                                                             ========    ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       16
<PAGE>   19
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                               COMMON STOCK     ADDITIONAL              CUMULATIVE                    TREASURY STOCK
                              ---------------    PAID-IN     RETAINED   TRANSLATION     UNEARNED     -----------------
                              SHARES   AMOUNT    CAPITAL     EARNINGS   ADJUSTMENT    COMPENSATION   SHARES    AMOUNT     TOTAL
                              ------   ------   ----------   --------   -----------   ------------   ------   --------   --------
<S>                           <C>      <C>      <C>          <C>        <C>           <C>            <C>      <C>        <C>
BALANCE AT DECEMBER 31,
  1994......................  17,685    $177     $68,216     $32,385      $ 1,967       $    --        500    $ (4,267)  $ 98,478
  Exercise of stock
    options.................       4      --          16          --           --            --         --          --         16
  Purchases under the
    Employee Stock Purchase
    Plan....................       7      --          38          --           --            --         --          --         38
  Cumulative translation
    adjustment..............      --      --          --          --        1,249            --         --          --      1,249
  Net loss..................      --                  --      (2,231)          --            --         --          --     (2,231)
                              ------    ----     -------     -------      -------       -------      -----    --------   --------
BALANCE AT DECEMBER 31,
  1995......................  17,696     177      68,270      30,154        3,216            --        500      (4,267)    97,550
  Exercise of stock
    options.................      15      --          76          --           --            --         --          --         76
  Restricted stock grant....     157       2       1,037          --           --        (1,204)        --          --       (165)
  Purchases under the
    Employee Stock Purchase
    Plan....................       4      --          22          --           --            --         --          --         22
  Cumulative translation
    adjustment..............      --      --          --          --          384            --         --          --        384
  Net income................      --      --          --      11,646           --            --         --          --     11,646
                              ------    ----     -------     -------      -------       -------      -----    --------   --------
BALANCE AT DECEMBER 31,
  1996......................  17,872     179      69,405      41,800        3,600        (1,204)       500      (4,267)   109,513
  Exercise of stock
    options.................      70      --         488          --           --            --         --          --        488
  Restricted stock grant....     139       1           8          --           --           153         35          --        162
  Purchases under the
    Employee Stock Purchase
    Plan....................       6      --          28          --           --            --         --          --         28
  Cumulative translation
    adjustment..............      --      --          --          --       (2,249)           --         --          --     (2,249)
  Net income................      --      --          --       4,550           --            --         --          --      4,550
  Treasury stock
    purchases...............      --      --          --          --           --            --      4,272     (26,382)   (26,382)
                              ------    ----     -------     -------      -------       -------      -----    --------   --------
BALANCE AT DECEMBER 31,
  1997......................  18,087    $180     $69,929     $46,350      $ 1,351       $(1,051)     4,807    $(30,649)  $ 86,110
                              ======    ====     =======     =======      =======       =======      =====    ========   ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       17
<PAGE>   20
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                                1997      1996       1995
                                                              --------   -------   --------
<S>                                                           <C>        <C>       <C>
Cash flows from operating activities:
  Net income (loss).........................................  $  4,550   $11,646   $ (2,231)
  Adjustments to reconcile net income (loss) to cash
     provided by (used in) operating activities:
     Depreciation...........................................     7,148     8,012      8,123
     Amortization of goodwill...............................     1,381     1,089        908
     Amortization of debt issuance costs....................       120        52         40
     Amortization of unearned compensation..................       164       516         --
     Deferred income taxes..................................      (749)     (957)    (1,573)
     Gain on sale of assets.................................      (271)     (186)       (86)
     Write down of assets...................................        --        --      8,470
     Increase (decrease) in cash due to changes in assets
       and liabilities:
       Accounts receivable net..............................    (2,292)   16,612     10,802
       Costs and estimated earnings in excess of billings on
          contracts in progress.............................     1,345     6,401     (1,200)
       Inventory............................................    (1,434)     (942)     2,222
       Prepaid expenses and other, net......................       856      (217)      (965)
       Accounts payable and accrued liabilities.............     7,166    (3,387)    (8,535)
       Advance billings on contracts in progress............      (181)      358        135
       Income taxes payable.................................      (576)    3,101     (1,914)
                                                              --------   -------   --------
          Net cash provided by (used in) operating
            activities......................................    17,227    42,098     14,196
                                                              --------   -------   --------
Cash flows from investing activities:
  Additions to property, plant and equipment................    (3,769)   (4,526)    (4,135)
  Proceeds from the sale of equipment.......................       450     1,173        860
  Payments for acquisition of a business, net of cash
     acquired...............................................        --    (4,774)        --
  Advances to affiliates and other, net.....................      (123)   (1,696)      (387)
                                                              --------   -------   --------
          Net cash provided by (used in) investing
            activities......................................    (3,442)   (9,823)    (3,662)
                                                              --------   -------   --------
Cash flows from financing activities:
  Payments on short-term debt, net..........................        --        --    (12,467)
  Proceeds from long-term debt..............................        --        --     25,000
  Repayments of long-term debt..............................    (5,916)   (6,242)   (17,692)
  Proceeds from the exercise of stock options and purchases
     under the employee stock purchase plan.................       486        98         54
  Repurchase of common stock................................   (26,382)       --         --
  Other.....................................................        --       467         --
                                                              --------   -------   --------
          Net cash provided by (used in) financing
            activities......................................   (31,812)   (5,677)    (5,105)
Effect of exchange rate changes on cash.....................      (251)      467      1,140
                                                              --------   -------   --------
Net increase (decrease) in cash and cash equivalents........   (18,278)   27,065      6,569
Cash and cash equivalents at beginning of year..............    43,122    16,057      9,488
                                                              --------   -------   --------
Cash and cash equivalents at end of year....................  $ 24,844   $43,122   $ 16,057
                                                              ========   =======   ========
Cash paid for interest......................................  $  4,152   $ 4,697   $  4,856
                                                              ========   =======   ========
Cash paid for income taxes..................................  $  4,764   $ 6,631   $  5,184
                                                              ========   =======   ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                       18
<PAGE>   21
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) BASIS OF PRESENTATION --
 
  Organization --
 
     Gundle/SLT Environmental, Inc. (the "Company"), a Delaware corporation, was
incorporated in August 1986, and through its wholly owned subsidiaries is
primarily engaged in the manufacture, sale and installation of polyethylene
lining systems.
 
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
 
  Consolidation --
 
     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Investments in partially owned
entities in which ownership ranges from 20 to 50 percent are accounted for using
the equity method. All material intercompany balances and transactions have been
eliminated.
 
  Cash Equivalents --
 
     The Company considers all highly liquid short-term investments with an
original maturity of three months or less to be cash equivalents.
 
  Inventory --
 
     Inventory is stated at the lower of cost or market. Cost, which includes
material, labor and overhead, is determined by the weighted average cost method,
which approximates the first in first out cost method.
 
  Property, plant and equipment --
 
     Costs of additions and major improvements are capitalized, whereas
maintenance and repairs which do not improve or extend the life of the asset are
charged to expense as incurred. When items are retired or otherwise disposed of,
income is charged or credited for the difference between net book value and
proceeds realized thereon. Interest costs incurred in construction of assets are
capitalized and depreciated over the useful life of the asset. Depreciation is
computed using the straight-line method, based on the estimated useful lives of
the assets. Total repairs and maintenance expense during 1997, 1996 and 1995 was
$2,411,000, $2,404,000 and $2,650,000, respectively.
 
  Excess of purchase price over fair value of net assets acquired --
 
     The excess of the aggregate price paid by the Company in the acquisition of
businesses, accounted for as a purchase, over the fair market value of the net
assets acquired is amortized on a straight-line basis over periods not exceeding
40 years. The carrying value of the excess of purchase price over fair value of
net assets acquired is reviewed if the facts and circumstances suggest that it
may be impaired. If this review indicates that the carrying value will not be
recoverable, determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, it is reduced to the discounted
cash flow value. As of December 31, 1997 and 1996, accumulated amortization was
$11,195,000 and $9,984,000, respectively.
 
  Revenue and cost recognition --
 
     The Company recognizes revenue upon shipment of product to the customer
except when work is being performed under an installation contract. Revenues
from installation contracts are recognized on the percentage-of-completion
method measured by the percentage of costs incurred to total estimated costs for
each contract.
 
                                       19
<PAGE>   22
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Cost of sales includes all direct material and labor costs, and indirect
costs such as indirect labor, depreciation, insurance, supplies, tools and
repairs.
 
     Provisions for the total estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job performance,
job conditions, estimated profitability and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
 
     Selling, general and administrative costs are charged to expense as
incurred.
 
  Deferred costs --
 
     Debt issuance costs are capitalized and amortized using the effective
interest rate method over the period the related debt is anticipated to be
outstanding.
 
  Warranty Costs --
 
     The Company's products are sold and installed with specified limited
warranties as to material quality and workmanship and may extend up to 20 years.
Provision for warranty costs are made based on the Company's claims experience.
The reserve for these costs is included in the self-insurance reserve (see Note
7).
 
  Income taxes --
 
     The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statements and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
 
  Foreign currency translation --
 
     Results of operations for foreign subsidiaries with functional currencies
other than the U.S. dollar are translated using average exchange rates during
the year. Assets and liabilities of these foreign subsidiaries are translated
using the exchange rates in effect at the balance sheet date and the resulting
translation adjustments are recognized as a separate component of stockholders'
equity. Gains and losses arising from foreign currency transactions are
recognized in income as incurred.
 
     In connection with contracts performed outside of the United States, the
Company routinely bids fixed-price contracts which are denominated in currencies
different than the functional currency of the applicable subsidiary performing
the work. The Company recognizes that such bidding practices, in the context of
international operations, are subject to the risk of foreign currency
fluctuations not present in domestic operations. Losses related to these
contracts are included in cost of sales and have not been significant.
 
  Foreign exchange contracts --
 
     The Company occasionally enters into forward contracts and cross currency
swaps in its management of foreign currency exposures. As a matter of policy,
the Company does not speculate in financial markets and therefore, does not hold
these contracts for trading purposes. The Company utilizes what it considers
straightforward instruments to accomplish its objectives.
 
     The Company is using a cross currency principal and interest rate swap to
effectively convert a portion of its U.S. dollar denominated debt into Deutsche
Marks. The objective of this hedging strategy is the management of the foreign
currency exchange risk associated with its net investment in Germany and is
based on the projected foreign currency cash flows from Germany over the next
eight years. The Company's investment in Germany and the foreign currency
portion of its swap are adjusted each period to reflect current
                                       20
<PAGE>   23
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
foreign exchange rates with the gains and losses recorded in the equity section
of the balance sheet. The differential paid or received on the interest rate
component is recognized as an adjustment to interest expense.
 
  Earnings per common share --
 
     In 1997, the Financial Accounting Standards Board Issued Statement No. 128
Earnings per Share. Statement 128 replaces the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the Statement 128 requirments.
 
  Stock options --
 
     The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
stock options. See Note 10 for disclosures required by Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation".
 
  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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
  Supplier/sources of supply --
 
     The Company currently purchases its raw material (polyethylene resins) from
at least two suppliers at each location. Polyethylene resins are occasionally in
short supply and are subject to substantial price fluctuation in response to
market demand. The Company has not encountered any significant difficulty to
date in obtaining raw materials in sufficient quantities to support its
operations at current or expected near-term future levels. However, any
disruption in raw material supply or abrupt increases in raw material prices
could have an adverse effect upon the Company's operations.
 
  Reclassifications --
 
     The accompanying consolidated financial statements for 1995 and 1996
contain certain reclassifications to conform with the presentation used in 1997.
 
  Accounting Changes --
 
     In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
and Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. These statements, which are effective for periods beginning after
December 15, 1997, expand and modify disclosures and, accordingly, will have no
impact on the Company's reported financial position, results of operations, or
cash flows.
 
                                       21
<PAGE>   24
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(3) TRADE RECEIVABLES --
 
     Trade receivables consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Direct sales................................................  $30,233    $29,231
Contracts:
  Completed.................................................   20,646     17,425
  In progress...............................................    3,821      7,280
  Retainage.................................................    2,319      2,872
                                                              -------    -------
                                                               57,019     56,808
Allowance for doubtful accounts.............................   (4,347)    (5,424)
                                                              -------    -------
                                                              $52,672    $51,384
                                                              =======    =======
</TABLE>
 
(4) ACCOUNTING FOR INSTALLATION CONTRACTS --
 
     The following summarizes installation contracts in progress at December 31:
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>         <C>
Costs incurred on contracts in progress.....................  $ 85,371    $64,576
Estimated earnings, net of losses...........................    16,137     12,271
                                                              --------    -------
                                                               101,508     76,847
  Less -- billings to date..................................   100,044     73,835
                                                              --------    -------
                                                              $  1,464    $ 3,012
                                                              ========    =======
Included in the accompanying balance sheet under the
  following captions:
  Contracts in progress.....................................  $  2,189    $ 3,948
  Advance billings..........................................      (725)      (936)
                                                              --------    -------
                                                              $  1,464    $ 3,012
                                                              ========    =======
</TABLE>
 
(5) INVENTORY --
 
     Inventory consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Raw materials and supplies..................................  $ 6,812    $ 5,084
Finished goods..............................................   15,188     16,346
                                                              -------    -------
                                                              $22,000    $21,430
                                                              =======    =======
</TABLE>
 
                                       22
<PAGE>   25
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(6) PROPERTY, PLANT AND EQUIPMENT --
 
     Property, plant and equipment consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Land........................................................  $  2,959    $  3,001
Buildings and improvements..................................    14,030      14,013
Machinery and equipment.....................................    70,259      70,188
Furniture and fixtures......................................     1,533       1,638
                                                              --------    --------
                                                                88,781      88,840
Less -- accumulated depreciation............................   (53,498)    (48,558)
                                                              --------    --------
                                                              $ 35,283    $ 40,282
                                                              ========    ========
</TABLE>
 
(7) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES --
 
     Accounts payable and accrued liabilities consisted of the following at
December 31:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Trade accounts payable......................................  $21,967    $12,534
Self-insurance reserves.....................................    2,952      3,775
Compensation and benefits...................................    3,105      3,753
Accrued construction costs..................................    2,382      2,833
Taxes, other than income....................................    1,000        981
Other accrued liabilities...................................    8,429      9,262
                                                              -------    -------
                                                              $39,835    $33,138
                                                              =======    =======
</TABLE>
 
                                       23
<PAGE>   26
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(8) LONG-TERM DEBT --
 
     Long-term debt consisted of the following at December 31:
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Revolving line of credit payable to banks, interest due
  quarterly.................................................  $    --    $    --
11.17% Notes due June 15, 2000, with required annual
  principal payments of $5,000,000 on June 15, interest
  payable quarterly at 11.17%...............................   15,000     20,000
7.34% Notes due August 1, 2005, with required annual
  principal payments of $5,000,000 beginning August 1, 2001,
  interest payable semi-annually at 7.34%...................   25,000     25,000
8% Promissory Note due December 31, 2004, with required
  annual principal and interest payments of $206,000 on
  December 31...............................................    1,072      1,172
Installment loans, denominated in Deutsche Marks, due
  September, 2002, with required semi-annual principal and
  interest payments, interest rates ranging from 7.5% to
  8.0%, secured by property and plant.......................    2,114      3,069
Installment loan, denominated in British Pounds, due
  September 2, 1998, with required quarterly principal and
  interest payments, interest rate at 11%, secured by
  equipment.................................................      209        499
                                                              -------    -------
                                                               43,395     49,740
  Less -- current maturities................................   (5,767)    (5,648)
                                                              -------    -------
                                                              $37,628    $44,092
                                                              =======    =======
</TABLE>
 
     The Company entered into a $35,000,000 multi-currency revolving credit
facility (the "Revolver") with NationsBank of Texas, N.A. as agent, on July 27,
1995. The Revolver as amended, matures on September 30, 1999, and bears
interest, at the Company's option, at the bank's prime rate or the reserve
adjusted LIBOR plus an applicable margin based on the ratio of funded debt to
total capitalization. An annual commitment fee of up to  3/8% is payable on any
unused portion of the facility. Under the terms of the revolving line of credit
agreement, the Company is required to maintain certain financial ratios and a
specific level of consolidated tangible net worth. As of December 31, 1997,
there was no balance outstanding under the Revolver. However, letters of credit
issued under this facility totaled $1,125,000 reducing the balance available to
$33,875,000. The letters of credit primarily secure performance of installation
contracts and self-insurance programs.
 
     On July 27, 1995, the Company entered into note agreements (the "7.34%
Notes") with two lenders, in the aggregate amount of $25,000,000 which mature on
August 1, 2005. The 7.34% Notes, which are unsecured, require semiannual
interest payments at a rate of 7.34% that began February 1, 1996, and annual
principal payments of $5,000,000 beginning August 1, 2001. The terms of the
7.34% Notes place various restrictions on the Company's ability to pay dividends
or make certain other payments, incur additional debt, consolidate or merge into
another corporation or sell assets unless certain other criteria are met. The
7.34% Notes also require the Company to maintain certain financial ratios and a
specified level of consolidated net worth. The proceeds from the 7.34% Notes
were used to retire outstanding indebtedness of SLT.
 
     The 11.17% Notes, which are unsecured, require quarterly interest payments
at a rate of 11.17% that began September 15, 1990, and annual principal payments
of $5,000,000 that began June 15, 1996. The terms of the 11.17% Notes are
consistent with the terms of the 7.34% Notes.
 
     The 8% Promissory Note, which is unsecured, requires annual principal and
interest payments of $206,000 ending December 31, 2004.
 
                                       24
<PAGE>   27
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Summarized below are the maturities of long-term debt of the Company during
the next five years and thereafter (in thousands).
 
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S>          <C>                                                           <C>
   1998..................................................................  $ 5,767
   1999..................................................................    5,644
   2000..................................................................    5,654
   2001..................................................................    5,665
   2002..................................................................    5,298
   Thereafter............................................................   15,367
                                                                           -------
                                                                           $43,395
                                                                           =======
</TABLE>
 
(9) FINANCIAL INSTRUMENTS --
 
  Fair value of financial instruments --
 
     The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and a cross
currency swap (see "Derivative financial instrument" below). The book values of
cash and cash equivalents, trade receivables and trade payables and
floating-rate debt instruments are considered to be representative of their
respective fair values. The Company had $43,395,000 and $49,740,000 of
fixed-rate debt instruments at December 31, 1997 and 1996, with fair values of
approximately $42,364,000 and $48,800,000, respectively. The fair value of
long-term debt was estimated based on quoted market prices for these or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities. The difference between the fair value and the carrying
value represents the theoretical net premium the Company would have to pay to
retire all debt at such date.
 
  Derivative financial instrument --
 
     Effective October 18, 1996, the Company swapped $10,000,000 in long-term
debt with an annual interest rate of 7.34% for 15,380,000 Deutsche Mark (DM)
denominated long-term debt with an annual interest rate of 6.32%, effectively
hedging a portion of its German net investment. The DM swap agreement requires
the Company to re-exchange 3,076,000 DM for $2,000,000 each August 1 for the
five-year period beginning August 1, 2001. The DM is marked to market as the
U.S. Dollar/DM exchange rate changes. These adjustments are included as a
component of cumulative translation adjustment in stockholders' equity. Interest
payments and receipts are semi-annual on February 1 and August 1. The DM
interest payments are also subject to exchange rate fluctuations. The gains and
losses resulting from these fluctuations are recognized in interest expense
during the current period.
 
(10) PER SHARE INFORMATION --
 
     The following table sets forth the weighted average shares for the
computation of basic and diluted earnings per share:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              1997     1996     1995
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Weighted average common shares outstanding.................  15,506   17,314   17,193
Dilutive securities -- stock options.......................       3       65       11
                                                             ------   ------   ------
Weighted average common shares outstanding assuming full
  dilution.................................................  15,509   17,379   17,204
                                                             ======   ======   ======
</TABLE>
 
                                       25
<PAGE>   28
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(11) STOCKHOLDERS' EQUITY --
 
     On December 12, 1997, the Company purchased 2,200,000 shares of its common
stock at a purchase price of $5.40 per share, or a total of $11,880,000. The
transaction was funded with the Company's available cash balances. The shares
purchased represented approximately 14.2% of the Company's then outstanding
stock.
 
     On January 23, 1997, the Company purchased 2,071,656 shares of its common
stock at a purchase price of $7.00 per share, or a total of $14,502,000. The
transaction was funded with the Company's available cash balances. The shares
purchased represented approximately 12% of the Company's then outstanding stock.
 
     On June 1, 1992, the Company's board of directors adopted a stock
repurchase plan under which the company was authorized to repurchase up to
500,000 shares of its outstanding common stock in open market transactions
depending on market conditions. As of December 31, 1997 and 1996, stockholders'
equity included 500,000 shares repurchased under the plan at an aggregate cost
of $4,267,000.
 
     The Company's board of directors adopted a qualified employee stock
purchase plan on October 16, 1991, effective January 1, 1992. The plan
authorizes the issuance of up to 100,000 shares of common stock for purchase by
participating employees at a 15% discount from the market price. As of December
31, 1997 and 1996, 30,086 and 24,539 shares, respectively, had been issued under
this plan.
 
     In 1986, the Company's board of directors adopted an employee stock option
plan (the "1986 Employee Plan"). This Plan, as amended, permitted up to 850,000
stock options to be granted. The plan permitted the grant of both "incentive"
and "non-qualified" stock options to employees of the Company. Each option is
exercisable for a period of up to ten years after it is granted. Unless the
terms of the option specify otherwise, options may be exercised in respect of
33 1/3%, 66 2/3% and 100% of the shares covered, upon the third, fourth and
fifth anniversaries of the date of grant. The option price cannot be less than
the fair market value of the shares on the date the option is granted. Any
options that were available for grant under this plan as of December 1995, are
now a part of the 1995 Incentive Stock Plan.
 
     During 1988, the Company's board of directors adopted a director stock
option plan (the "1988 Director Plan"), which permits the grant of up to 75,000
"non-qualified" stock options to non-employee directors. The terms of this plan
are substantially the same as those of the 1986 Employee Plan. This Plan was
terminated in December 1995 and subsequently replaced by the 1996 Non-Qualified
Stock Option Plan for Non-Employee Directors.
 
     In 1995, the Company's board of directors adopted the 1995 Incentive Stock
Plan (the "1995 Employee Plan"). The 1995 Employee Plan as subsequently amended
and restated, permits the grant of up to 1,750,000 stock options less any
options exercised or outstanding under the 1986 Employee Plan. The 1995 Employee
Plan provides for the grant of (i) non-qualified stock options, (ii) incentive
stock options, (iii) shares of restricted stock, (iv) shares of phantom stock,
and (v) stock bonuses (collectively, "Incentive Awards"). In addition, the 1995
Employee Plan permits the grant of cash bonuses payable when a participant is
required to recognize income for federal income tax purposes in connection with
the vesting of shares of restricted stock or the grant of a stock bonus. Key
employees, including officers (whether or not they are directors), of the
Company and its subsidiaries are eligible to participate in the 1995 Employee
Plan. Each non-qualified stock option issued under the 1995 Employee Plan is
granted for a period up to seven years after it is granted and may be exercised
in respect of 50% and 100% of the shares covered upon the first and second
anniversaries of the date of grant. The option price cannot be less than the
fair market value of the shares on the date the option is granted.
 
     During 1997 and 1996, the board of directors granted 138,840 and 156,800
shares, respectively of restricted stock to senior management under the 1995
Employee Plan. One-third of the shares are subject to annual vesting provided
specific financial performance measurements are met by the Company. This plan
also provides for cash bonuses to be paid to grantees to cover federal income
taxes and requires that the grantee be
 
                                       26
<PAGE>   29
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
employed at the end of the three year vesting period in order to receive the
shares. Shares issued to employees who terminate employment prior to the plans
three year vesting period are transferred into treasury shares.
 
     During 1996, the Company's board of directors adopted the 1996
Non-Qualified Stock Option Plan for Non-Employee Directors (the "1996 Director
Plan"). The 1996 Director Plan authorizes an aggregate of 100,000 shares, of
non-qualified stock options to be issued to non-employee directors. The 1996
Director Plan provides for the automatic annual grant to each non-employee
director of a five year option to purchase 2,000 shares of common stock at an
exercise price equal to the market price on the date of grant. The options will
be granted immediately following each annual meeting of stockholders, with each
option to vest and become exercisable in its entirety one year from the date of
grant. This Plan replaces the 1988 Director Plan.
 
     The stock option activity under each plan is set forth below:
<TABLE>
<CAPTION>
                                            1986 EMPLOYEE PLAN          1988 DIRECTOR PLAN         1995 EMPLOYEE PLAN
                                        --------------------------   ------------------------   -------------------------
                                         SHARES        OPTION        SHARES       OPTION         SHARES        OPTION
                                         UNDER          PRICE        UNDER         PRICE         UNDER         PRICE
                                         OPTION       PER SHARE      OPTION      PER SHARE       OPTION      PER SHARE
                                        --------   ---------------   ------   ---------------   --------   --------------
<S>                                     <C>        <C>               <C>      <C>               <C>        <C>
OUTSTANDING AT DECEMBER 31, 1994......   450,383   $4.27 to $16.92   50,000   $6.25 to $16.17
 Granted..............................                               10,000        $7.00         289,700   $5.38 to $5.50
 Exercised............................    (3,751)       $4.27
 Cancelled............................   (75,085)  $7.63 to $15.63
                                        --------   ---------------   ------   ---------------   --------   --------------
OUTSTANDING AT DECEMBER 31, 1995......   371,547   $4.27 to $16.92   60,000   $6.25 to $16.17    289,700   $5.38 to $5.50
 Granted..............................                                                           291,800   $5.31 to $7.13
 Exercised............................   (15,375)       $4.27                                   (156,800)  $5.31 to $5.31
 Cancelled............................  (121,375)  $5.25 to $15.63                                (5,000)  $5.38 to $7.13
                                        --------   ---------------   ------   ---------------   --------   --------------
OUTSTANDING AT DECEMBER 31, 1996......   234,797   $4.27 to $16.92   60,000   $6.25 to $16.17    419,700   $5.38 to $7.13
 Granted..............................                                                           438,590   $4.88 to $9.00
 Exercised............................                                                          (140,090)  $5.63 to $7.25
 Cancelled............................   (50,647)  $5.25 to $13.38                               (37,750)  $5.50 to $6.75
                                        --------   ---------------   ------   ---------------   --------   --------------
OUTSTANDING AT DECEMBER 31, 1997......   184,150   $5.25 to $15.63   60,000   $6.25 to $16.17    680,450   $4.88 to $9.00
                                        ========   ===============   ======   ===============   ========   ==============
OPTIONS EXERCISABLE...................   136,810   $5.25 to $15.63   44,998   $6.25 to $16.17    261,034   $4.88 to $9.00
                                        ========   ===============   ======   ===============   ========   ==============
OPTIONS AVAILABLE FOR FUTURE
 GRANTS...............................        --                        --                       460,071
                                        ========                     ======                     ========
 
<CAPTION>
                                          1996 DIRECTOR PLAN
                                        -----------------------
                                        SHARES       OPTION
                                        UNDER        PRICE
                                        OPTION     PER SHARE
                                        ------   --------------
<S>                                     <C>      <C>
OUTSTANDING AT DECEMBER 31, 1994......
 Granted..............................      0
 Exercised............................
 Cancelled............................
                                        ------   --------------
OUTSTANDING AT DECEMBER 31, 1995......      0
 Granted..............................  12,000   $6.50 to $7.00
 Exercised............................
 Cancelled............................
                                        ------   --------------
OUTSTANDING AT DECEMBER 31, 1996......  12,000   $6.50 to $7.00
 Granted..............................  12,000       $4.88
 Exercised............................
 Cancelled............................
                                        ------   --------------
OUTSTANDING AT DECEMBER 31, 1997......  24,000   $4.88 to $7.00
                                        ======   ==============
OPTIONS EXERCISABLE...................  12,000   $6.50 to $7.00
                                        ======   ==============
OPTIONS AVAILABLE FOR FUTURE
 GRANTS...............................  76,000
                                        ======
</TABLE>
 
     Substantially all outstanding options were priced between $4.88 and $16.17
per share at December 31, 1997. The weighted average of the remaining
contractual life for the outstanding options at December 31, 1997, was 5.9
years. The weighted average price of options outstanding during 1997, 1996 and
1995 was $6.51, $7.57 and $7.64, respectively.
 
     The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
expense has been recognized for its 1996 Director Plan and unrestricted stock
options from the 1995 Employee Plan. The compensation expense that has been
charged against income for its performance based restricted stock grant pursuant
to the provisions of the 1995 Employee Plan was $164,000, $516,000, and $0 for
1997, 1996, and 1995, respectively.
 
     Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123 also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rates of 6% and 6.5%; a dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
44% and a weighted-average expected life of the option of 5 to 7 years.
 
                                       27
<PAGE>   30
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          1997      1996       1995
                                                         ------    -------    -------
<S>                                                      <C>       <C>        <C>
Net income (loss)
  As reported..........................................  $4,550    $11,646    $(2,231)
  Pro forma............................................   4,235     11,398     (2,347)
Basic and diluted earnings (loss) per share
  As reported..........................................     .29        .67       (.13)
  Pro forma............................................     .27        .66       (.14)
</TABLE>
 
     The estimated fair value of stock options issued in 1997 and 1996 was
$891,000 and $545,000, respectively.
 
(12) INCOME TAXES --
 
     Domestic and foreign income (losses) before income taxes were as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          1997      1996       1995
                                                         ------    -------    -------
                                                                (IN THOUSANDS)
<S>                                                      <C>       <C>        <C>
Domestic...............................................  $5,836    $18,113    $(2,124)
Foreign................................................   2,010      1,967        828
                                                         ------    -------    -------
          Total........................................  $7,846    $20,080    $(1,296)
                                                         ======    =======    =======
</TABLE>
 
                                       28
<PAGE>   31
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The provision (benefit) for income taxes consisted of the following:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1997       1996       1995
                                                        -------    -------    -------
                                                               (IN THOUSANDS)
<S>                                                     <C>        <C>        <C>
Current expense:
  U.S.
     Federal..........................................  $ 2,149    $ 7,861    $ 2,109
     State............................................      195      1,501        386
                                                        -------    -------    -------
          Total U.S...................................    2,344      9,362      2,495
  Foreign.............................................    2,081         29         13
                                                        -------    -------    -------
          Total current...............................    4,425      9,391      2,508
Deferred expense (benefit):
  U.S.
     Federal..........................................      129     (1,293)    (1,572)
     State............................................       19       (357)      (530)
                                                        -------    -------    -------
          Total U.S...................................      148     (1,650)    (2,102)
  Foreign.............................................   (1,277)       693        529
                                                        -------    -------    -------
          Total deferred..............................   (1,129)      (957)    (1,573)
                                                        -------    -------    -------
          Total provision for income taxes............  $ 3,296    $ 8,434    $   935
                                                        =======    =======    =======
</TABLE>
 
     A reconciliation between the provision for income taxes and income taxes
computed by applying the statutory rate is as follows:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             1997      1996     1995
                                                            ------    ------    -----
                                                                 (IN THOUSANDS)
<S>                                                         <C>       <C>       <C>
Tax provision (benefit) at statutory rate.................  $2,667    $7,028    $(441)
Add (deduct):
  Merger costs............................................      --        --      553
  Amortization of goodwill................................     449       365      377
  Meals and entertainment disallowance....................     375       329      440
  Foreign Sales Corporation benefit.......................    (306)     (344)    (200)
  Taxable differential for foreign operations.............     122       312      144
  State income taxes......................................      72       744      (95)
  Other, net..............................................     (83)       --      157
                                                            ------    ------    -----
                                                            $3,296    $8,434    $ 935
                                                            ======    ======    =====
</TABLE>
 
                                       29
<PAGE>   32
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities were as follows at December 31:
 
<TABLE>
<CAPTION>
                                                               1997      1996
                                                              ------    ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax assets:
  Accrued expenses..........................................  $6,381    $6,965
  Other.....................................................      64       196
                                                              ------    ------
                                                               6,445     7,161
                                                              ------    ------
Deferred tax liabilities:
  Excess of tax depreciation over book depreciation.........   3,076     3,477
  Long-term contracts.......................................     436     1,267
  Intangible assets.........................................      95        82
  Other.....................................................     499     1,796
                                                              ------    ------
                                                               4,106     6,622
                                                              ------    ------
          Total deferred tax asset (liabilities)............  $2,339    $  539
                                                              ======    ======
</TABLE>
 
     In 1995 the U.S. current tax provision for income taxes was net of
approximately $601,000, of tax benefit due to the utilization of net operating
loss carryforwards. In Germany the 1997, 1996 and 1995 current tax provisions
for income taxes were net of approximately $132,000, $607,000 and $324,000,
respectively, of tax benefit due to utilization of net operating loss
carryforwards.
 
     Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $1,515,000 at December 31, 1997. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
 
(13) EMPLOYEE BENEFIT PLANS --
 
     The Company has a defined contribution employee benefit plan under which
substantially all U.S. employees are eligible to participate. The Company
matches a portion of the employees' contributions. The Company contributed
$376,000, $380,000 and $264,000 to the plan during the years ended December 31,
1997, 1996 and 1995, respectively. Under the terms of the plan, contributions to
the plan may be discontinued at any time.
 
(14) PENSION PLAN --
 
     The Company's German subsidiary has an unfunded pension plan providing
benefits to one present employee and three former employees. The plan provides
fixed minimum pension payments at retirement age. There are no assets held in
outside funds.
 
     The Company has adopted FAS 87, "Employers' Accounting for Pensions";
however, to the extent pension costs under German law exceed amounts computed
under FAS 87, those additional amounts are recorded by the Company. Pension
expense for the years ended December 31, 1997, 1996, and 1995 was $96,000,
$160,000 and $94,000, respectively. The actuarial present value of accumulated
benefits was $1,219,000 at December 31, 1997, and $1,315,000 at December 31,
1996. The projected benefit obligation for service rendered to date, net of
unrecognized prior service cost, was $1,210,000 and $1,308,000 as of December
31, 1997 and 1996, respectively.
 
                                       30
<PAGE>   33
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The computation assumed a discount rate on benefit obligations of 7%,
annual salary increases of 2% and annual benefit increases of 3%.
 
(15) SALES TO SIGNIFICANT CUSTOMERS --
 
     During 1997, 1996 and 1995, no single customer accounted for 10% or greater
of total net sales.
 
(16) RESEARCH AND DEVELOPMENT COSTS --
 
     Research and development costs are charged to expense as incurred. The
amounts of research and development and quality control expenditures during the
years ended December 31, 1997, 1996 and 1995 were $1,469,000, $1,675,000 and
$1,705,000, respectively.
 
(17) COMMITMENTS AND CONTINGENCIES --
 
  Product warranties and insurance coverage --
 
     The Company's products are sold and installed with specified limited
warranties as to material quality and workmanship. These limited warranties may
last for up to 20 years, but are generally limited to repair or replacement by
the Company of the defective liner or the dollar amount of the contract
involved, on a prorated basis. The Company may also indemnify the site owner or
general contractor for other damages resulting from negligence of the Company's
employees. The Company often is required to post bid and performance bonds
covering the full amount of an installation contract.
 
     Although the Company is not exposed to the type of potential liability that
might arise from being in the business of handling, transporting or storing
hazardous waste or materials, the Company could be susceptible to liability for
environmental damage or personal injury resulting from defects in the Company's
products or negligence by Company employees in the installation of its lining
systems. Such liability could be substantial because of the potential that
hazardous or other waste materials might leak out of their containment system
into the environment. The Company maintains liability insurance, which includes
pollution coverage in the U.S. and Germany, in amounts which it believes to be
prudent. However, there is no assurance that this coverage will remain available
to the Company. While the Company's claims experience to date may not be a
meaningful measure of its potential exposure for product liability, the Company
has experienced no material losses from defects in products and installations.
 
  Litigation and claims --
 
     The Company is involved in litigation arising in the ordinary course of
business, which in the opinion of management, will not have a material adverse
effect on the Company's financial position or results of operations.
 
  Operating Leases --
 
     The Company leases certain equipment through operating lease arrangements
of varying terms. Annual rental expense under the terms of non-cancellable
operating leases is less than 1% of consolidated revenues.
 
  Other --
 
     The Company's products are sometimes sold into foreign markets with
extended terms, secured by an irrevocable letter of credit from a customer's
bank. Payment terms may extend up to six months. At December 31, 1997, the
Company had a U.S. dollar receivable of $3,666,000 from an Indonesian customer
secured by an irrevocable letter of credit issued by an Indonesian bank,
maturing in 1998. Indonesia is experiencing economic and currency difficulties
which could create the potential for non-performance under
 
                                       31
<PAGE>   34
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the terms of the letter of credit by the Indonesian bank. Management has
complied with all the terms of the letter of credit and has requested payment
from the bank with the first payment due in March 1998. There has been no
indication that the bank will not perform under the terms of the letter of
credit, and therefore, there has been no provision made in the financial
statements for any possible difficulty in collecting under this irrevocable
letter of credit.
 
(18) ACQUISITION OF SGS GEOSYSTEMS, LTD. --
 
     On April 30, 1996, the Company acquired SGS Geosystems Ltd. (SGS), a UK
geomembrane manufacturer, for $4,774,000 net cash plus the assumption of certain
obligations of SGS in the amount of $600,000. The acquisition was accounted for
as a purchase and, accordingly, the results of operations of SGS have been
included in the consolidated results of operations of the Company from the date
of acquisition. The excess of purchase price over fair value of net assets
acquired associated with this transaction was $2,796,000. Pro forma financial
information for SGS has not been presented as it is not material to the overall
consolidated operating results of the Company.
 
(19) INVESTMENT IN JOINT VENTURE --
 
     On November 9, 1996, the Company completed the formation of two joint
ventures with Hyma Plastic Hyma Foam Co., an Egyptian supplier of plastic liner,
bags and foam products. The administrative offices of the ventures are located
in Cairo, Egypt. The manufacturing facilities are located outside of Cairo,
Egypt and will manufacture and sell synthetic lining systems in Egypt.
 
     The Company made an initial contribution of $1,696,000 to the ventures and
has a commitment to invest an additional $1,659,000 over the next nine years.
The Company has a 50% ownership interest in both ventures and accounts for its
investments using the equity method of accounting.
 
(20) MERGER WITH SLT ENVIRONMENTAL, INC. --
 
     On July 27, 1995, the Company merged with SLT Environmental, Inc. (SLT).
The stockholder of SLT received 7,000,000 shares of the Company's common stock
for all issued and outstanding shares of SLT common stock. The merger was
accounted for as a pooling of interests. Accordingly, the Company's financial
statements have been restated to include the results of SLT for all periods
presented.
 
     Combined and separate results of Gundle and SLT during the period preceding
the merger were as follows (unaudited and in thousands):
 
<TABLE>
<CAPTION>
                                                      SEVEN MONTHS ENDED JULY 27, 1995
                                                      --------------------------------
                                                      GUNDLE        SLT       COMBINED
                                                      -------     -------     --------
<S>                                                   <C>         <C>         <C>
Sales...............................................  $70,390     $67,715     $138,105
                                                      =======     =======     ========
Net income..........................................  $  (267)    $ 1,308     $  1,041
                                                      =======     =======     ========
</TABLE>
 
     As a result of the merger and the planned disposal of SLT's old office and
manufacturing facility, the Company recorded nonrecurring charges of
$15,270,000. Of this amount, $10,070,000 related to a plan to reduce the overall
cost structure of the Company's products and manufacturing operations. To
accomplish the reduction in cost, the Company standardized its products, as well
as streamlined its manufacturing processes. An analysis was completed during
1995 and the Company concluded that certain products, processes and
manufacturing assets had to be upgraded or eliminated. The resulting charge of
$10,070,000 represented the Company's best estimate of the net cost to
standardize products and streamline the manufacturing process, including the
writedown of certain assets. Costs related to the merger with SLT were
$5,200,000. These
 
                                       32
<PAGE>   35
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
expenses represented the cost of combining the two companies, including costs
related to the consolidation of SLT's manufacturing facilities, closing its
Conroe facility, severance expense, standardization of employee benefit plans,
professional fees, office and equipment relocation and other related costs
incurred in connection with the merger.
 
(21) GEOGRAPHIC INFORMATION --
 
     Summary geographic financial information is as follows:
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED
                                                     --------------------------------
                                                       1997        1996        1995
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Sales to unaffiliated customers:
  North America....................................  $104,023    $114,339    $129,221
  Europe...........................................    54,474      63,780      68,391
  Latin & South America............................    11,824      12,956      25,764
  Far East/Pacific Rim.............................    21,620      16,229      19,988
  Middle East/Africa...............................     7,377       2,068       4,699
Identifiable assets:
  North America....................................   133,471     151,685     138,551
  Europe...........................................    37,029      45,024      50,320
  Far East/Pacific Rim.............................     5,756       7,337       7,150
  Middle East/Africa...............................     1,705          --          --
</TABLE>
 
                                       33
<PAGE>   36
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                               SUPPLEMENTARY DATA
 
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) --
 
     Unaudited quarterly information for fiscal 1997 and 1996 is as follows (in
thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                        1997                                     1996
                                        -------------------------------------    -------------------------------------
                                                       QUARTER                                  QUARTER
                                        -------------------------------------    -------------------------------------
                                         FIRST    SECOND     THIRD    FOURTH      FIRST    SECOND     THIRD    FOURTH
                                        -------   -------   -------   -------    -------   -------   -------   -------
<S>                                     <C>       <C>       <C>       <C>        <C>       <C>       <C>       <C>
Net sales.............................  $33,349   $48,352   $66,096   $51,521    $27,107   $60,625   $71,898   $49,742
Gross profit..........................    6,168     8,276    12,271     9,386      5,526    16,123    17,776    10,446
Income (loss) before income taxes.....     (948)    1,685     5,184     1,925     (1,523)    7,835    10,306     3,462
Net income (loss).....................     (550)      977     3,010     1,113       (883)    4,544     5,977     2,008
Basic and diluted earnings (loss) per
  common share........................     (.03)      .06       .19       .07       (.05)      .26       .34       .12
</TABLE>
 
  The above data should be read in conjunction with the consolidated financial
                         statements and notes thereto.
 
                                       34
<PAGE>   37
 
                                                                     SCHEDULE II
 
                         GUNDLE/SLT ENVIRONMENTAL, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                     BALANCE AT    ADDITIONS                  BALANCE
                                                     BEGINNING      CHARGED                   AT END
                    DESCRIPTION                       OF YEAR      TO EXPENSE    WRITEOFFS    OF YEAR
                    -----------                      ----------    ----------    ---------    -------
<S>                                                  <C>           <C>           <C>          <C>
December 31, 1995:
  Allowance for doubtful accounts..................    $2,700        $4,133       $2,098      $4,735
                                                       ======        ======       ======      ======
December 31, 1996:
  Allowance for doubtful accounts..................    $4,735        $2,519       $1,830      $5,424
                                                       ======        ======       ======      ======
December 31, 1997:
  Allowance for doubtful accounts..................    $5,424        $1,290       $2,367      $4,347
                                                       ======        ======       ======      ======
</TABLE>
 
                                       35
<PAGE>   38
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
     Not applicable.
 
                                    PART III
 
     Part III (Items 10 through 13) is omitted since the Company expects to file
with the Securities and Exchange Commission within 120 days following December
31, 1997, definitive proxy materials pursuant to Regulation 14A under the
Securities Exchange Act of 1934 involving the annual election of directors and
certain other matters. If for any reason such a statement is not so filed, this
Report will be appropriately amended.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 
     (a)(1) Financial statements (see financial statements at pages 14-33)
 
     (a)(2) Supplementary data (see page 34)
 
     (a)(3) Financial schedule (see page 35)
 
          Schedule II -- Valuation and Qualifying Accounts
 
     Schedules not listed above are omitted since the information required to be
submitted has been included in the financial statements or the notes thereto, or
the schedules are not required.
 
     (a)(3) Exhibits:
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.
        -------
<C>                      <S>
           2-A           -- Plan Agreement of Merger dated March 28, 1995, between
                            the Company and SLT Environmental, Inc. (Exhibit A to
                            Registrant's Preliminary Proxy Statement filed on May 4,
                            1995, is incorporated herein by reference).
           3-A           -- Articles of Incorporation as amended (Exhibits 3.1, 3.2
                            and 3.3 to Registrant's Registration Statement No.
                            33-9809 are incorporated herein by reference).
           3-B           -- Bylaws (Exhibit 3.4 to Registrant's Registration
                            Statement No. 33-9809 is incorporated herein by
                            reference).
           4-E           -- Credit Agreement dated as of July 27, 1995, between the
                            Company, the financial institutions named therein and
                            NationsBank of Texas, N.A., as agent (incorporated by
                            reference to Exhibit 1.6 to Registrant's Current Report
                            on Form 8-K filed on August 9, 1995).
           4-F           -- Note Agreements dated as of June 15, 1995, between Gundle
                            Environmental Systems, Inc. and certain institutions
                            covering the Senior Notes due August 1, 2005
                            (incorporated by reference to Exhibits 1.3 and 1.4 to
                            Registrant's Current Report on Form 8-K filed August 9,
                            1995).
          10-B           -- Registrant's 1986 stock option plan (Exhibit 10.11 to
                            Registrant's Registration Statement No. 33-44306 is
                            incorporated herein by reference).
          10-G           -- Registrant's 1995 Amended and Restated Incentive Stock
                            Plan. (Incorporated by reference to 4.1 of the
                            Registrant's Registration Statement number 333-01759)
          10-H           -- Employment Agreement dated March 10, 1997, between
                            William P. Reid and the Company.
</TABLE>
 
                                       36
<PAGE>   39
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.
        -------
<C>                      <S>
          10-I           -- Employment Agreement dated March 10, 1997, between Roger
                            J. Klatt and the Company.
          10-J           -- Registrant's 1996 Nonqualified Stock Option Plan for
                            Non-Employee Directors (Exhibit 4.1 to Registrant's
                            Report on Form S-8 No. 333-23299 is incorporated herein
                            by reference).
          11             -- Computation of per share earnings (see financial
                            statements at page 21).
          21             -- Subsidiaries.
          23             -- Consent of Independent Auditors -- Ernst & Young LLP.
          27             -- Financial Data Schedule.
</TABLE>
 
     (b) Reports on Form 8-K -- None.
 
     (c) Exhibits (see Item (a)(3), above).
 
     (d) Additional financial statements (see Items (a)(1) and (a)(2) above).
 
                                       37
<PAGE>   40
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 3rd day of
March, 1998.
 
                                            GUNDLE/SLT ENVIRONMENTAL, INC.
 
                                            By     /s/ WILLIAM P. REID
                                             -----------------------------------
                                                 William P. Reid, President
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 3rd day of March, 1998.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                             TITLE
                      ---------                                             -----
<C>                                                      <S>
                 /s/ WILLIAM P. REID                     Director and Principal Executive Officer
-----------------------------------------------------
                   William P. Reid
 
                 /s/ ROGER J. KLATT                      Principal Financial and Accounting Officer
-----------------------------------------------------
                   Roger J. Klatt
 
                 /s/ SAMIR T. BADAWI                     Director and Chairman of the Board
-----------------------------------------------------
                   Samir T. Badawi
 
                 /s/ JAMES R. BURKE                      Director
-----------------------------------------------------
                   James R. Burke
 
                /s/ AHMED Y. KHALAWI                     Director
-----------------------------------------------------
                  Ahmed Y. Khalawi
 
                /s/ T. WILLIAM PORTER                    Director
-----------------------------------------------------
                  T. William Porter
 
                  /s/ HUGH L. RICE                       Director
-----------------------------------------------------
                    Hugh L. Rice
 
                 /s/ BRIAN D. YOUNG                      Director
-----------------------------------------------------
                   Brian D. Young
</TABLE>
 
                                       38
<PAGE>   41
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.
        -------
<C>                      <S>
           2-A           -- Plan Agreement of Merger dated March 28, 1995, between
                            the Company and SLT Environmental, Inc. (Exhibit A to
                            Registrant's Preliminary Proxy Statement filed on May 4,
                            1995, is incorporated herein by reference).
           3-A           -- Articles of Incorporation as amended (Exhibits 3.1, 3.2
                            and 3.3 to Registrant's Registration Statement No.
                            33-9809 are incorporated herein by reference).
           3-B           -- Bylaws (Exhibit 3.4 to Registrant's Registration
                            Statement No. 33-9809 is incorporated herein by
                            reference).
           4-E           -- Credit Agreement dated as of July 27, 1995, between the
                            Company, the financial institutions named therein and
                            NationsBank of Texas, N.A., as agent (incorporated by
                            reference to Exhibit 1.6 to Registrant's Current Report
                            on Form 8-K filed on August 9, 1995).
           4-F           -- Note Agreements dated as of June 15, 1995, between Gundle
                            Environmental Systems, Inc. and certain institutions
                            covering the Senior Notes due August 1, 2005
                            (incorporated by reference to Exhibits 1.3 and 1.4 to
                            Registrant's Current Report on Form 8-K filed August 9,
                            1995).
          10-B           -- Registrant's 1986 stock option plan (Exhibit 10.11 to
                            Registrant's Registration Statement No. 33-44306 is
                            incorporated herein by reference).
          10-G           -- Registrant's 1995 Amended and Restated Incentive Stock
                            Plan. (Incorporated by reference to 4.1 of the
                            Registrant's Registration Statement number 333-01759)
          10-H           -- Employment Agreement dated March 10, 1997, between
                            William P. Reid and the Company.
          10-I           -- Employment Agreement dated March 10, 1997, between Roger
                            J. Klatt and the Company.
          10-J           -- Registrant's 1996 Nonqualified Stock Option Plan for
                            Non-Employee Directors (Exhibit 4.1 to Registrant's
                            Report on Form S-8 No. 333-23299 is incorporated herein
                            by reference).
          11             -- Computation of per share earnings (see financial
                            statements at page 21).
          21             -- Subsidiaries.
          23             -- Consent of Independent Auditors -- Ernst & Young LLP.
          27             -- Financial Data Schedule.
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