UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

      For the fiscal year ended December 31, 2002

| |   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

           For the transition period from ___________ to _____________

                         Commission file number: 0-30463

                               R-TEC HOLDING, INC.

                 (Name of small business issuer in its charter)

           IDAHO                                        82-0515707

(State or other jurisdiction                (I.R.S. Employer Identification No.)
 of incorporation or organization)

 1471 E. Commercial Ave., Meridian, Idaho                    83642

 (Address of principal executive offices)                 (Zip Code)

Issuer's telephone number: (208) 887-0953       FAX:  (208) 888-1757

Securities registered under Section 12(b) of the Exchange Act:

        Title of each class        Name of each exchange on which registered

________________________________   ____________________________________________

________________________________   ____________________________________________

Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock $1.00 par value

                                (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant

<PAGE>

was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes | | No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. | |

Registrants revenues for the fiscal year ended December 31, 2002 were
$2,672,237.

As of December 31, 2002, there were 21,742,189 shares of the registrant's no par
value common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

As referenced in the Exhibit List attached hereto.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

R-Tec Holding, Inc. (the "Company")

R-Tec Holding, Inc., through its subsidiaries (collectively "the Company")
develops custom automation solutions to the high-tech industry through its
consulting services, prototype development, tooling and manufacturing. The
Company also designs and manufacturers high performance test sockets, burn-in
sockets and IC interconnect devices for the IC chip industry.

Although R-Tec Holding, Inc., was initially formed as a wholly owned subsidiary
of Biogan International, Inc. (Biogan), R-Tec Holding, Inc., has operated as a
totally independent and separate entity from Biogan since its formation in
August, 1999.

R-Tec Corporation (R-Tec) has been in existence since 1995. On September 27,
1999, R-Tec Holding, Inc. and R-Tec Corporation entered into a definitive
agreement under which the shareholders of R-Tec transferred 80% of their common
stock holdings of R-Tec Corporation in exchange for 4,266,797 shares of R-Tec
Holding, Inc. R-Tec Holding also agreed to contribute its investment of
IntorCorp to R-Tec Corporation (IntorCorp was dissolved prior to year end 2002).
The transaction closed on November 3, 1999. On November 4, 1999, R-Tec
Corporation redeemed the remaining 20% ownership from the shareholders. The
redemption resulted in recording a $100,000 note payable to the former
shareholders. The stock redemption resulted in R-Tec Corporation being a wholly
owned subsidiary of R-Tec Holding, Inc.

The financial statements for the Company have been prepared in accordance with
reverse purchase accounting. The newly formed holding company, R-Tec Holding,
Inc. had no activity prior to the acquisition, and accordingly, is considered to
be the acquired entity. R-Tec

<PAGE>

Holding was formed to posture itself to effect a business combination. R-Tec
Holding had no tangible assets, liabilities, or earnings process prior to the
combination. The only assets of R-Tec Holding at the date of the combination
were the in-process research and development assets.

On December 1, 1999, the Company formed a new, wholly owned subsidiary, R-Tec
Interconnect, Inc. (hereinafter referred to as "Interconnect") to focus on its
IC Testing Interface products. The Company has been developing testing interface
products since 1998 believing that product development and maturity were at a
stage to justify a separate divisional focus. However, effective September 1,
2001, Interconnect was merged into R-Tec Corporation to create one operational
company under the umbrella ownership of R-Tec Holding, Inc. The merger was also
effected to reduce common overhead expenses; both Interconnect and R-Tec Corp
are located in the same facilities and receive managerial support from the same
individuals.

R-Tec Corporation, a subsidiary of the Company.

R-Tec Corporation was initially organized in 1995 as a small individually
operated company in a modified garage for the purpose of developing and
fabricating High-Tech custom manufacturing equipment, primarily for a single
customer. Most of the contracts during the first 18 months were for the
duplication of High-Tech manufacturing tools going overseas for Hewlett Packard.
Presently R-Tec Corporation, under contracts with various customers, develops,
engineers and fabricates High-Tech custom manufacturing equipment and parts to
be incorporated into customer owned and operated manufacturing equipment and
manufactured products. R-Tec Corporation's expertise includes engineering,
development of controls, machine design and tooling, consulting services,
prototype development, tooling and manufacturing. Typical production includes:
mechanical fixtures; "mech-op stations" (devices for testing mechanical
operations and performance of equipment); "servo-writers" and "transfer
stations"(devices that write code instructions for reading disc drives in
manufacturing stations); "sub-assemblies" (an assembly of electrical components
as a unit to be integrated with other units to complete a device or product);
"automatic robot work stations" (a machine that automatically constructs part of
a manufactured product); and electronic testing devices. Essentially all of the
products and services incorporate one or more complete disciplines of
mechanical, electrical, software, machine visions (a vision camera that
digitizes information for testing purposes) and controls.

Developed technology currently includes CAD-based software (computer aided
design software), electro-mechanical devices, tool design, PC Board Layout
(printed circuit board layout technology from concept to manufactured product),
International CE-Marked products (a quality designation in Europe similar to
"UL" marked products in the US) Machine Vision, Specialty Tooling, Engineering
Design, Motion Control, Robotics, Software Development, PLC Programming
(programmable logic controller which is a low level computer for controlling
functions).

Significant clients of R-Tec Corporation include Iomega Corporation, Hewlett
Packard, Pro-Precision Machining, Steelhead Metals, SCP Global Technologies,
System Integration

<PAGE>

(Division of Micron), Intel, TECHNIT Interconnection Products, 3Com Corporation,
Preco, Inc., Motorola, Micron Communications, Inc., Palm, Raytheon, Ford
Microelectronics, Inc., and Anadigics.

From 1998 through July 16, 2001, distribution of products and services was
primarily made through Browand, LaMeire & Associates (B.L.& A.), a
Manufacturer's Representative firm who maintained sales representative agents in
the US, Europe and Asia. B.L.& A. had four representative firms in the U.S. with
twelve sales persons, three European agents for Germany, France and England, and
five Asian agents for Singapore, Malaysia, Taiwan and Japan. In December of
2000, the principals of B.L.&A. were hired as management employees to oversee
the internal development of marketing efforts. Effective July 17, 2001, the
Company acquired certain assets of B.L.&A., primarily customers contact lists,
in exchange for 380,000 shares of R-Tec Holding, Inc. stock valued at $1.00 per
share, and continued to solidify its position of bringing the marketing and
distribution expertise of B.L.&A. in-house.

See additional discussion in the following section, "R-Tec Interconnect Inc., a
subsidiary of the Company."

Prior to July 3, 2001, certain functions of some projects were, when needed,
contracted to R-Tec Machine Tools, Inc., an Idaho corporation, in which Doug
Hastings and Gary Clayton owned a combined 50% interest. R-Tec Machine Tools,
Inc conducted business as a machine shop in the same building as R-Tec
Corporation (See "Certain Relationships and Related Transactions "). However,
some machine work was also contracted with other machine shops depending on time
of delivery constraints. R- Tec Machine Tools, Inc. exclusively machined raw
metal into custom parts on contract with its customers, one of which was R-Tec
Corporation. Effective July 3, 2001, R-Tec Machine Tools, Inc. was acquired by
R-Tec Corporation in a stock for stock acquisition. Joe Hawkins, Walter Hinkle,
Gary Clayton, and Doug Hastings, each 25% owners of R-Tec Machine Tools, Inc.,
received an aggregate 291,248 shares of R-Tec Holding, Inc. stock valued at
$1.00 per share.

The custom-parts manufacturing industry is vast with many major competitors who
are larger and financially stronger than R-Tec Corporation, such as Wright
Industries, Technistar, and Acufab. Major companies such as Motorola and Micron
frequently have their own internal tooling development groups to develop their
own equipment requirements and who on occasion will "out source" their over-load
demands to companies like R-Tec Corporation. Management is not aware of any
information to estimate a market share of the industry, but is confident that
R-Tec Corporation has a very small share of the overall market. Management of
R-Tec Corporation primarily relies on it manufacturer's representative to sell
its products and services.

Materials for products, such as aluminum, bar stock, plate stock, wire and
plastics are provided by several subcontractors who bid to provide supplies
according to contract specifications. To the best knowledge of Management the
required materials are of a generic nature with ample availability from several
sources, and therefore there is no dependence on a source of raw materials.

<PAGE>

During 1999 R-Tec Corporation had approximately 43 customers with material
contractual agreements, four of the customers provided in excess of 10% of
annual revenues, i.e. 3COM Corporation, Micron System Integration, Palm
Computing, Inc., and Performance Design, Inc., for a combined total of 52.2%
from the four. During 2000, R-Tec Corporation had approximately 30 customers
with material contractual agreements, two of the customers provided in excess of
10% of annual revenues, i.e., MSL Salt Lake and Palm Computing. During 2001,
R-Tec Corporation and merged entities had approximately 18 customers with
material contractual agreements, 3 of the customers provided in excess of 10% of
annual revenue, i.e., 3com, MSL Salt Lake, and Palm Computing. During 2002,
R-Tec Corporation had approximately 24 customers with material contractual
agreements, two of the customers, i.e., 3Comm Corporation and Palm Computing,
Inc., provided in excess of 10% of annual revenues, for a combined total of
34.54% of total revenues.

The nature of the "custom parts" engineering business is such that customers
producing material revenues generally change from year to year and no dependence
on any specific customers develops.

Prior to 1999 R-Tec Corporation did not have any patents or other proprietary
property interests. In 1999 it had in application stage two patents, one of
which was issued for a "Test Probe Positioning Device, and one of which has been
re-applied. The patent issued is #6,064,195 dated May 16, 2000, and will expire
on May 15, 2017. The patent is for a self-aligning device for positioning a test
probe in a socket of a printed circuit board to be tested.

Neither the products nor services provided by R-Tec Corporation presently
require any governmental approval. Management is not currently aware of any
existing or probable governmental regulation on any part of the business.

Excluding the $190,000 of R&D expenses associated with the initial merger,
during 1999 R-Tec Corporation did not expend material funds on research and
development. Any significant activity that may be considered as research and
development has been only in connection with the performance under a contract
with a customer for services and/or products the cost of which has been paid by
the customer as part of the contract terms. In 2000 and 2001, material funds
spent on research and development were not generally accounted for on the income
statement; strictly as R&D, as these efforts were directed for customers'
benefits on a contractual basis. In 2002, R&D accounted for $64,525 in expenses;
these expenses were not part of a contractual basis.

Presently, there are no material costs or effects of compliance with
environmental laws for R-Tec Corporation. Management is aware however, that with
the implementation of its production facility for the GCI(TM) product group, it
will be incumbent upon the Company to ensure strict compliance with any
environmental laws. The GCI(TM) production line became operational in January,
2003.

<PAGE>

R-Tec Corporation currently employs 28 full time employees and 8 part time
employees in the Boise office and 2 full time employees in the Utah office. See
discussion of Utah office and employees under Item 2 "Description of Property."

R-TEC INTERCONNECT, INC. A SUBSIDIARY OF THE COMPANY

R-Tec Interconnect, the newly formed subsidiary of R-Tec Holding, Inc., as
previously discussed, was merged into R-Tec Corporation effective September 1,
2001. The products and product group previously contained within R-Tec
Interconnect, will continue in R-Tec Corporation. Common resources are being
utilized to help develop the IC products and to focus on minimizing overhead
costs.

The product group transferred into R-Tec Corporation will be the continued
engineered design and manufacture of testing sockets and related testing
interface products to existing customers. Testing sockets for the IC industry
include a variety of custom designs and technical requirements as determined by
customer's specifications. The Company will also focus on developing a
standardized, lower cost, testing solution for its existing customer base.

Testing devices include test sockets with probe contacts and a new proprietary
interface device engineered by the Company called GCI(TM). This new technology
can be incorporated into existing design structure for socket testing devices
with minimal design adjustments. The GCI(TM) presents new opportunities to the
Company due to its favorable characteristics and responses to issues regarding,
co-planarity, inductance, and durability.

During 2001, customers received shipments of R-Tec Corporation's proprietary
technology and began testing the new interconnect products. Product introduction
has taken longer than originally projected and the Company continues to work on
enhancing its products to meet specific customers' technological needs.

Significant customers for R-Tec Corporation's testing products include Maxim,
Amkor, RF Micro Devices, Gamma Technology, Anadigics, Micron System Integration,
Celeritek, Teradyne, Cisco Systems, Inc., Transmeta, P.T. Products & Services,
3Com, and Motorola. It is anticipated that customer usage will become broad
based and that the Company will not become dependent or at risk for a
concentration of its interconnect products within one or several customers.

Competitors for the testing product interface market include the following
companies: 3M, Aries Electronics, Cerprobe, ECT, Gold Tech, John Tech, Loranger
International, Primeyield, and Tecknit. Among these competitors, which it is
believed by management represent a combined market share of approximately 75% to
80% of the $247,000,000 testing product interface market, four utilize spring
probe technology. The remainder utilize various testing technologies. It is
believed by management that the new R-Tec Corporation GCI(TM) products represent
a leading edge challenge to other competitors in this same market.

<PAGE>

Production for the testing devices is accomplished by using existing engineering
resources within R-Tec Corporation's personnel group and by outsourcing some
facets of the production needs. All assembly of manufactured products is
accomplished within the Company's current facilities. With the addition of the
GCI(TM) production facility, it is anticipated that the Company will become more
competitive, have faster response time to customers, and be able to better
control product quality.

Sources of raw materials for production are represented by commonly used
materials available to the outsourced manufacturers previously mentioned and
management does not foresee any limitations or interruptions in the availability
of materials for production. These common raw materials include aluminum, steel,
gold, plastics, solder, and copper.

Management is not aware of any governmental approvals or legislative impacts
that would affect its current product lines. As previously indicated, some
compliance and necessary expense will be effected with the addition of the
GCI(TM) production line. However, current estimates for permits and hazardous
material handling for ongoing operations through outsourcing are nominal and not
material.

ITEM 2.  DESCRIPTION OF PROPERTY.

DESCRIPTION OF PROPERTY OF R-TEC CORPORATION (SUBSIDIARY)

R-Tec Corporation is a tenant in a single purpose industrial building located at
1471 E. Commercial Avenue, in Meridian, Idaho. The building is owned by H2C2 &
Associates, LLC, an Idaho limited liability company (owned by Mr. and Mrs.
Hastings and Mr. and Mrs. Clayton, shareholders of R-Tec Corporation) and leased
100% to R-Tec Corporation under a 5 year lease expiring December 30, 2004. See,
"Certain Relationships and Related Transactions" under ITEM 12. The building was
constructed in 1998 according to the applicable commercial building code
requirements, on approximately 1.36 acres of land, and includes a parking area
of 20 spaces.

R-Tec Corporation office space consists of approximately 2,000 square feet, and
includes a reception area, conference room, and 6 individual offices. The
assembly and manufacturing areas consist of approximately 4,000 square feet. The
rent is at the rate of $4,365 per month, subject to Cost of Living Index
increases on an annual basis. The Company leased in 2001 an additional office
trailer, approximate size of 12 feet by 50 feet. In December 2002, the Company
discontinued its lease of the office trailer and consolidated personnel in the
main office building.

In December of 2000, R-Tec Corporation entered into a lease agreement for office
and production space for a satellite division of R-Tec Corporation, i.e.,
Creative Test Solutions, in North Salt Lake, Utah. The Creative Test Solutions
division houses the software engineering support group for R-Tec Corporation.
Creative Test Solutions is not a separate legal entity but is recognized as a
part of the R-Tec Corporation structure. The office space in Utah consists of
approximately, 2,400 square feet of combined office and warehouse space with
monthly lease payments of $1,320 per month and additional expenses as per a
triple net lease agreement. All operating expenses including employment
reimbursement and taxes are


<PAGE>

paid directly from the Corporate offices in Meridian, Idaho and are included in
the expense structure of R-Tec Corporation. Currently, two employees, Alan
Ashcroft and Nyle Stewart, work at the Utah office under the supervision of Gary
Clayton.

In March 2002, the Company entered into a one year lease agreement, with the
option to renew for one year, for office and manufacturing space for the
interconnect products manufacturing facility. The facility is within the
proximity of several blocks of the corporate office and is located at 703 and
705 N. Ralstin, in Meridian, Idaho. Monthly rent is $1,550 triple net.

R-Tec Holding, Inc. does not have any separate corporate offices, but uses, when
required, the offices of R-Tec Corporation for its purposes, without the payment
of any rent or other obligation, until such time as independent offices may be
required.

Except for the described leasehold interest in the occupied premises by R-Tec
Corporation, R-Tec Holding does not have any investments in real estate, nor
interests in real estate, real estate mortgages, nor securities of or interests
in persons primarily engaged in real estate, activities.

Holding's New Interconnect Manufacturing Facility

R-Tec Holding, Inc., through its subsidiary R-Tec Corporation, completed
construction of a new 3,000 sq. ft. manufacturing facility late in the fourth
quarter of 2002. This state of the art interconnect manufacturing facility
started shipping customer orders and expects to see substantial orders and
revenue growth throughout 2003.

The facility will enable R-Tec to manufacture all GCI(TM) products locally.
Expected results of R-Tec's latest expansion include reduced production costs,
greater quality control, handling of larger product volumes and faster product
shipments. The in-house manufacturing process will also enable R-Tec to continue
providing additional product niches within the interconnect sectors, including
silicone wafer testing, known good die testing and flex circuit manufacturing.

ITEM 3.  LEGAL PROCEEDINGS

There were no material legal proceedings to report at fiscal year end 2002.

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

      a)    An annual meeting of shareholders was held on the 19th day of
            November, 2002.

      b)    The following directors received a plurality of votes:

                             Douglas G. Hastings
                             Gary A. Clayton
                             Rulon L. Tolman


<PAGE>

                             David R. Stewart

      c)    Amendment to the Articles of Incorporation approved to increase the
            authorized shares of voting common stock from 30,000,000 to
            60,000,000 shares.

                          Votes For          Votes Against
                          --------------------------------
                          14,919,806           1,578,960


     c)     Other matters of voting included:

                  ratification of Balukoff, Lindstrom, & Co., P.A. as the
                  company's independent auditors. Voting was tabulated and the
                  results were as follows:

                       Votes For         Against or Abstaining
                       ---------------------------------------
                       14,919,806            1,578,960

                                     PART II

ITEM  5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

Market Information

The Registrant's stock is publicly traded on the OTC BB under the symbol RTHG.
Public trading was initiated July 2, 2001.

Quarterly prices for the stock are as follows:

Year 2001                        Stock price High           Stock price Low
-------------------------------------------------------------------------------

3rd quarter 2001                    $ 7.25                      $ 0.01
4th quarter 2001                    $ 0.85                      $ 0.31

Year 2002                       Stock price High            Stock price Low
-------------------------------------------------------------------------------

1st quarter 2002                    $ 0.70                      $ 0.20
2nd quarter 2002                    $ 0.40                      $ 0.10
3rd quarter 2002                    $ 0.30                      $ 0.12
4th quarter 2002                    $ 0.23                      $ 0.10

Holders of Record of Each Class of Common Equity.

Class                                   Date of Reporting   No.of Shares Held
-------------------------------------------------------------------------------


<PAGE>

Series A Convertible Preferred              12-31-02          2,781,564
Common Stock                                12-31-02          21,742,189

Unregistered Equity Securities Sold by Registrant During 2002.

Series "A" Preferred Stock

During 2002, the Company received no subscriptions from Series "A" Preferred
Stock sold to existing shareholders of such stock.

Common Stock

During 2002 Registrant issued 2,732,984 shares of common stock of Registrant
without registration under the Securities Act in private transactions to the
class of persons indicated, for consideration of cancellation of debt, services
rendered, and cash.

The described stock transactions were exempt from registration under the
provisions of Section 4(2) of the Securities Act of 1933, as amended.

Convertible Debentures

During 2002, the Company issued convertible debentures without registration
under the Securities Act in private transactions in the amount of $895,000. The
convertible debt contain a conversion feature that allows for payment of
interest only until 30 days prior to the maturity date, at which time principal
and accrued interest may be converted to stock, at the option of the holder,
into shares of common stock of the Company. The conversion price equals 75% of
the fair market value of the Company's common stock, determined as of the date
of the conversion notice. See Note I in "notes to financial statements" herein
attached for additional information.

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

The following discussion contains forward-looking statements that involve known
and unknown risks and uncertainties which may cause actual results in future
periods to differ materially from those indicated herein as a result of a number
of factors. When the Company uses words like "may," "believes," "expects,"
"anticipates," "should," "estimate," "project," "plan," their opposites and
similar expressions, the Company is making forward-looking statements. These
expressions are most often used in statements relating to business plans,
strategies, anticipated benefits or projections about the anticipated revenues,
earnings or other aspects of our operating results. We make these statements in
an effort to keep stockholders and the public informed about our business, and
have based them on our current expectations about future events. Such statements
should be viewed with caution. These statements are not guarantees of future
performance or events. As noted elsewhere in this report, all phases of our
business are subject to uncertainties, risks and other influences,

<PAGE>

many of which the Company has no control over. Additionally, any of these
factors, either alone or taken together, could have a material adverse effect on
the Company and could change whether any forward-looking statement ultimately
turns out to be true. The Company undertakes no obligation to publicly release
updates or revisions to these statements. The following discussion should be
read in conjunction with audited consolidated financial statements and the notes
thereto for the year ending December 31, 2002, included elsewhere in this Form
10-KSB.

Corporate Structure

The Company did not undergo any significant restructuring changes during 2002.
Product groups remained consolidated into one operating entity, R-Tec
Corporation. The product groups include: 1) the custom engineered automation
group, 2) the interconnect devices group, 3) the retail machine shop sales
group, and 4) the software solutions product group. The custom engineered
automation group and the retail machine shop sales group are located within the
Company's main location, the software solutions product group is located at the
Utah office location, and the interconnect devices group is located in the
Company's new plant in Meridian, Idaho, at 703 and 705 N. Ralstin St.

IntorCorp, which was a separately owned corporation of R-Tec Corporation, was
dissolved prior to the end of 2002. The motor technology from IntorCorp has been
transferred into R-Tec Corporation for possible future development. There were
no operating activities within IntorCorp during 2002.

Performance Overview

Revenues:

The Company recognized revenues of $2,672,237 for year end 2002, compared with
$2,209,826 for year end 2001, an increase of $462,411, or 21%.

Within the product groups, custom engineered sales decreased from $2,046,049 to
$1,797,877, interconnect sales increased from $107,689 to $619,558, software
solution sales decreased from $22,476 to $16,142, retail machine shop sales
increased from $5,669 to $44,606, and other sales increased from $27,943 to
$194,054, respectively year 2001 to 2002. Of the product groups, custom
engineered sales and interconnect sales accounted for the majority of sales.

Custom engineered sales are dependent primarily upon the availability of and
spending of funds for capital acquisitions from the Company's primary customers.
With the continued sluggish economic conditions, especially within the Company's
primary sector for this product group, i.e., high technology, new product orders
were difficult to find. Several of the large projects were continuations from
efforts initiated in a prior year. It is not anticipated that this product group
will experience any significant growth within year 2003 arising solely from
economic expansion. In order to augment sales within this product group, the
Company is seeking to expand its customer base into new areas where variations
of its existing

<PAGE>

products and technologies might be adaptable. For example, with its vision
inspection applications, the Company's sales personnel and engineers are
researching the viability of adapting existing technologies for use within the
wood products sector.

For the interconnect products group, sales continued to grow in 2002 as the
Company introduced its products to a broadening customer base. Within this
product group, sales are expected to continue to grow in 2003 as new customers
are added and as new product variations are designed and introduced into the
market to meet existing customer needs. With the on-line capability of the
Company's new plant for the manufacture of interconnect products, the Company
expects its quality and capacity to support anticipated growth. The Company
feels its proprietary interconnect products are positioned for growth in
revenues due to the technological changes in the IC testing industry.
Particularly, as the size of IC chips decreases, creating tighter tolerance
issues, and the speed of the chips increases, creating challenging electrical
testing parameters, the Company feels its products are positioned to capture
market share as other competitive products suffer from technological
obsolescence.

The other product groups only accounted for approximately 10% of sales. It is
not anticipated that significant growth will occur within these other product
groups. The Company does seek opportunities within these other groups to fill in
excess capacity when available.

Profitability:

The Company recognized losses of ($1,566,370) in year 2002, compared to
($1,439,903) in year 2001. The increase in losses of $126,467, representing an
increase of 9%, resulted from several factors. The primary contribution came
from a one-time impairment of intangible assets. Specifically, goodwill and
customer lists were written down by $429,952. In addition, research and
development increased from $3,150 in 2001 to $64,525 in 2002 and interest
expense increased from $38,303 in 2001 to $158,037 in 2002.

Gross profit increased from $533,372 or 24% in 2001 to $724,534 or 27% in 2002,
an increase of $191,162 or 36%. The increase in gross profit as a percentage of
sales came primarily from a decrease in material and labor costs.

Selling, general and administrative expenses decreased from $1,881,400 in 2001
to $1,574,243 in 2002, a decrease of $307,157, or 16%. The decrease reflects a
concerted effort on the part of management to control costs associated with
overhead expenses.

In January 2003, the Company reduced its workforce by 16%, continuing its
efforts to trim overhead expenses. The layoffs occurred primarily in areas
reflecting administrative functions and excess production capacity. The Company
is not anticipating additional workforce reductions in the near term.

Net loss per common share for year end 2002 on weighted shares outstanding of
21,250,289, was ($0.07) compared to ($0.08) on weighted shares outstanding of
17,761,069, for year end 2001.

<PAGE>

Changes in Financial Condition

At December 31, 2002, current assets were $873,517, with current liabilities of
$1,178,965, resulting in a current ratio of .74, compared to $558,943 and
$394,734 respectively for year 2001, and a corresponding current ratio of 1.42.

Current assets increased by $314,574 year 2001 to 2002, due primarily to an
increase in accounts receivable, inventory, and prepaid expenses. Current
liabilities increased by $784,231, year to year, primarily due to an increase in
short term convertible debentures. The convertible debentures may be converted
to stock at the option of the holder, upon the date of maturity. To the extent
the convertible debentures are converted to stock or equity, they will relieve
short term liabilities. Management does not yet know the disposition of the
holders of the convertible debentures regarding the potential for conversion to
equity.

Changes in accounting procedures on the balance sheet included, as previously
mentioned, impairment of intangible assets with a one time write down of
$429,952 for goodwill and customer lists in accordance with Financial Accounting
Standards Board (FASB) No. 142 and No.144.

Equipment and leasehold improvements, net of cost and accumulated depreciation
increased from $628,957 in 2001 to $888,247 in 2002.

Liquidity and Capital Resources

Liquidity remains one of the major challenges for the Company. The inclusion of
the short-term convertible debentures in the amount of approximately $895,000,
reduces the current ratio from approximately 3.08 to .74. Management recognizes
the critical nature of funding the convertible debentures either through
conversion to equity or cash payments. The Company will continue to seek
additional funding opportunities. Some flexibility exists in dealing with the
convertible debentures as the maturity dates are staggered throughout the
remainder of 2003.

At the annual shareholders meeting held in November 2002, the Board of Directors
authorized, and the stockholders voted to ratify, an additional 30 million
shares of common stock. It is not anticipated that the Company will need to use
all of the additional shares authorized, but may need to allocate some shares
for additional capital funding.

In order to increase capital resources and strengthen liquidity the Company may
seek partnership arrangements with larger, established corporations which have
distribution channels in place that would be synergistic to the Company's
existing product lines. Partnerships of this nature may include funding for
continued product research and joint development, or for development of
additional market opportunities.

The Company recognizes that to the extent it continues to have a negative cash
flow position, it will need to seek additional capital funding from external
investors.

Company Strategy

<PAGE>

The Company continues to focus on minimizing expenses, in the areas of cost of
goods sold as well as overhead expenses. Excess labor costs have been trimmed
for the short term to facilitate this strategy. Where possible, the Company also
is working on maximizing profitability on bidding opportunities.

With the completion of the interconnect products manufacturing plant, the
Company is aggressively introducing its interconnect products to new customers
and is reviewing new product opportunities that would be compatible with the
plant's capabilities. Management feels it has a product introduction period of 6
to 12 months prior to establishing, substantial, repeat orders with existing
clients. Management does feel however, that upon product acceptance, sales
should increase rapidly with existing customers. The plant capacity will support
significant increases in sales as currently constructed.

In addition, the Company has been approached with new opportunities for its
proprietary GCI(TM) products. Presently, the new product modifications are being
tested by existing customers for future applications. The Company feels that if
the new modifications are successful, significant, short-term revenues will
result.

Longer term, the Company is organizing strategic plans to expand its product
lines in the interconnect sector to provide a complete package solution. With
the existing product lines, the Company is reviewing the potential of the design
and manufacture of testing handlers, which would be compatible with existing
Company products. The addition of the capital equipment handlers with the
consumable testing products, could potentially create a captive market in some
testing sectors.

As previously mentioned, in order to increase sales in engineered automation
products, the Company's marketing group is aggressively exploring other market
segments that would build upon the engineering group's core competencies. The
Company is currently manufacturing its first project for the food services
industry. Also, bids have been placed for opportunities in the wood products
industry, for modified products utilizing known technology the Company has
successfully developed in previous projects. It is anticipated by management,
that this shift from a single market segment within the automation products to
multiple market segments will increase revenues by the 3rd and 4th quarters of
2003.

In negotiations with several large, well established companies, with worldwide
activities, the Company has recognized the weakness of its distribution
channels. With this in mind, the Company has engaged in discussions with larger
distributors who have existing vendor acceptance arrangements with the larger
companies. By utilizing the existing distribution channels, it is felt the
Company may be able to realize additional revenue increases for its products.
The companies selected for this type of partnering, have similar product lines
that could utilize the proprietary products of R-Tec.

Due to the current financial condition, the Company will necessarily need to
seek additional capital funding. First, the Company will continue to seek
smaller investments that will minimize dilution of the existing stockholder
base. Funding from these sources will be used for operations and to retire
convertible debentures in the event holders of those investment

<PAGE>

instruments choose not to convert to equity. Secondly, the Company will pursue
larger funding partners whose existing product lines would be compatible. These
funds would be used for longer term planning and development of products such as
the testing handlers as mentioned above. Management recognizes that the latter
type of funding would necessitate a greater dilution of stockholder equity, but
feels, with the right partner, it may be the most prudent approach to strengthen
the Company's financial position.

Income Taxes

Income taxes are provided for temporary differences between financial and tax
basis income. The components of net deferred taxes are as follows at December
31, 2002, using a combined deferred tax rate of 40%:

Deferred tax asset from:
     Net operating loss carryforward                             $ 1,015,000
     Fixed assets                                                     44,000
     Stock options                                                   100,000
     Bad debt reserve                                                  8,000
                                                                 -----------
                                                                   1,167,000
Deferred tax liability from:
     Valuation allowance                                          (1,167,000)
                                                                 -----------

Net deferred tax                                                 $        --
                                                                 ===========

The following reconciles the federal tax provisions with the expected provisions
by applying statutory rates (34%) to income before income taxes as of December
31:

                                                                    2002
                                                                ----------
   Provision at statutory rate                                  $ (510,000)
   State income taxes, net of federal expense                      (60,000)
   Non-deductible interest expense                                   7,000
   Goodwill impairment                                              67,000
   Change in valuation allowance                                   496,000
                                                                ----------

   Income tax expense                                           $       --
                                                                ==========

The net operating loss carry forward at December 31, 2002, for federal tax
purposes of approximately $2,550,000 begins to expire in the year 2020.

<PAGE>

The following reconciles the federal tax provisions with the expected provisions
by applying statutory rates (34%) to income before income taxes as of December
31, 2001:

                                                         2001            2000
                                                      -----------    -----------

Provision at statutory rate                            $(470,000)     $(141,622)
State income taxes, net of federal expense               (83,000)        (1,923)
Effect of graduated rates                                (23,000)        10,376
Effect of merger                                          40,000             --
Change in valuation allowance                            536,000        121,265
Other                                                         --           (989)
                                                       ---------      ---------

Income tax expense (benefit)                           $      --      $ (12,893)
                                                       =========      =========

The net operating loss carry forward at December 31, 2001, for federal tax
purposes of approximately $1,550,000 begins to expire in the year 2020.

Recently Issued Accounting Statements

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
". SFAS 145 slightly changes and clarifies the accounting for the extinguishment
of long-term debt and eliminates inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Under current operations, adoption of SFAS 145 is not expected to
have a material impact on the Company's results of operations or financial
position. SFAS 145 will be effective for the Company's fiscal year ending
December 31, 2003, although earlier adoption is permitted.

In June 2002, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS 146 changes the accounting for costs associated with exit or disposal
activities. Under current operations, adoption of SFAS 146 is not expected to
have a material impact on the Company's results of operations or financial
position. SFAS 146 will be effective for the Company's fiscal year ending
December 31, 2003, although earlier adoption is permitted.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the disclosures to be
made by sellers or guarantors of products and services, as well as those
entities guaranteeing the financial performance of others. The Interpretation
further clarifies that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the obligations it has undertaken in

<PAGE>

issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are effective on a prospective basis to
guarantees issued or modified after December 31, 2002, and the disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. The Company believes that its disclosures with regards to
these matters are adequate as of December 31, 2002.

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123. This Statement amends FAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, it
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As of December 31, 2002, the Company continued to
follow the intrinsic value method to account for stock-based employee
compensation. The additional disclosure requirements of this Statement are
effective for financial statements for interim periods beginning after
December15, 2002.

ITEM 7:  FINANCIAL STATEMENTS


                        Consolidated Financial Statements

                               R-TEC HOLDING, INC.
                                 AND SUBSIDIARY

                           December 31, 2002 and 2001


<PAGE>

TABLE OF CONTENTS

                                                                        Page No.
                                                                        -------

INDEPENDENT AUDITORS' REPORT .....................................        1

FINANCIAL STATEMENTS

  Consolidated Balance Sheet .....................................        2

  Consolidated Statements of Operations ..........................        3

  Consolidated Statements of Cash Flows...........................        4

  Consolidated Statements of Changes in Shareholders' Equity......        5

  Notes to Consolidated Financial Statements .....................        6




<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Shareholders and Board of Directors
R-Tec Holding, Inc. and Subsidiary
Boise, Idaho

We have audited the accompanying consolidated balance sheet of R-Tec Holding,
Inc. and Subsidiary as of December 31, 2002, and the related consolidated
statements of operations, cash flows, and changes in shareholders' equity for
the years ended December 31, 2002 and 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of R-Tec Holding, Inc.
and Subsidiary as of December 31, 2002, and the results of their operations and
their cash flows for the years ended December 31, 2002 and 2001, in conformity
with U.S. generally accepted accounting principles.


/s/ Balukoff, Lindstrom & Co. P.A.

Boise, Idaho
February 21, 2003

<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                December 31, 2002

<TABLE>
<S>                                                                             <C>
Current assets
    Cash                                                                        $  172,572
    Accounts receivable (net of $20,177
       allowance for doubtful accounts)                                            478,529
    Costs and estimated earnings in excess
       of billings on uncompleted contracts                                         72,723
    Income taxes receivable                                                         15,295
    Inventory                                                                       35,941
    Prepaid expenses                                                                98,457
                                                                                ----------
                                                    Total current assets           873,517
Equipment and leasehold improvements, at cost,
    net of accumulated depreciation                                                888,247
Other assets, at cost, net of accumulated
    amortization                                                                    24,775
                                                                                ----------
                                                    Total assets                $1,786,539
                                                                                ==========
Current liabilities
    Accounts payable                                                            $  107,569
    Accrued expenses                                                                84,797
    Billings in excess of costs and estimated
      earnings on uncompleted contracts                                             61,594
    Notes and leases payable, current portion                                      925,005
                                                                                ----------
                                                    Total current liabilities    1,178,965

Accrued preferred dividends payable                                                161,780
Notes and leases payable, less current portion                                     110,013
Notes payable to related parties                                                   200,000
                                                                                ----------
                                                    Total liabilities            1,650,758
Shareholders' equity
    Series A cumulative convertible preferred
       stock, par value $0.23437 per share,
       5,000,000 authorized, 2,781,564 shares
       issued and outstanding                                                      651,100
    Common stock, no par value per share,
       60,000,000 authorized, 21,742,189 shares
       issued and outstanding                                                    2,834,082
    Additional paid-in capital                                                     514,123
    Accumulated deficit                                                         (3,863,524)
                                                                                ----------
                                                    Total shareholders' equity     135,781
                                                                                ----------
                                    Total liabilities and shareholders' equity  $1,786,539
                                                                                ==========
</TABLE>

                             See accompanying notes


                                      -2-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     Years Ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                  2002            2001
                                                              ------------    -----------
<S>                                                           <C>             <C>
Revenues                                                      $  2,672,237    $ 2,209,826

Operating costs                                                  1,947,703      1,676,454
                                                              ------------    -----------
                                                Gross profit       724,534        533,372

Selling, general and administrative expenses                     1,574,243      1,881,400
Research and development                                            64,525          3,150
Loss on asset impairment                                           429,952             --
                                                              ------------    -----------
                                              Operating loss    (1,344,186)    (1,351,178

Interest expense                                                  (158,037)       (38,303)
Interest income                                                      2,516          8,177
                                                              ------------    -----------
                                                                  (155,521)       (30,126)
                                                              ------------    -----------
Loss before income taxes                                        (1,499,707)    (1,381,304)
Income taxes expense (benefit)                                          --             --
                                                              ------------    -----------
                                                    Net loss    (1,499,707)    (1,381,304)

Preferred stock dividends                                           66,663         58,599
                                                              ------------    -----------
                   Net loss available to common shareholders  $ (1,566,370)   $(1,439,903)
                                                              ============    ===========

Net loss per common share                                     $      (0.07)   $     (0.08)
Weighted average shares outstanding                             21,250,289     17,761,069
</TABLE>

                             See accompanying notes


                                      -3-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     Years Ended December 31, 2002 and 2001


<TABLE>
<CAPTION>
                                                                        2002           2001
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
Cash flows from operating activities
     Net loss                                                        $(1,499,707)   $(1,381,304)
     Adjustments to reconcile net loss to net
         cash used by operating activities
         Depreciation and amortization                                   259,954        153,903
         Write-down of impaired assets                                   429,952             --
         Options issued for consulting services                           82,240        251,101
         Common stock issued for services                                     --         18,876
         Changes in assets and liabilities
             Accounts receivable                                        (327,681)       360,676
             Costs and estimated earnings in excess
               of billings on uncompleted contracts                      (20,696)       150,503
             Prepaid expenses                                            (22,020)            --
             Inventory                                                   (35,941)            --
             Accounts payable                                            (97,238)        41,961
             Accrued expenses                                             56,306        (73,670)
             Billings in excess of costs and estimated
               earnings on uncompleted contracts                          61,594        (94,663)
                                                                     -----------    -----------
                             Net cash used by operating activities    (1,113,237)      (572,617)

Cash flows from investing activities
     Purchase of equipment and other assets                             (408,450)      (456,830)

Cash flows from financing activities
     Collections on loans                                                 15,110          6,140
     Proceeds from common stock                                          701,327      1,112,634
     Proceeds from notes payable                                       1,003,922        200,000
     Payments on debt                                                   (356,144)       (35,917)
                                                                     -----------    -----------
                         Net cash provided by financing activities     1,364,215      1,282,857
                                                                     -----------    -----------
                                              Net increase in cash      (157,472)       253,410
Beginning cash                                                           330,044         76,634
                                                                     -----------    -----------
                                                       Ending cash   $   172,572    $   330,044
                                                                     ===========    ===========


Supplemental disclosures of cash flow information
     Interest paid                                                   $   143,773    $    31,262
     Noncash investing and financing activities
         Preferred stock dividends payable                           $    66,664    $    58,599
         Note payable paid through issuance of a note payable from
             another party                                           $    50,000    $        --
         Write-down of impaired assets                               $   429,952    $        --
         Notes payable to related party converted to common stock    $        --    $    65,000
         Accrued expenses converted to notes payable                 $        --    $   169,295
         Accrued expenses converted to common stock                  $        --    $    18,876
         Acquisition of assets, net of liabilities of $113,806
             with common stock                                       $        --    $   557,442
</TABLE>

                             See accompanying notes


                                       -4-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF CHANGES
                             IN SHAREHOLDERS' EQUITY
                     Years Ended December 31, 2002 and 2001



<TABLE>
<CAPTION>
                                                                            Additional
                                         Common    Preferred  Accumulated     Paid-in
                                         Stock       Stock      Deficit       Capital      Total
                                      ----------   --------   -----------    --------   -----------
<S>                                   <C>          <C>        <C>            <C>        <C>
      Balance at December 31, 2000    $  280,731   $651,100   $  (857,251)   $107,439   $   182,019

Net loss                                      --         --    (1,381,304)         --    (1,381,304)
Dividends                                     --         --       (58,599)         --       (58,599)
Common stock issuances                 1,852,024         --            --          --     1,852,024
Non employee stock options                    --         --            --     251,101       251,101
                                      ----------   --------   -----------    --------   -----------
      Balance at December 31, 2001     2,132,755    651,100    (2,297,154)    358,540       845,241

Net loss                                      --         --    (1,499,707)         --    (1,499,707)
Dividends                                     --         --       (66,663)         --       (66,663)
Common stock issuances                   701,327         --            --          --       701,327
Non employee stock options                    --         --            --      82,240        82,240
Intrinsic value of conversion
features on notes payable                     --         --            --      73,343        73,343
                                      ----------   --------   -----------    --------   -----------

      Balance at December 31, 2002    $2,834,082   $651,100   $(3,863,524)   $514,123   $   135,781
                                      ==========   ========   ===========    ========   ===========
</TABLE>

                             See accompanying notes


                                       -5-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

R-Tec Holding, Inc., (the Company), is a system integrator, designer, and
manufacturer of automation and manufacturing equipment, primarily to the
high-tech industry.

Entity

The Company has been in existence, in various forms, since 1995. In 1999 the
Company completed a reverse merger with R-Tec Corporation (R-Tec). After the
merger, R-Tec became a wholly owned subsidiary of the Company. In 2000, the
Company created another subsidiary, R-Tec Interconnect (Interconnect).
Interconnect was merged into R-Tec during 2001.

The Company had two acquisitions during 2001. The first resulted in the Company
merging R-Tec Machine Tool (Machine Tool) into R-Tec effective June 3, 2001. The
second resulted in the Company acquiring certain assets of Browand, LaMeire &
Associates (Browand) effective July 17, 2001. Both acquisitions were completed
by issuing common stock of the Company.

Principles of Consolidation

The consolidated financial statements include the accounts of R-Tec Holding,
Inc. and subsidiary, after elimination of significant intercompany items and
transactions.

Method of Accounting

The Company reports on the accrual basis of accounting for financial purposes.
Contracts are reported using the percentage-of-completion method of revenue
recognition. Under the percentage-of-completion method, earnings are recognized
based on the ratio of costs incurred to total estimated costs. Costs include
direct materials, direct labor, subcontractors and job related overhead. Assets
and liabilities relating to the "costs and estimated earnings in excess of
billings on uncompleted contracts" and "billings in excess of costs and
estimated earnings on uncompleted contracts" are recorded as current assets and
current liabilities on the balance sheet as they will be liquidated in the
normal course of contract completion.

Revisions in cost and profit estimates during the course of the work are
reflected in the accounting period in which the facts requiring revision become
known. The entire amount of an estimated ultimate loss is accrued at the time
such a loss becomes known.


                                       -6-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


Concentrations of Credit Risk

The Company is engaged primarily in the manufacture and sale of manufacturing
equipment, primarily to the high-tech industry throughout the United States. The
Company provides credit in the normal course of business to its customers and
performs ongoing credit evaluations of those customers. It maintains allowances
for doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information. Credit losses, when
realized, have been within the range of the Company's expectations and,
historically, have not been significant. The Company generally requires no
collateral from its customers.

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments and trade accounts
receivables. The Company places its temporary cash investments with financial
institutions and limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across different geographic areas. As of December 31,
2002, the Company's only significant concentrations of credit risk is the
high-tech industry in which it serves.

Cash Equivalents

The Company considers all highly liquid investments maturing in three months or
less as cash equivalents.

Trade Accounts Receivable

Trade accounts receivable are recorded net of an allowance for expected losses.
The allowance is estimated from historical performance and projections of
trends.

Inventories

Raw material inventories and finished goods inventories purchased for resale are
stated at the lower of cost (last-in, first-out method) or market.

Equipment and Leasehold Improvements

Capital additions are classified as equipment and leasehold improvements and are
recorded at cost. Depreciation and amortization is recorded by use of the
straight-line method. The book value of each asset is reduced by equal amounts
over its estimated useful life.


                                       -7-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


Maintenance and repairs are charged to operations as incurred. When an asset is
disposed of, accumulated depreciation is deducted from the original cost, and
any gain or loss arising from its disposal is credited or charged to operations.

Investment in IntorCorp

R-Tec has a 50% ownership interest in IntorCorp. IntorCorp has had no operations
since its formation in 1998. The only assets of IntorCorp are in-process
research and development technology, which have no value to report in the
balance sheet as of December 31, 2002. The technology acquired relates to 5 HP
motor technologies, which have not been fully developed and does not currently
have alternative future uses.

Significant Customers and Suppliers

The Company recorded revenue from services provided to customers that exceeded
10 percent of total revenue as follows:

                                                      2002            2001
                                                   ----------      -----------

     Company A                                     $  308,270      $   305,756
     Company B                                           --            382,658
     Company C                                        609,028          670,670
                                                   ----------      -----------

                                                   $  917,298      $ 1,359,084
                                                   ==========      ===========

The Company has no vendors that supplied 10% or more of Company purchases.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due or recoverable and
deferred taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting.

Value of Financial Instruments

The Company has a number of financial instruments. The Company estimates that
the fair value of all financial instruments, at December 31, 2002, do not differ
materially from the aggregate carrying values of its financial instruments
recorded in the accompanying balance sheet. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required in
interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are


                                       -8-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


not necessarily indicative of the amounts that the Company could realize in a
current market exchange.

Estimates

Management uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and reported
revenues and expenses. Significant estimates used in preparing these financial
statements include those assumed in determining the collectibility of
receivables, computing profit percentages under the percentage-of-completion
revenue recognition method, determining the allocation of purchase price on
acquisitions, and determining the future revenues and expenses for the purpose
of evaluating going concern and impairment on intangible assets. It is at least
reasonably possible that the significant estimates used will change within the
next year.

Earnings Per Share

Earnings per share are computed by dividing net income applicable to common
shareholders by the weighted average number of shares outstanding.

Recently Issued Accounting Statements

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
". SFAS 145 slightly changes and clarifies the accounting for the extinguishment
of long-term debt and eliminates inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Under current operations, adoption of SFAS 145 is not expected to
have a material impact on the Company's results of operations or financial
position. SFAS 145 will be effective for the Company's fiscal year ending
December 31, 2003, although earlier adoption is permitted.

In June 2002, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS 146 changes the accounting for costs associated with exit or disposal
activities. Under current operations, adoption of SFAS 146 is not expected to
have a material impact on the Company's results of operations or financial
position. SFAS 146 will be effective for the Company's fiscal year ending
December 31, 2003, although earlier adoption is permitted.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of


                                      -9-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


Others. The Interpretation elaborates on the disclosures to be made by sellers
or guarantors of products and services, as well as those entities guaranteeing
the financial performance of others. The Interpretation further clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the obligations it has undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
effective on a prospective basis to guarantees issued or modified after December
31, 2002, and the disclosure requirements are effective for financial statements
of periods ending after December 15, 2002. The Company believes that its
disclosures with regards to these matters are adequate as of December 31, 2002.

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123. This Statement amends FAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, it
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As of December 31, 2002, the Company continued to
follow the intrinsic value method to account for stock-based employee
compensation. The additional disclosure requirements of this Statement are
effective for financial statements for interim periods beginning after
December15, 2002.

NOTE B - UNCOMPLETED CONTRACTS

Costs, estimated earnings and billings on uncompleted at December 31, 2002
contracts consist of:

    Costs incurred on uncompleted contracts                          $  39,665
    Estimated earnings                                                  65,321
                                                                     ---------
                                                                       104,986

    Billings to date                                                   (93,857)
                                                                     ---------

                                                                     $  11,129
                                                                     =========
    Balance sheet captions are:
      Costs and estimated earnings in excess of
         billings on uncompleted contracts                           $  72,723

      Billings in excess of costs and estimated
         earnings on uncompleted contracts                             (61,594)
                                                                     ---------

                                                                     $  11,129
                                                                     =========


                                      -10-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


NOTE C - INVENTORIES

Inventories at December 31, 2002 consist of:

     Raw materials                                                    $   9,381
     Finished goods                                                      26,560
                                                                      ---------

                                                                      $  35,941
                                                                      =========

NOTE D - PREPAID EXPENSES

During the year ended December 31, 2002, prepaid interest of $157,101 was
capitalized as a result of the issuance of convertible notes payable as
described in Note I. The prepaid interest is the combination of three
components: (1) the intrinsic value of the non-detachable beneficial conversion
feature; (2) the value of the common stock issued concurrently with the notes
and (3) the pro rata share of commissions paid relating to the intrinsic value
of the non-detachable beneficial conversion feature and the convertible note.
The prepaid interest is expensed over the period from the inception of the note
to the earliest conversion date. Of the amount capitalized, $63,288 was
amortized as interest expense for the year ended December 31, 2002.

Prepaid expenses at December 31, 2002 consist of:

     Prepaid rent                                                  $     4,644
     Prepaid interest                                                   93,813
                                                                   -----------

                                                                   $    98,457
                                                                   ===========

NOTE E - EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements December 31, 2002
  consist of:

     Equipment                                                     $   946,032
     Vehicles                                                           33,804
     Leasehold improvements                                            118,484
     Office equipment and furnishings                                   96,082
                                                                   -----------
                                                                     1,194,402

     Accumulated depreciation and amortization                        (306,155)
                                                                   -----------

                                                                   $   888,247
                                                                   ===========


                                      -11-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


The estimated useful lives of equipment is five to seven years. The leasehold
improvements are amortized over the life of the lease.

NOTE F - ACQUISTIONS, INTANGIBLE ASSETS AND GOODWILL

Acquisitions

On July 3, 2001, the Company acquired R-Tec Machine Tool, Inc. (Machine Tool),
an Idaho corporation, pursuant to a Share Exchange and Reorganization Agreement
by and between the Company and the four individual shareholders of Machine Tool.

Under the terms of the Agreement, the parties agreed to be bound by and accept
the fair market value placed on Machine Tool obtained from an independent
business appraisal. Consideration for the acquisition was 291,248 shares of the
common stock of the Company valued at $1.00 per share, which the parties agree
and acknowledge was the fair market value of the Company's shares as of the date
of the Agreement. Common stock issuances during the period prior to the
acquisition provided the basis for the $1.00 per share valuation. The Company
exchanged 291,248 shares of common stock for all of the outstanding shares of
stock of Machine Tool. Machine Tool was owned by 50% by Doug Hastings and Gary
Clayton. Two other shareholders owned the remaining 50%. Machine Tool had been
providing substantially all of the machine tooling necessary to complete custom
automation work for the Company. The Company determined it could reduce costs
and decrease the time requirement for machine tooling if Machine Tool was
acquired. In addition, Machine Tool operates in space adjoining to the Company.

Significant assets acquired and liabilities assumed were as follows:

     Cash                                            $      15,734
     Equipment                                             188,102
     Goodwill                                              201,218
     Notes payable assumed                                (113,806)
                                                     -------------

                                                     $     291,248
                                                     =============

Goodwill is all reported at the entity level as the Company has only a single
segment. Goodwill is not amortizable for income tax purposes.

On July 17, 2001, the Company acquired certain assets from Browand, LaMeire &
Associates, Inc. (Browand), an Oregon corporation, pursuant to an Asset Purchase
Agreement by and between the Company and Browand and its two shareholders, Bill
Browand and Jeanette LaMeire.


                                      -12-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


Under the terms of the Agreement, the Company acquired certain assets, which
include the customer list and industry contacts, certain items of office
equipment and inventory. Substantially, all of the purchase price related to the
customer list and industry contacts. Consideration for the acquisition was
380,000 shares of the common stock of the Company valued at $1.00 per share,
which the parties agree and acknowledge was the fair market value of the
Company's shares as of the date of the Agreement. Common stock issuances during
the period prior to the acquisition provided the basis for the $1.00 per share
valuation.

Browand had previously provided for substantially all of the Company's selling
activities. The Company determined by bringing these resources into the Company
they could focus the sales efforts on specific Company products and reduce
costs.

Significant assets acquired and liabilities assumed were as follows:

     Equipment                                       $      12,025
     Customer lists                                        365,975
     Other                                                   2,000
                                                     -------------
                                                     $     380,000
                                                     =============

Based on the industry in which the Company operates and the rapidly changing
technology and customers, the Company determined the estimated useful life of
the customer lists was four years.

Intangible Assets and Goodwill

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". SFAS 141 requires business combinations
to be accounted for by the purchase method starting July 1, 2001. SFAS 142
requires intangible assets to be amortized over their useful life if
determinable. SFAS 141 and 142 were adopted by the Company in 2001. Accordingly,
goodwill was not amortized for the Machine Tool purchase and customer lists were
amortized over the estimated useful life of four years for the Browand purchase.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS 144 slightly changes and clarifies the
accounting for long-lived assets. SFAS No. 144 was adopted in 2002.

At December 31, 2002, the Company reviewed the carrying value of the goodwill
and the customer list in accordance with SFAS 142 and SFAS 144. The Company
estimated the fair value for goodwill and the customer list utilizing expected
present value of future cash flow projections. These projections indicated that
there was no determinable value for these assets. Accordingly, the entire
unamortized balances were charged to expense as an impairment loss.


                                      -13-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


The loss is aggregated in the caption, "Loss on asset impairment" on the
consolidated statements of operations.

The changes in the carrying amount of goodwill and intangible assets for the
year ended December 31, 2002, are as follows:
<TABLE>
<CAPTION>

                                                      Goodwill    Customer List     Total
                                                     ----------    -------------- -----------
<S>                                                  <C>           <C>            <C>
     Balance as of January 1, 2002                   $ 201,218     $  320,228     $  521,446
     Amortization                                           --        (91,494)       (91,494)
     Impairment                                       (201,218)      (228,734)      (429,952)
                                                     ----------    -----------    ----------

     Balance as of December 31, 2002                 $      --     $       --     $       --
                                                     =========     ==========     ==========
</TABLE>

NOTE G - OTHER ASSETS

Other assets at December 31, 2002 consist of:

     Software                                                 $  76,327
     Accumulated amortization                                   (51,552)
                                                              ---------
                                                              $  24,775
                                                              =========

The estimated useful life of software is three years.

NOTE H - NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties at December 31, 2002 consist of:

   Note payable to Doug Hastings, payable
   in monthly nterest only payments at
   10%, until maturity in
   February 2005, unsecured.                                      $   50,000

   Note payable to Gary Clayton, payable in
   monthly interest only payments at
   10%, until maturity in
   February 2005, unsecured.                                          50,000


                                      -14-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


   Note payable to Glen Clayton, interest at 9%,
   payable in full with interest in September
   2004, unsecured.                                                  100,000
                                                                  ----------
                                                                  $  200,000
                                                                  ==========
Maturities in future years are:

         2003                                                     $       --
         2004                                                        100,000
         2005                                                        100,000
                                                                   ---------

                                                                  $  200,000
                                                                  ==========
NOTE I - NOTES PAYABLE

Notes payable at December 31, 2002 consist of:

Convertible note payable, monthly interest only
payments at 12%, principal due
June 2003, convertible to common
stock, unsecured.                                                $ 100,000

Convertible note payable, monthly interest only
payments at 12%, principal due
June 2003, convertible to common
stock, unsecured.                                                  145,900

Convertible note payable, monthly interest only
payments at 12%, principal due
June 2003, convertible to common
stock, unsecured.                                                   50,000

Note payable, 35% interest, due on demand,
secured by certain assets of the Company.                           83,000

Convertible note payable, monthly interest only
payments at 12%, principal due November 2003,
convertible to common stock, unsecured.                             50,000

Convertible note payable, monthly interest only
 payments at 12%, principal due
August 2003, convertible to common
stock, unsecured.                                                   25,000


                                      -15-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


Convertible note payable, monthly interest only payments
at 12%, principal due August 2003, convertible to common
stock, unsecured.                                                  100,000

Convertible note payable, monthly interest only
payments at 12%, principal due
August 2003, convertible to common
stock, unsecured.                                                   30,000

Convertible note payable, monthly interest only
payments at 12%, principal due
July 2003, convertible to common
stock, unsecured.                                                   50,022

Convertible note payable, monthly interest only
payments at 12%, principal due
October 2003, convertible to common
stock, unsecured.                                                   25,000

Convertible note payable, monthly interest only
payments at 12%, principal due
October 2003, convertible to common
stock, unsecured.                                                  200,000

Convertible note payable, monthly interest only
payments at 12%, principal due
October 2003, convertible to common
stock, unsecured.                                                   20,000

Convertible note payable, bi-annual interest only
payments at 8% beginning November 2002, principal due
November 2004, convertible at the option of the holder
to common stock of the Company at $.35 per share within
thirty days prior to the maturity date, secured by
certain assets of the Company.                                     100,000
                                                                  --------

                                                                   978,922

            Less current portion                                   878,922
                                                                 ---------

            Long-term portion                                    $ 100,000
                                                                 =========

The convertible debt listed above, unless stated otherwise, contain a conversion
feature that allows the principal and accrued interest to be converted within
thirty days prior to the maturity date, at the option of the holder, into shares
of common stock of the Company. The conversion price equals


                                      -16-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


75% of the fair market value of the Company's common stock, determined as of the
date of the conversion notice.

Maturities in future years are:

         2003                                          $ 878,922
         2004                                            100,000
                                                       ---------
                                                       $ 978,922
                                                       =========

NOTE J - CAPITAL LEASE PAYABLE

The Company leases equipment under capital leases at December 31, 2002 as
follows:

   Capitalized cost                                             $176,358
   Accumulated amortization                                       65,854
   Amortization expense, included in depreciation expense         35,272

Future minimum lease payments due as of December 31, 2002 under the capital
lease agreements are as follows:

            2003                                             $48,479
            2004                                              10,380
                                                             -------
            Total minimum lease payments                      58,859

            Less amount representing interest                  2,763
                                                             -------

            Present value of minimum lease payments           56,096

            Less current portion                              46,083
                                                             -------

            Long-term portion                                $10,013
                                                             =======

NOTE K - LEASES

The Company leases its office and manufacturing space from a related party,
H2C2. H2C2 is owned by Doug and Rena Hastings and Gary and Patricia Clayton. The
lease term expires in December 2004, but may be extended, subject to cost of
living increases, for a five-year term at the option of the Company. Doug
Hastings and Gary Clayton are Executive Officers of the Company.

The Company has entered into a five-year lease agreement for office space in
another state. The


                                      -17-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

lease expires January 2006, with annual 3% increases in rent.

The Company has entered into a one year lease agreement for manufacturing space
in Meridian, Idaho. The lease expires in March 2003 and includes a one year
renewal option.

Future minimum payments under operating lease agreements at December 31, 2002
are:

         2003                                              $ 72,285
         2004                                                65,324
         2005                                                17,828
                                                           --------
                                                           $155,437
                                                           ========

Rent expense for 2002 and 2001 was $84,195 and $54,620, respectively.

NOTE L - PENSION PLANS

The Company has a SIMPLE Pension Plan covering all employees who are at least 21
years of age, worked at the Company for a minimum of 2 years and made at least
$2,000 in each of the previous two-year periods. The Plan allows the employee to
make elective deferrals up to a maximum of $7,000. The Company is required to
make matching contributions of up to 3% of employee wages or $7,000. During the
years ended December 31, 2002 and 2001, the Company recorded $16,304 and $12,173
respectively, in contributions.

NOTE M - INCOME TAXES

Income taxes are provided for temporary differences between financial and tax
basis income. The components of net deferred taxes are as follows at December
31, 2002, using a combined deferred tax rate of 40%:

Deferred tax asset from:
     Net operating loss carryforward                        $ 1,015,000
     Fixed assets                                                44,000
     Stock options                                              100,000
     Bad debt reserve                                             8,000
                                                            -----------
                                                              1,167,000
Deferred tax liability from:
     Valuation allowance                                     (1,167,000)
                                                            -----------
Net deferred tax                                            $        --
                                                            ===========


                                      -18-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


The following reconciles the federal tax provisions with the expected provisions
by applying statutory rates (34%) to income before income taxes as of December
31:

                                                         2002            2001
                                                      -----------     ----------

Provision at statutory rate                            $(510,000)     $(470,000)
State income taxes, net of federal expense               (60,000)       (83,000)
Non-deductible interest expense                            7,000             --
Effect of graduated rates                                     --        (23,000)
Effect of merger                                              --         40,000
Goodwill impairment                                       67,000             --
Change in valuation allowance                            496,000        536,000
                                                       ---------      ---------

Income tax expense                                     $      --      $      --
                                                       =========      =========

The net operating loss carry forward at December 31, 2002, for federal tax
purposes of approximately $2,550,000 begins to expire in the year 2020.

NOTE N - RELATED PARTY TRANSACTIONS

The Company conducts business with other entities affiliated through common
ownership or control.

As described in Note K, the Company leases office and manufacturing space from
H2C2. Amounts paid during 2002 and 2001 for rent were $52,380 and $42,908. The
Company has also paid H2C2 for utilities, which amounted to $ 0 and $8,169 for
2002 and 2001, respectively.

Interest expense on related party notes payable was $25,772 and $23,258 for 2002
and 2001, respectively.

Shareholders of the Company provide legal and accounting services to the
Company. The following amounts were expended:

                                                         2002        2001
                                                       -------     --------

         John Hansen, attorney                         $    --     $  5,290
         Robert Montgomery, attorney                    28,658       32,364
         David Stewart, accountant                      20,250       15,304


                                      -19-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


NOTE O - EMPLOYMENT AGREEMENTS

In 1999, the Company entered into five-year employment agreements with Doug
Hastings and Gary Clayton. The agreements provide for minimum base salaries of
$81,120 to each of them with bonuses determined in relationship to Company
profits.

On September 13, 2000, the Company acquired certain assets of Creative Test
Solutions, L.L.C. for $10,000. The Company entered into five-year employment
agreements with two of the members of Creative Test Solutions, L.L.C. on August
28, 2000. As part of the employment agreement the Company provided signing
bonuses in the form of Common Stock totaling 100,000 shares. Annual salaries of
$59,000 and $69,000 are required.

In 2001, the Company entered into five year employment agreements with Jeanette
LaMeire and Bill Browand. These agreements were terminated in 2002 with no
compensation due at December 31, 2002.

NOTE P - PREFERRED STOCK

The Board of Directors adopted an amendment to the Articles of Incorporation in
January 2000 to provide for the original preferred stock to be divided into
series, with the first series, Series A Preferred Stock, consisting of
cumulative convertible preferred stock with a par value of $.23437. Dividends on
this preferred stock are cumulative from the date of issuance at the rate of
$.0222 per share, per annum, payable out of funds legally available. Such
dividends are payable only when, as, and if declared by the Board of Directors,
and shall accumulate from the date of issue, payable annually. Unpaid dividends
are not interest bearing. Dividends on Common Stock cannot be paid until all
dividends on the Series A Preferred Stock have been paid. Each Series A
Preferred stock is convertible, at the option of the holder, at any time on or
before the fifth day before any redemption date (January 31 each year) to the
Company's Common Stock. The conversion price is $.117185 per share of Common
Stock, after the Common Stock dividend declared in 2000. The Series A Preferred
Stock shall be automatically converted on the earlier of the date specified by
vote or written consent or agreement of at least two-thirds of the outstanding
shares of such series or immediately on the closing of the sale of public
offering of Common Stock in excess of $2.50 per share and $1,000,000 in
proceeds.

The remaining preferred shares outstanding shall be designated, as the Board of
Directors shall determine into classes, series, and preferences, limitations,
restrictions and relative rights of each class or series of preferred stock.


                                      -20-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


NOTE Q - GOING CONCERN CONTINGENCY

The Company has incurred net losses during 2002 and 2001 of $1,499,707 and
$1,381,304, respectively. Current liabilities exceeded current assets by
$305,448 at December 31, 2002. This creates an uncertainty about the Company's
ability to continue operations as a going concern. Current operating losses
included one-time impairment losses to purchased intangible assets of $429,952.
During the same period, the Company reduced its administrative expenses $307,157
or 16%. Additionally, gross profit margins increased from 24% to 27%. As of
December 31, 2002 the Company was current on all of its financial obligations
and commitments. Subsequent to year-end, management has taken measures to reduce
operating and administrative costs by approximately another $350,000, primarily
through reduction of excess labor. Completion of the interconnect manufacturing
facility in December of 2002 will enable the Company to better manage quality
control and new product development at a substantially reduced cost. With the
new facility, management is better able to perform on high-volume development
projects with national companies. Management is currently pursuing several such
projects and is confident that the Company will be successful in obtaining and
performing on such projects.

The Company's ability to continue as a going concern is primarily dependent upon
three factors: increased sales, maximizing contract profits, and obtaining
investor contributions. Management expects sales to increase during 2003,
expects the profitability on contracts to increase, and expects to obtain
additional investor contributions. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.

NOTE R - STOCK OPTION PLAN

Effective December 12, 2000, the Board of Directors of Company adopted a stock
option plan which allows for the grant of options for up to 2,000,000 shares of
the Company's Common Stock to officers, directors or key employees of the
Company, consultants of the Company or employees of companies that do business
with the Company. The plan allows for granting incentive stock options to
employees and non-qualified stock options to all other parties. The plan
provides for the options to be granted on incentive stock options at a price
equal to the market price of the stock and at a price of not less than 85% of
the market price of the stock for non-qualified stock options. The plan further
allows for the option period to not exceed five years for the incentive stock
options and not to exceed ten years for the non-qualified stock options. A
schedule of the options is as follows:

                                               Number of        Exercise price
                                                Options            Per Share
                                              -------------     ----------------

      Outstanding at December 31, 2001         1,522,100        $ .50 to 1.00
              Granted                            331,920                  .50
              Exercised                               --                   --
              Expired                                 --                   --
                                               ---------        -------------

      Outstanding at December 31, 2002         1,854,020        $ .50 to 1.00
                                               =========        =============

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (FAS) No. 123, which establishes financial accounting and
reporting standards for stock-based employee compensation. This standard defines
a fair value method of accounting for an employee stock option or similar equity
instrument. This statement gives entities the choice between adopting the fair
value method or continuing to use the intrinsic value method


                                      -21-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001


under Accounting Principles Board (APB) Opinion No. 25 with footnote disclosures
of the pro forma effects if the fair value method had been adopted. The Company
has opted for the latter approach for incentive employee stock options. However,
FAS No. 123 requires the use of a fair value method of accounting for stock
options issued to non-employees.

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-based Compensation - Transition and Disclosure". SFAS 148 amends SFAS No.
123, "Accounting for Stock Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reporting
results. SFAS 144 will be effective for years beginning after December 15, 2002,
although earlier adoption is permitted. The recognition provisions for
stock-based employee compensation are not required to be adopted in a fiscal
year beginning before December 16, 2003. The Company has elected not to adopt
the recognition provisions of this statement.

During 2002, 331,920 stock options were issued to key employees. Had
compensation expense for the Company's issuances to employees under its stock
option plan been determined based on the fair value at the grant date for awards
in 2002 and 2001 consistent with the provisions of FAS No. 123, the Company's
results of operations would have been reduced to the pro forma amounts indicated
below:

                                                           December 31,
                                                    ---------------------------
                                                       2002             2001
                                                    ----------      -----------

Net loss available to common - as reported          $(1,566,370)    $(1,439,903)
Deduct: Total stock-based employee
  compensation expense determined under
  fair value based method for all awards,
  net of related tax effects                            (73,840)        (47,191)
                                                    -----------     -----------
Net loss available to common - pro forma            $(1,640,210)    $(1,487,094)
                                                    ===========     ===========

Loss per share:
  Basic - as reported                               $      (.07)    $      (.08)
  Basic - pro forma                                 $      (.08)    $      (.08)

The fair value of each option grant is estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:


                                      -22-
<PAGE>

                       R-TEC HOLDING, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2002 and 2001

     Weighted average:
         Risk-free interest rate                           3.5%
         Expected life                                     3 years
         Expected volatility                               249%
         Expected dividends                                None

The weighted average fair value of options granted during 2002 and 2001 were
$.57 and $.70, respectively.

The following table summarized information about fixed stock options outstanding
at December 31, 2002.

<TABLE>
<CAPTION>

                       Options Outstanding                                Options Exercisable
------------------------------------------------------------------   ---------------------------------
                                          Weighted
                                          Average
                                          Remaining     Weighted                     Weighted
  Range of                              Contractual     Average                      Average
  Exercise               Number            Life        Exercise        Number        Exercise
  Prices               Outstanding        (Years)        Price        Exercisable     Price
-----------          -----------     --------------   -----------    ------------    ---------
<S>                  <C>            <C>              <C>            <C>            <C>
$.50 to $1.00         4,427,820            3             $.57        4,110,900         $.58
</TABLE>

                                       23
<PAGE>

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

None

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

      9.1 Directors and Officers.

<TABLE>
<CAPTION>
     Name                           Age               Position                          Date Appointed
     ----                           ---               --------                          --------------
<S>                                 <C>              <C>                                <C>
Douglas G. Hastings                 45               Director, President/CEO            Nov.3, 1999
Gary A. Clayton                     45               Director, VP Engineering           Nov.3, 1999
Rulon L. Tolman                     53               Director, VP Investor Rel.         Original
David R. Stewart                    49               Director                           Nov.3, 1999
Robert C. Montgomery                55               Secretary                          Nov. 3, 1999
Michael T. Montgomery               46               Treasurer, CFO, VP Finance         March 1, 2001
</TABLE>

<PAGE>

The directors of the Company are elected to serve until the next annual
shareholder's meeting or until their respective successors are elected and
qualified. Officers hold office until removal by the Board of Directors. There
are no arrangements or understandings among the Officers and Directors pursuant
to which any of them were elected as Officers and Directors except for the
following. When the Company was formed, shareholders Douglas G. Hastings, Gary
A. Clayton, Rulon L. Tolman, Ronald J. Tolman, L. William Glazier, Robert C.
Montgomery, George W. Wadsworth and Keith Cline, entered into a voting agreement
under which Hastings and Clayton have the right to nominate 3 of the 5 directors
and the other named shareholders have the right to nominate 2 of the 5
directors. The combined ownership, which controls a voting percentage of
approximately 65%, would then be voted as a block for the nominated directors.
The voting agreement is effective for 5 years from August 11, 1999.

William E. Browand resigned as a member of the Company's board of directors in
the Spring of 2002.

Family Relationships: Douglas G. Hastings is married to Rena Clayton Hastings, a
sister of Gary A. Clayton. Robert C. Montgomery and Michael T. Montgomery are
brothers.

Business Experience of Officers and Directors:

Douglas G. Hastings, Meridian, Idaho, is currently serving as President and CEO
of the Company. He received a Micro M.B.A. in May of 1999, and received special
training in Robotics, Machine Vision and software controls. Prior to starting
R-Tec Corporation in 1995, Mr. Hastings was employed by Hewlett Packard from
1981 to 1995 specializing in electrical and mechanical tool design and controls.

Gary A. Clayton, Meridian, Idaho, is currently serving as Vice President of
Engineering for the Company. He received a BS degree in Mechanical Engineering
from BYU in 1983. He received training in Robotics and Industrial Controls in
1987 (with honors), and a Masters Degree in Mechanical Engineering in 1993 from
the University of Utah. Prior to 1995 (when he helped start R-Tec Corporation),
Mr. Clayton was the Engineering Manager for Lynn Industries of Boise, Idaho for
a year, and prior thereto was Project Engineer at Thiokol Corporation in Brigham
City, Utah, for design, implementation and project management of HVAC system,
process equipment, CNC type machine tools, and plant automation.

Rulon L. Tolman, Boise, Idaho, is currently serving as Vice President of Public
Relations for the Company. Mr. Tolman was employed with Mutual of New York from
1978 through 2000 in various capacities including Account Executive, Field
Underwriter and Sales Manager. Previously Mr. Tolman was a Production Supervisor
with Boise Cascade Container Division managing 80 employees.

David R. Stewart, Boise, Idaho, is a Certified Public Accountant with Stewart &
Associates, with more than 20 years experience. He has been President of the
accounting firm for the past 6 years. He obtained his BS degree in Accounting in
1979 from the University of Utah.

<PAGE>

Michael T. Montgomery, is presently CFO, Vice President of Finance and Treasurer
of the Company. He received a Bachelor of Arts Degree in Finance, with composite
minors in Accounting & Economics, from Brigham Young University in 1981. He
completed the MBA program at Boise State University in 1986. Prior to his
employment with the Company, he was involved in production management for 15
years, financial management 12 years and 1 year international business
management and government negotiations.

Robert C. Montgomery, is presently Secretary and General Counsel of the Company.
He received his JD Degree from the University of Idaho in 1974 and is admitted
to practice law in the states of Idaho, Oregon and Washington. He has served as
legal counsel to both private and nonprofit corporations. He was a former
adjunct professor of Business Law and Ethics at Boise State University, and has
practiced law in Idaho since 1974.

*William E. Browand left his employment as Vice President of Sales for the
Company in the Spring of 2002. The employment of Jeanette LaMeire as Vice
President of Marketing was terminated in the Spring of 2002.

9.5   Compliance with Section 16(A) of the Exchange Act:

Section 16 of the Securities Exchange Act of 1934 ("Section 16") requires that
reports of beneficial ownership of common stock and preferred stock and changes
in such ownership be filed with the Securities and Exchange Commission by
Section 16 "reporting persons" including directors, certain officers, holders of
more than 10% of the outstanding common stock or preferred stock, and certain
trusts of which reporting persons are trustees. The Company is required to
disclose each reporting person whom it knows has failed to file any required
reports under Section 16 on a timely basis. Based solely upon a review of copies
of Section 16 reports furnished to the Company for the year ended December 31,
2002, the Company finds the following information is appropriately disclosed:
None of the officers, directors and 10% shareholders filed Form 4 for calendar
year 2002. However, all of the officers and directors filed a Form 5 on or
before February 14, 2002, respecting transactions occurring during calendar year
2002. Douglas G. Hastings should have filed a Form 4, but did not, with respect
to 1 stock option acquisition and 2 transactions involving gifting of shares
during calendar year 2002. He did file a Form 5 reporting these transactions.
Gary A. Clayton should have filed a Form 4, but did not, with respect to 1 stock
acquisition of shares during calendar year 2002. He did file a Form 5 reporting
these transactions. Rulon L. Tolman should have filed a Form 4, but did not,
with respect to 1 stock option acquisition and 1transaction involving the sale
of shares during calendar year 2002. He did file a Form 5 reporting these
transactions. David R. Stewart should have filed a Form 4, but did not, with
respect to 1 stock option acquisition during calendar year 2002. He did file a
Form 5 reporting this transaction. Michael T. Montgomery should have filed a
Form 4, but did not, with respect to 1 stock option acquisition during calendar
year 2002. He did file a Form 5 reporting this transaction. Robert C. Montgomery
should have filed a Form 4, but did not, with respect to 1 stock option
acquisition during calendar year 2002. He did file a Form 5 reporting this
transaction.

<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION.

The 2002 salary and stock remuneration paid to the officers and directors and
other benefits received by each of them are set forth below:

R-Tec Corporation paid executive compensation for the years ended December 31,
2000, 2001, and 2002 to the following:

Douglas G. Hastings, President.                      Year 2000         $78,912
                                                     Year 2001         $86,058
                                                     Year 2002         $86,058

On July 1, 2001, the Company granted to the following officers options to
purchase 50,000 shares each of common stock at $1.00 per share, exercisable 1
year from date of grant: Douglas G. Hastings, Gary A. Clayton, Rulon L. Tolman,
Michael T. Montgomery, William E. Browand, and Jeanette LaMeire.

On August 14, 2002, the Company granted to the following officers and board
members options to purchase shares of common stock at $ .50 per share as
follows: 50,000 options each to Douglas G. Hastings, Gary A. Clayton, Rulon L.
Tolman, Michael T. Montgomery, 15,000 options each to David R. Stewart and
Robert C. Montgomery. The options are exercisable 1 year from the date of grant.

No other executive compensation or forms of compensation, short or long term
apply and are required to be disclosed as required by Reg. S-B 228.402 (Item
402).

ITEM  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the shares of Common Stock
and Preferred Stock of the Company that is convertible into common stock, which
is presently held beneficially by (i) each director and executive officer of the
Company, (ii) all officers and directors as a group, and (iii) each person known
by the Company to beneficially own 5% or more of the outstanding shares of the
Company's common and preferred stock. Share ownership and subscriptions are
reflected as of December 31, 2001.

                                         Amount & Nature
Name and Address                         of Benef. Owner          Percent
of Beneficial Owner                     Common - Preferred    Common - Preferred
--------------------------------------------------------------------------------

a.  MORE THAN FIVE PERCENT SHAREHOLDERS

L. William Glazier (11)                  250,000    569,345     1.14%   20.47%
     121 Tyson Dr.
     Cottage Grove, OR 97424

<PAGE>

Ronald J. Tolman   (11)                  694,340    600,427     3.19%   21.59%
     2326 Bruins Avenue
     Boise, Idaho 83704

More than five percent                   944,340  1,169,772     4.33%   42.06%
Shareholders as a group.
(2 persons)

b.  DIRECTORS AND EXECUTIVE OFFICERS

Gary A. Clayton (1)(2)(3)              4,160,659         -0-   19.14%      -0-%
     1471 E. Commercial Ave
     Meridian, Idaho 83642

Douglas G. Hastings (1)(2)(4)          4,160,657         -0-   19.14%      -0-%
     1471 E. Commercial Ave
     Meridian, Idaho 83642

Rulon L. Tolman (1)(2)(5)              1,009,250    532,478     4.64%   19.14%
     7213 Potomac Drive
     Boise, Idaho 83704

David R. Stewart (2)(6)                  103,490         -0-    0.46%      -0-%
     9486 Fairview Ave
     Boise, Idaho

Michael T. Montgomery (1)(7)             115,000         -0-    0.34%      -0-%
         3072 Maywood Ave.
         Boise, Idaho 83704

Robert C. Montgomery (1)(10)             254,876    149,506     1.35%    5.38%
         2160 S. Twin Rapid Way
         Boise, Idaho 83709

All Officers and Directors
as a Group (6 persons)                 9,803,932    681,984    45.09%   24.52%


Total Shares Issued and Outstanding as of 12/31/02 include:

                                  Common 21,742,189 Preferred 2,781,564

      (1)   These individuals are the executive officers of the Company.

<PAGE>

     (2)  These individuals are the directors of the Company.

     (3)  The beneficial ownership of Gary A. Clayton includes 100,000 options
          by grant.

     (4)  The beneficial ownership of Douglas G. Hastings includes 100,000
          options by grant.

     (5)  The beneficial ownership of Rulon L. Tolman includes 115,000 options
          by grant.

     (6)  The beneficial ownership of David R. Stewart includes 37,500 options
          by grant.

     (7)  The beneficial ownership of Michael T. Montgomery includes 100,000
          options by grant.

     (8)  The beneficial ownership of Robert C. Montgomery includes 37,500
          options by grant.

     (9)  If converted to Common Stock at the present conversion ratio, the
          Preferred Stock would represent approximately .08% of the after-
          conversion issued and outstanding common stock.

Securities authorized for issuance under equity compensation plans
<TABLE>
<CAPTION>

                                          Number of securities to       Weighted average        Number of securities
                                          be issued upon exercise      exercise price of      remaining available for
                                          of outstanding options,     outstanding options,        future issuance
             Plan category                  warrants and rights       warrants and rights
             -------------                ------------------------    --------------------    ------------------------
                                                    (a)                       (b)                       (c)
<S>                                              <C>                         <C>                      <C>


Year 2001                                        1,522,100                   $ .70                    477,900

Equity compensation plans not approved
by security holders


Year 2002                                        1,854,020                   $ .57                    145,980

Equity compensation plans not approved
by security holders
</TABLE>

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

a. Commercial Building Ownership and leases:

R-Tec Corporation currently leases 100% of the building it presently occupies at
1471 E. Commercial Ave, Meridian, Idaho 83642 from H2C2 & Associates, LLC, an
Idaho limited liability company owned by Mr. and Mrs. Hastings and Mr. and Mrs.
Clayton under a five year lease ending November 30, 2004, with an option to
extend the lease for an additional five years. The rental rate is $4,365 per
month subject to annual Cost of Living Index increases.

b.   Stock Transactions with Douglas G. Hastings and Gary A. Clayton.

     On November 3, 1999, the Company issued 4,266,797 shares of Common Stock
(50% ownership) in a private placement transaction, to Gary A. Clayton and
Douglas G. Hastings the two shareholder-owners of R-Tec Corporation, an
engineering company located in Meridian, Idaho, in exchange for 80% of the
outstanding stock of R-Tec Corporation. In addition, the Company contributed its
stock of IntorCorp, Inc. to R-Tec Corporation. On November 4, 1999, R-Tec
Corporation redeemed the remaining 20% of R-Tec Corporation stock from the two
shareholder-owners for the price of $100,000 paid with an interest bearing
promissory note payable from available earnings commencing in January of 2001.

(c)  Purchase of R-Tec Machine Tools by the Company

On July 3, 2001, the Company acquired R-Tec Machine Tool, Inc., an Idaho
corporation pursuant to a Share Exchange and Reorganization Agreement by and
between the Company and the four individual shareholders of R-Tec Machine Tool.
Under the terms of the Agreement, the parties agreed to be bound by and accept
the fair market value placed on R-Tec Machine Tool obtained from an independent
business appraisal. Consideration for the acquisition was 291,248 shares of the
common stock of the Registrant valued at $1.00 per share which the parties agree
and acknowledge was the fair market value of the Company's shares as of the date
of the Agreement. The Agreement provides for each of the four R-Tec Machine Tool
shareholders to receive equal shares of the Company's common stock in the
transaction. Two of R-Tec Machine Tool shareholders, Douglas G. Hastings and
Gary A. Clayton, are also officers, directors and major shareholders of the
Company. The other two shareholders of R-Tec Machine Tool are Walter T. Hinkle
and Joseph E. Hawkins. R-Tec Machine Tool is located in the same building used
by the Company as its primary business location.

(d)   Purchase of Assets from Browand, LaMeire & Associates

On July 17, 2001, the Company acquired certain assets from Browand, LaMeire &
Associates, Inc., an Oregon corporation, pursuant to an Asset Purchase Agreement
(the "Agreement") by and between the Company and Browand, LaMeire & Associates
and its two shareholders, William E. Browand and Jeanette LaMeire. The Agreement
culminated

<PAGE>

a lengthy period of discussion and negotiation between the parties. Under the
terms of the Agreement, the Company acquired certain assets which include the
client list and industry contacts, certain items of office equipment and
inventory. Consideration for the acquisition was 380,000 shares of the common
stock of the Company valued at $1.00 per share which the parties agree and
acknowledge was the fair market value of the Company's shares as of the date of
the Agreement. The Agreement provides for the shares to be issued in the name of
Browand, LaMeire & Associates, Inc. William E. Browand was employed as Vice
President of Sales for the Company but left his employment in the Spring of
2002. Jeanette LaMeire was employed as Vice President of Marketing but her
employment was terminated in the Spring of 2002.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

                  Exhibit Index

Exhibit
Number   Description

4.1      DEF 14A, Definitive Proxy Statements
         (Filed November 6, 2002)


<PAGE>

                                   SIGNATURES

In accordance with section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.

                               R-Tec HOLDING, INC.

                                  (Registrant)


March 27, 2001                          By  /s/ Douglas G. Hastings
                                               ---------------------------------
                                                 Douglas G. Hastings, President

Principal Executive Officer:            By  /s/ Douglas G. Hastings
                                               ---------------------------------
                                                 Douglas G. Hastings, President

Principal Financial Officer:            By  /s/ Michael T. Montgomery
                                               ---------------------------------
                                                 Michael T. Montgomery, CFO

Majority of Board of Directors:             /s/ Rulon J. Tolman
                                               ---------------------------------
                                                 Rulon J. Tolman, Director

                                             /s/ Gary C. Clayton
                                               ---------------------------------
                                                 Gary C. Clayton, Director

                                             /s/ Douglas G. Hastings
                                               ---------------------------------
                                                 Douglas G. Hastings, Director

                                             /s/ David R. Stewart
                                               ---------------------------------
                                                 David R. Stewart, Director