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 1934For the fiscal year ended December 31, 2003|_|
  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934For 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 of
  incorporation or organization)
  (I.R.S. Employer Identification
  No.)1471 E. Commercial Ave., Meridian, Idaho
  83642(Address of principal executive
  offices)
  (Zip Code)Issuers
  telephone number: (208) 887-0953          FAX:  (208) 888-1757Securities
  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 no par value(Title of class) Indicate by
check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
|X|  Yes   |_|  No Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K Is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  |_| Indicate by check mark if whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
|_| Yes   |X| No The aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, as of the last business day of the issuers most recently
completed second fiscal quarter, June 30, 2003, was $3,976,203. Registrants revenues for the fiscal year ended December 31, 2003 were $
1,278,942. As of December 31, 2003, there were 22,878,994 shares of the
registrants no par value common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE As referenced in the Exhibit List attached hereto. 1   TABLE OF CONTENTS
PART IItem 1.
  Description
  of Business
  4Item 2.
  Description
  of Property
  8Item 3.
  Legal
  Proceedings
  8Item 4.
  Submission
  of Matters to a Vote of Security Holders
  9PART IIItem 5.
  Market
  for Registrants Common Equity, Related Stockholder Matters and Issuer
  Purchases of Equity Securities.
  9Item 6.
  Managements
  Discussion and Analysis of Financial Condition and Results of Operations
  14Item 7.
  Financial
  Statements
  21Item 8.
  Changes
  in and Disagreements With Accountants on Accounting and Financial Disclosures
  39Item 8A.
  Controls
  and Procedures
  40PART IIIItem 9.
  Directors,
  Executive Officers, Promoters and Control Persons; Compliance With Section
  16(a) of the Exchange Act.
  40Item 10.
  Executive
  Compensation
  42Item 11.
  Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters
  43Item 12.
  Certain
  Relationships and Related Transactions
  45Item 13.
  Exhibits
  and Reports on Form 8-K
  45Item 14.
  Principal
  Accountant Fees and Services
  48Supplemental
  Information
  502

DISCLOSURE REGARDING FORWARD LOOKING
STATEMENTS
This Report,
including any documents incorporated by reference into this Report, contains
certain Forward-Looking Statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including without limitation, statements regarding our
products, our operating revenues or profits, our dependence on products that
are still undergoing research and development, exposure to general economic
fluctuations, government regulations which may affect our production
capabilities or products, competition to our products in both design and
pricing, employment factors including but not limited to adequate personnel to
support the design, manufacturing, and sales of our products, status of patent
protection to our intellectual properties, and our ability to raise additional
funding for continuing operations. Other than statements of historical fact,
all statements made within this Report may be construed to be forward looking
and are identified by terminology such as may, believe, estimates,
projects, anticipates, plans, hopes, or potential, or the negative
thereof or similar terminology. Although we believe that statements made within
the context of this Report are reasonable, there can be no assurance that said
expectations or any of the Forward-Looking Statements will prove to be correct.
Actual results may differ substantially from those statements, projections,
tabulations, or estimates, presented or projected. All Forward-Looking
Statements included in the Companys press releases or reports to the
Securities and Exchange Commission (SEC) contain inherent risk and are
expressly qualified by these cautionary statements.
3

PART I
Item 1. 
Description of Business
OVERVIEW & DEVELOPMENT OF BUSINESS
R-Tec Holding, Inc. (the Company)
R-Tec
Corporation began operations in 1995 as a privately held corporation. In August
1999, R-Tec Holding, Inc., which previously operated as a wholly owned
subsidiary of Biogan International, Inc., began operating as a totally
independent and separate entity. In order to bring the operating entity, R-Tec
Corporation, under the umbrella of the holding corporation, R-Tec Holding,
Inc., on September 27, 1999, the two corporations entered into a definitive
agreement under which the shareholders
of R-Tec Corporation 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, Inc. 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.

On
July 2, 2001,  R-Tec Holding, Inc.s
stock, with the symbol of RTHG, started trading publicly on the OTC.BB
exchange, having previously registered and received approval from the
Securities and Exchange Commission (SEC).
R-Tec
Holding, Inc., and its wholly owned subsidiary, R-Tec Corporation,
(collectively the Company) has been a developer and supplier to the high-tech
industry of custom automation solutions, including prototype development,
tooling and manufacturing; and high performance test sockets and IC (integrated
circuit) interconnect devices for the testing of IC chips.
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.
On July 17,
2001, the Company acquired certain assets of Browland, LaMeire &
Associates, (B.L.&A.), previously a Manufacturers Representative firm, in
order to increase distribution and marketing capabilities. B.L.&A.
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.
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. 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.
On November
1, 2003, due to continuing general economic challenges, and specific, weak
economic performance in the high-tech industry relating to future bookings of
automation projects, custom automation operations were terminated. The
automation operations have been included with a group of revenues consisting of
custom automation, machine tooling, and other sales. The Company elected to
focus on the development of its interconnect technologies for the IC
industries. As of year end, December 31, 2003, the Company was continuing its
efforts to expand sales and operations for its interconnect products and was
continuing its retail sales of machine shop contract work.
In
terminating its operations for custom automation projects, the Company did not
dispose of any material properties or assets, nor did it write down or obsolete
any material amounts of inventory. For custom automation projects, the Company
generally purchased parts and supplies on as needed basis only and did not
stock material parts, other than smaller quantities of hardware, i.e., bolts,
nuts, and screws, etc. It is anticipated that the smaller quantities of
hardware will be used in the normal course of business and issued to projects
in the Companys remaining operations. For its interconnect products and
machine shop sales, the Company does not anticipate any additional, material
additions to plant or equipment in the next quarter. The interconnect
production line was constructed and placed into operation beginning January 1,
2003 and it is believed that excess capacity still exists to handle additional
sales for the foreseeable future.
4

PRODUCTS
For its
interconnect technology sales, the Company relies primarily on two product
types, i.e., sockets and interconnects. For testing IC chips, testing
laboratories and facilities rely on sockets as a connection device that attach
to a DUT (device under test). Sockets are designed in various configurations,
sizes, and functionalities. The Companys primary socket designs consist of
clamshell designs with variable pressure adjustments, or pneumatic pressure
design, fixed socket design with bolt down bases and lids, and smaller precisor
designs intended for use with other socket configurations. Interconnects are
designed using the Companys proprietary technology GCI
for providing the electrical connection between the DUT board and the chip or
device being tested. The socket provides the physical apparatus to connect the
DUT board and the chip or device under test, the interconnect provides the
electrical connection that allows electrical performance testing of the chip or
device under test.
The
Companys sockets do not present new technological advances in general industry
design, nor do they represent proprietary products, but instead are in
conformance with designs commonly accepted by testing engineers and technicians
within the industry. Specific to the Companys socket designs however, are
engineering specifications that allow the Companys proprietary GCI
technology to perform at maximum functionality. It is believed that the
Companys proprietary GCI technology
represents leading edge technology in the IC testing industry, especially where
testing criteria demands performance above 7GHz.
Sales by
product groups are listed below for the preceding three years. With the
discontinuation of automation sales, it is anticipated that interconnect sales
will represent approximately 75% of sales in the near term and machine shop
sales will represent approximately 25% of sales for the same periods. Longer
term, it is anticipated that interconnect sales will grow in greater proportion
to machine shop sales.
Year
  
  InterconnectProducts
  
  Automation
  and Other
  Products  Sales
  
  % Totals2001
  
  19%
  
  81%
  
  100%2002
  
  23%
  
  77%
  
  100%2003
  
  43%
  
  57%
  
  100%Raw
materials do not appear to present a problem for ongoing sales or operations.
Of the materials used in the manufacturing of interconnect products, specific
suppliers products are preferred, but it is believed that substitute products
are available through multiple suppliers with reasonable lead times. For
machine shop sales, raw materials of plastics, and various metals are common to
most machine shop operations and the supply appears to be available in
sufficient supply.
Seasonality
does not affect either interconnect sales or machine shop sales. However, some
nominal cyclical fluctuations may exist due to production cycles at IC testing
facilities. IC testing may ramp up at either the beginning or end of a testing
quarter or may be affected by the scheduled introduction of new products to be
tested. With multiple customers, each having different product introduction
schedules and testing quarters, R-Tec has not identified trends that would
substantially affect overall sales.
5

PATENTS
R-Tec has
received four patents for designs completed by its engineering staff. The first
patent issued was #6,064,195, dated May 16, 2000, and expires May 11, 2018, for
a Test Probe Positioning Device. The patent is for a self-aligning device for
positioning a test probe in a socket of a printed circuit board to be tested.
The second patent issued was #6,194,904 B1, dated Feb 27, 2001, and expires May
19, 2018, for a Socket Test Probe and Method of Making. The patent is for a
probe used with the process defined by the first patent and also relates to the
process of testing a B.I.B. (burn-in board). The third patent issued was
#6,527,563 B2, dated March 4, 2003, and expires October 4, 2020, for a Grid
Interposer and Method of Making. This third patent represents the design and
manufacturing process of the Companys GCI
products which are used in testing of integrated circuit chips. The fourth
patent issued was #6,564,455, dated May 20, 2003, and expires May 19, 2018, for
a Socket Test Probe and Method of Making, international class. The patent is
for the socket and method of making which includes flat plates which serve as
electrodes encased in resin.
The first
two patents listed represent products sold within the Companys automation
group, which has had its operations terminated.  Going forward, it is not known, if these patents will have any
significant impact on the Companys future revenues. The third patent for the
Grid Interposer, represents the major design and manufacturing procedure for
the interconnect groups products. This patent will be critical to the
continued revenues and growth of the Company as it has been restructured to
focus on the sales of interconnect products.
CUSTOMERS AND COMPETITION
With the
closure of the automation division in November of 2003, the customer base that
remains significant to R-Tecs revenues are those who purchase interconnect
products. Significant customers for 
testing products include Aries Electronics, Inc., Maxim, Amkor, RF Micro
Devices, Gamma Technology, Anadigics, Micron System Integration, Celeritek,
Teradyne, Cisco Systems, Inc., Transmeta, 
P.T. Products & Services, 3Com, Motorola, Vitesse Semiconductor, and
RS Tech. 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.
The Company
has determined that its target markets include those customers within
qualification and testing segments. Many of these customers require a high
performance interconnect solution. The GCI
products represent a viable solution for these high performance requirements.
R-Tec also is attempting to develop more customers who would use its products
in the production testing sales area. These applications would represent  automated testing of IC chips where larger
quantities of testing occur. As a longer-term market opportunity, R-Tec is also
exploring the viability of product solutions for the burn-in market. The
burn-in market is characterized by large volumes and low prices for
interconnect solutions. With the Companys current production processes, the
burn-in market is probably not a good fit for current product designs.
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.
Management
feels that spring probe technologies, while a mainstay in the market for many
years, will begin to become obsolete for the market segments represented by
high performance requirements. As a basis for this belief, management feels
that future testing applications will have mechanical and electrical
requirements beyond the range of spring probe technologies. Spring probe
technology is an older technology that fills the market segment of lower
pricing and lower performance requirements. As future iterations of chip
designs become smaller and have higher testing requirements, particularly above
7GHz, management feels that GCI
products may represent a leading edge challenge to other competitors in this
same market.
Pricing in
the target markets the Company is focusing on is a factor but not the major
factor. As the performance requirements for IC testing are becoming more
challenging, pricing has taken a second position to the challenge for testing
engineers and personnel to find a socket solution that will ensure the
throughput of the testing process. Management believes that some older
technologies that are less expensive than the Companys GCI
products are facing technological obsolescence in the high performance testing
segments, while other direct segment competitors products are struggling with
performance issues. Performance and technical support, appear to be the most
important criteria for the current market segments the Company is focusing on,
with pricing as a lesser concern. The Company is aware however, that pricing is
a factor, but does not foresee disruption of revenue growth due to pricing
pressure from competitors.
6

OTHER INFORMATION
Research
and Development
In 2003,
the Company spent $84,932 on research and development, compared to $64,525 in
2002 and $3,150 in 2001.  Most of the
expense in 2003 was directed towards interconnect products. Since the inception
of sales of the Companys GCI
products in the fourth quarter of 2000 it has relied heavily on feedback from
customers to support its research and development. This information however,
was difficult to obtain due to the inherent secretive nature of the IC chip
manufacturing and testing industry.
The
parameters affecting successful research and development and ultimately,
successful product design, of the Companys interconnect products center in
three main areas of functionality, i.e., 1) mechanical performance, 2)
electrical performance, and 3) thermal performance. In 2003, the Company was
able to engage the services of GIGA Test Laboratories to validate the
electrical performance characteristics of 
the GCI. The test results
did validate what Company engineers had proposed, that the GCI
performance represented leading edge technology possibilities. In the fourth
quarter of 2003, Company engineers have designed testing procedures to validate
additional mechanical performance, with potential thermal performance tests to
follow within the first and second quarters of 2004. It is believed by
management, that these additional testing data as supportive documentation,
will enhance marketing efforts of the GCI
products.
Government
Regulations
The Company
is not aware of any government regulations that would materially impact its
operations. Since the GCI
product line became operational in January 2003, the Company has strictly
adhered to environmental regulations at both the local and federal levels.
Regular tests are conducted by Company personnel and validated by qualified
third party sources to ensure compliance with any discharge or environmental
standards.
Employment
Following
the termination of operations within the automation group, the Company employs
16 individuals.
Other
The Company
does not have any operations within foreign countries. It does not have any
long-lived assets in foreign countries or foreign corporations, and does not
have any material amounts of revenues from foreign corporations or countries.
As the GCI products move into
the production market segment as previously defined in Customers and
Competition, it is possible the Company will develop material amounts of
revenues in the future with foreign corporations or at least sales may be
consummated with U.S. owned entities who have foreign production testing
operations.
The Company
files annual, quarterly, and current reports, proxy statements, and other
information with the Commission. You may read and copy any reports, statements,
or other information that the Company files at the Commissions Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for further information on the Public
Reference Room. The Commission also maintains an Internet site
(http://www.sec.gov) that makes available to the public, reports, proxy
statements and other information regarding issuers, such as the Company, that
file electronically with the Commission.
7

The
Companys web site is (http://www.rtec.com). The Company does not currently
post its filings with the Commission on its web site but is preparing to do so.
The Company will make its filings available free of charge in electronic format
upon request.
Item 2. 
Description of Properties
R-Tec
Holding, Inc. does not own or lease any properties, and 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.
Property
leases have been entered into by R-Tec Holdings wholly owned subsidiary, R-Tec
Corporation (R-Tec.) R-Tec 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 Holding,
Inc.) and leased 100% to R-Tec Corporation under a 5 year lease expiring
December 30, 2004.  The Company has the
right to extend, at the Companys option for another five years. 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.
In December
of 2000, R-Tec Corporation entered into a lease agreement for office and
production space for a satellite division, Creative Test Solutions, in North
Salt Lake, Utah. Effective November 1, 2003, the Company suspended operations
at the Utah office. The Company remains liable for the remainder of the lease
in Utah at the rate of $1,320 per month and is seeking legal guidance for a
resolution to terminating the lease. This lease terminates on January 15, 2006.
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. This 3,000 sq. ft. facility is a state-of-the-art
production facility that enables R-Tec to manufacture its proprietary GCI
products and to conduct additional research to expand its product lines in the
interconnect group to potentially include testing solutions for silicone wafer
testing, known good die testing and flex circuit manufacturing.  Monthly rent is $1,550 triple net.
Subsequent to year-end, and the expiration of this lease on February 29, 2003, the
Company has continued leasing this property on a month-to-month basis.
The
capacity of the production facility for the interconnect products is scalable
and is currently capable of handling short tem increases in sales demand.
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.
Item 3. 
Legal Proceedings
The Company
acknowledges that due its financial condition, it has received complaints from
vendors arising from past due invoices, and from note holders, arising out of
the companys inability to pay interest accrued and to pay the principal
portion of those notes upon maturity. None of these amounts individually,
exclusive of interests and costs, exceed ten percent of the Companys assets.
8

As a
subsequent event to year end, the Company was contacted by the State of Idaho
Department of Finance, Securities Division, on February 27, 2004, which
requested information from the Company including the following items: 1) Names
and addresses of individuals that have offered or sold debt instruments on
behalf of R-Tec, 2) Copies of all finders fee agreements, 3) Payments made to
individuals who located investors and related information, 4) Names and
addresses of investors and related information, 5) Exemptions from registration
requirements of the Idaho Securities Act, and 6) Copies of contracts,
agreements and other legal documents, including marketing materials and other
related documents. The Company has furnished the information and officers from
the Company have met with the individual representing the Securities Division,
State of Idaho, and have answered her questions. The Company has not been given
any additional information at this time regarding additional requested
information.
Item 4.  
Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5.  
Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
MARKET
INFORMATION
The Companys stock is publicly traded on the
OTC.BB under the symbol RTHG. Public trading was initiated July 2, 2001. The
following table sets forth the range of bid quotations for the Companys common
stock for the quarters indicated according to data provided by the OTC.BB.
Fiscal
  Year Ended December 31, 2003
  
  High Bid
  
  Low BidFirst Quarter
  
  
  $
  .028
  
  
  .055Second Quarter
  
  
  
  .300
  
  
  .030Third Quarter
  
  
  
  .240
  
  
  .060Fourth Quarter
  
  
  
  .080
  
  
  .020Fiscal
  Year Ended December 31, 2002
  
  High Bid
  
  Low BidFirst Quarter
  
  
  $
  0.70
  
  
  0.20Second Quarter
  
  
  
  0.40
  
  
  0.10Third Quarter
  
  
  
  0.30
  
  
  0.12Fourth Quarter
  
  
  
  0.23
  
  
  0.109

SHAREHOLDERS
This
information sets forth the approximate number of holders of each class of
common equity of the registrant as of December 31, 2003. The registrant has not
paid cash dividends on its stock for the preceding two years, nor does it
anticipate doing so in the foreseeable future. It intends to retain any
retained earnings to fund growth and expansion.
Fiscal
  Year Ended December 31, 2003
  
  No. of SharesSeries A Convertible Preferred
  
  2,646,094Common Stock
  
  22,878,994SECURITIES AUTHORIZED
FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following table contains information regarding our equity compensation plans as
of December 31, 2003.
Plan Category
  
  Number of
  Securities to
  be Issued
  upon
  Exercise of
  Outstanding
  Options,
  Warrants
  and Rights
  
  Weighted-
  Average
  Exercise
  Price of
  Outstanding
  Options,
  Warrants
  and Rights
  
  Number of
  Securities
  Remaining
  Available for
  Future
  Issuance Under
  Equity Plans
  (Excluding
  Securities
  Reflected in the
  First Column)Equity compensation plans approved by security holders
  
  
  0
  
  
  
  0
  
  
  0Equity compensation plans not approved by security holders
  
  
  7,237,820
  
  
  
  .44
  
  
  0Totals
  
  
  7,237,820
  
  
  
  .44
  
  
  0Description of
equity compensation plan not approved by shareholders: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.
UNREGISTERED
SALES OF SECURITIES
The Company
sold the following unregistered securities in the past three years.  None of the sales involved an
underwriter.  We believe these sales
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933 because the sales did not involve a public offering.
10

Securities Sold for
Cash:

  On January
  17, 2001, the Company sold 100,000 shares of restricted common stock, at
  $1.00 per share, to Relawk Capital. 
  The cash proceeds resulting from this transaction were $100,000.00.
  On January
  22, 2001, the Company sold 10,000 shares of restricted common stock, at $1.00
  per share, to Harold Bowers.  The cash
  proceeds resulting from this transaction were $10,000.00.
  On January
  26, 2001, the Company sold 31,000 shares of restricted common stock, at $1.00
  per share, to Dr. Willard Nelson.  The
  cash proceeds resulting from this transaction were $31,000.00.
  On January
  29, 2001, the Company sold 100,000 shares of restricted common stock, at
  $1.00 per share, to Barry Barnett. 
  The cash proceeds resulting from this transaction were $100,000.00.
  On March 2,
  2001, the Company sold 25,000 shares of restricted common stock, at $1.00 per
  share, to Michael Calhoun.  The cash
  proceeds resulting from this transaction were $25,000.00.
  On March 5,
  2001, the Company sold 400,000 shares of restricted common stock, at $1.00
  per share, to Lomap LP.  The cash
  proceeds resulting from this transaction were $400,000.00.
  On March 14,
  2001, the Company sold 25,000 shares of restricted common stock, at $1.00 per
  share, to Roy Phillips.  The cash
  proceeds resulting from this transaction were $25,000.00.
  On March 28,
  2001, the Company sold 10,000 shares of restricted common stock, at $1.00 per
  share, to Keith Cline.  The cash
  proceeds resulting from this transaction were $10,000.00.
  On April 20,
  2001, the Company sold 10,000 shares of restricted common stock, at $1.00 per
  share, to RED, LLC.  The cash proceeds
  resulting from this transaction were $10,000.00.
  On May 28,
  2001, the Company sold 25,000 shares of restricted common stock, at $1.00 per
  share, to James Cron.  The cash
  proceeds resulting from this transaction were $25,000.00.
  On June 4,
  2001, the Company sold 15,000 shares of restricted common stock, at $1.00 per
  share, to Brian White.  The cash
  proceeds resulting from this transaction were $15,000.00.
  On June 11,
  2001, the Company sold 25,000 shares of restricted common stock, at $1.00 per
  share, to Robert White.  The cash
  proceeds resulting from this transaction were $25,00.00.
  On June 29,
  2001, the Company sold 24,900 shares of restricted common stock, at $1.00 per
  share, to Chris White.  The cash
  proceeds resulting from this transaction were $24,900.00.
  On June 29,
  2001, the Company sold 50,000 shares of restricted common stock, at $1.00 per
  share, to Ronald Spencer.  The cash
  proceeds resulting from this transaction were $50,000.00.
  On June 29,
  2001, the Company sold 25,000 shares of restricted common stock, at $1.00 per
  share, to Alan Spencer.  The cash
  proceeds resulting from this transaction were $25,000.00.
  On September
  11, 2001, the Company sold 120,000 shares of restricted common stock, at
  $1.00 per share, and granted an option of 120,000 shares, at the exercise
  price of $0.50 per share, to the Ragon Family Trust.  The cash proceeds resulting from this
  transaction were $120,000.00.
  On September
  11, 2001, the Company sold 50,000 shares of restricted common stock, at $1.00
  per share, and granted an option of 50,000 shares, at the exercise price of
  $0.50 per share, to Wendy or Peter Lewis. 
  The cash proceeds resulting from this transaction were $50,000.00.
  On September
  11, 2001, the Company sold 20,000 shares of restricted common stock, at $1.00
  per share, and granted an option of 20,000 shares, at the exercise price of
  $0.50 per share, to the Executive Image Auto Group.  The cash proceeds resulting from this transaction were
  $20,000.00.
  On September
  11, 2001, the Company sold 10,000 shares of restricted common stock, at $1.00
  per share, and granted an option of 10,000 shares, at the exercise price of
  $0.50 per share, to Oscar Mink.  The
  cash proceeds resulting from this transaction were $10,000.00.
  On September
  11, 2001, the Company sold 21,000 shares of restricted common stock, at $1.00
  per share, and granted the option of 21,000 shares, at the exercise price of
  $0.50 per share, to Hospitality Car Wash. 
  The cash proceeds resulting from this transaction were $21,000.00.
  On January
  17, 2002, the Company sold 40,000 shares of restricted common stock, at $0.50
  per share, and granted the option of 40,000 shares, at the exercise price of
  $0.50 per share, to Warren Scheibe. 
  The cash proceeds resulting from this transaction were $20,000.00.
  On January
  17, 2002, the Company sold 100,000 shares of restricted common stock, at
  $0.50 per share, and granted the option of 100,000 shares, at the exercise
  price of $0.50 per share, to James Trimble. 
  The cash proceeds resulting from this transaction were $50,000.00.11


  On January
  17, 2002, the Company sold 50,000 shares of restricted common stock, at $0.50
  per share, and granted the option of 50,000 shares, at the exercise price of
  $0.50 per share, to Carol A. Martinez. 
  The cash proceeds resulting from this transaction were $25,000.00.
  On January
  17, 2002, the Company sold 190,000 shares of restricted common stock, at
  $0.50 per share, and granted the option of 190,000 shares, at the exercise
  price of $0.50 per share, to John M. Plocher.  The cash proceeds resulting from this transaction were
  $95,000.00.
  On January
  17, 2002, the Company sold 400,000 shares of restricted common stock, at
  $0.50 per share, and granted the option of 400,000 shares, at the exercise
  price of $0.50 per share, to Michael Shane Creech.  The cash proceeds resulting from this transaction were
  $200,000.00.
  On January
  17, 2002, the Company sold 200,000 shares of restricted common stock, at
  $0.50 per share, and granted the option of 200,000 shares, at the exercise
  price of $0.50 per share, to Michael P. Hamilton.  The cash proceeds resulting from this transaction were
  $100,000.00.
  On February
  25, 2002, the Company sold 66,800 shares of restricted common stock, at $0.50
  per share, and granted the option of 66,800 shares, at the exercise price of
  $0.50 per share, to Federico Cordova. 
  The cash proceeds resulting from this transaction were $33,000.00.
  On March 19,
  2002, the Company sold 200,000 shares of restricted common stock, at $0.50
  per share, and granted the option of 200,000 shares, at the exercise price of
  $0.50 per share, to John M. Plocher. 
  The cash proceeds resulting from this transaction were $100,000.00.
  On April 27,
  2002, the Company sold 200,000 shares of restricted common stock, at $0.25
  per share, and granted the option of 100,000 shares, at the exercise price of
  $0.50 per share, to Karl A. Schurter. 
  The cash proceeds resulting from this transaction were $50,000.00.
  On May 14,
  2002, the Company sold 400,000 shares of restricted common stock, at $0.25
  per share, and granted the option of 400,000 shares, at the exercise price of
  $0.50 per share, to Emory C. Christensen. 
  The cash proceeds resulting from this transaction were $100,000.00.
  On June 13,
  2002, the Company sold 196,000 shares of restricted common stock, at $0.25
  per share, and granted the option of 196,000 shares, at the exercise price of
  $0.50 per share, to Kent Mason.  The
  cash proceeds resulting from this transaction were $49,000.00.Securities Exchanged for Goods and
  Services:
  On June 10,
  2003, the Company issued 58,125 shares of restricted common stock, valued at
  $0.08 per share, to SWCR, Inc., in consideration of $4,650.00 of rent
  payments for March, April and May 2003.
  On June 29,
  2001, the Company issued 3,334 shares of restricted common stock, valued at
  $1.00 per share, to Dave Stewart, in consideration of $3,334.00 of Accounting
  services performed by Mr. Stewart on the Companys behalf.
  On May 31
  2003, the Company issued 77,500 shares of restricted common stock, valued at
  $0.06 per share, to SWCR, Inc., in consideration of $4,650.00 of rent
  payments for June, July and August 2003.
  On July 1,
  2003, the Company issued 192,000 shares of restricted common stock, valued at
  $0.18 per share, to Keith Cline, in consideration of $34,560.00 for Investor
  Relations expenses.
  On July 1,
  2003, the Company issued 120,000 shares of restricted common stock, valued at
  $0.18 per share, to Alan Ashcroft, in consideration of $21,600.00 for
  Investor Relations expenses.
  On July 1,
  2003, the Company issued 120,000 shares of restricted common stock, valued at
  $0.18 per share, to Nyle Stewart, in consideration of $21,600.00 for Investor
  Relations expenses.
  On July 1,
  2003, the Company issued 87,374 shares of restricted common stock, valued at
  $0.18per share, to Joseph E. Hawkins, in consideration of $15,727.00 for
  Investor Relations expenses.
  On July 1,
  2003, the Company issued 87,374 shares of restricted common stock, valued at
  $0.18 per share, to Walter T. Hinkle, in consideration of $15,727.00 for
  Investor Relations expenses.
  On September
  26, 2003, the Company issued 46,500 shares of restricted common stock, valued
  at $0.10 per share, to SWCR, Inc., in consideration of $4,650.00 of rent
  payment for September, October and November 2003.12

Convertible Debentures:
  On December
  7, 2001, the Company issued a convertible promissory note to Glen Clayton, in
  the amount of $100,000.00, bearing interest at the rate of 9%, for 12 months,
  for $100,000.00 cash.  The note was
  extended by Mr. Clayton and the Company to September 6, 2004.
  On June 10,
  2002, the Company issued a convertible promissory note to Paul B. Miller, in
  the amount of $50,000.00, bearing interest at the rate of 12%, for 12 months,
  for $50,000 cash and 10,000 shares of the Companys common stock, convertible
  at the rate of 75% of market value at the date of conversion.
  On June 10,
  2002, the Company issued a convertible promissory note to B.C. Coleman, in
  the amount of $50,000.00, bearing interest at the rate of 12%, for 12 months,
  for $50,000.00 cash and 10,000 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On June 20,
  2002, the Company issued a convertible promissory note to Jill Marhsall, in
  the amount of $100,000.00, bearing interest at the rate of 12%, for 12
  months, for $100,000.00 cash and 20,000 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On July 18,
  2002, the Company issued a convertible promissory note to Fe A. Juachon, in
  the amount of $50,022.00, bearing interest at the rate of 12%, for 12 months,
  for $50,022.00 cash and 10,004 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On July 30,
  2002, the Company issued a convertible promissory note to B.C Coleman, in the
  amount of $95,900.00, bearing interest at the rate of 12%, for 12 months, for
  $95,900.00 cash and 19,180 shares of the Companys common stock, convertible
  at the rate of 75% of market value at the date of conversion.
  On August
  14, 2002, the Company issued a convertible promissory note to Janice Baumer,
  in the amount of $25,000.00, bearing interest at the rate of 12%, for 12
  months, for $25,000.00 cash and 5,000 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On August
  19, 2002, the Company issued a convertible promissory note to Gordon R.
  Johnson, in the amount of $100,000.00, bearing interest at the rate of 12%,
  for 12 months, for $100,000.00 cash and 20,000 shares of the Companys common
  stock, convertible at the rate of 75% of market value at the date of
  conversion.
  On August
  19, 2002, the Company issued a convertible promissory note to James F. Haney,
  in the amount of $30,000.00, bearing interest at the rate of 12%, for 12
  months, for $30,000.00 cach and 6,000 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On October
  30, 2002, the Company issued a convertible promissory note to Sandra Stell
  and Oren Thomas, in the amount of $20,000.00, bearing interest at the rate of
  12%, for 12 months, for $20,000.00 cash and 4,000 shares of the Companys
  common stock, convertible at the rate of 75% of market value at the date of
  conversion.
  On October
  30, 2002, the Company issued a convertible promissory note to Venna Davis, in
  the amount of $200,000.00, bearing interest at the rate of 12%, for 12
  months, for $200,000.00 cash and 40,000 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On November
  1, 2002, the Company issued a convertible promissory note to Charlene
  Bronson, in the amount of $50,000.00, bearing interest at the rate of 12%,
  for 12 months, for $50,000.00 cash and 10,000 shares of the Companys common
  stock, convertible at the rate of 75% of market value at the date of
  conversion.
  On November
  20, 2002, the Company issued a convertible promissory note to Doug Hardin, in
  the amount of $25,000.00, bearing interest at the rate of 12%, for 12 months,
  for $25,000.00 cash and 5,000 shares of the Companys common stock,
  convertible at the rate of 75% of market value at the date of conversion.
  On November
  22, 2002, the Company issued a convertible promissory note to Glen
  Stephenson, in the amount of $100,000.00, bearing interest at the rate of
  12%, for 24 months, for $100,000.00 cash. 
  The balance due on this note has been extended to September 6, 2004.13

Secured Promissory Notes:
  On April 15,
  2002, the Company issued a promissory note, secured by assets of the Company,
  to BFS Group Ltd., in the amount of $108,500.00, bearing the interest rate of
  36% for 25 days, for $108,500.00 cash. 
  This note was subsequently re-assigned to Kent Mason, in the amount of
  $25,000.00, and Emory Christensen, in the amount of $83,500.00, bearing the
  interest rate of 24%.  Of this amount,
  $25,000.00 has been paid to Kent Mason on December 31, 2002.
  On May 1,
  2003, the Company issued a convertible promissory note, secured by assets of
  the Company, to S&S Home Businesses, Inc., in the amount of $75,000.00,
  bearing the interest rate of 12%, for 12 months, for $75,000.00 cash. The
  note is convertible into 300,000 shares of the Companys common stock at
  $.25.Item 6. 
Managements Discussion and Analysis of Financial Condition and Results
of Operations.
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, 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, 2003, included elsewhere in this
Form 10-KSB.
CORPORATE
STRUCTURE
As
previously discussed in Item #1, Overview and Development of Business, the
Company engaged in a restructuring process which included the elimination of
operations at its Utah offices and its custom automation sales at its corporate
office in Meridian, Idaho. The purpose of the restructuring was related to
managements belief that given general economic conditions, the automation
division would not be profitable in the short term. There were no appreciable
custom automation contracts that were projected to come to fruition in a period
of time that would reverse the losses of the group. The Utah offices functioned
as an adjunct group to the automation operations and were included in the
termination of automation operations.
Following
the restructuring, R-Tec Holding, Inc remains the parent corporation with a
wholly owned subsidiary, R-Tec Corporation. All operational activities are
conducted within R-Tec Corporation.
RESULTS
OF OPERATIONS
Revenues:For the period ending December 31, 2003, the
Company recognized revenues of $1,278,942, compared with $2,672,504, for
year-end 2002, a decrease of $1,393,562 or 52%. The decrease was attributable
primarily to continued slow sales in automation projects. Automation sales,
which comprised custom automation, machine tooling, and other sales, for 2003
were $730,132, compared to $2,052,946 for 2002, a drop of approximately 64%.
The custom automation portion of these sales terminated in November, 2003.The
Companys sales are sensitive to general economic conditions, and especially
sensitive to economic trends in the high tech markets.
14

While
reports coming to the Company from its automation customers in year 2003
appeared to be signaling an upturn in their respective businesses, it became
apparent to management that significant increases in capital spending budgets
had not yet occurred or at least had not yet been approved, for projects
relating to the Companys automation sales opportunities. Requests for Quotes
had dropped significantly by the end of the third quarter of 2003 and continued
to decline in the fourth quarter of the same period. Management did not feel
that the trend would be reversed in a time frame that would justify the
continuation of automation operations, and as indicated above, suspended those
operations.
Sales
for the Companys interconnect products declined slightly from 2002 to 2003,
with sales of $619,558 and $548,810 respectively, a decrease of 11%. Management
attributes the slight decline to general economic conditions and a lack of resources
for funding marketing efforts.
Beginning
with the first quarter of 2004, management anticipates that total sales will
drop from previous years levels due to the discontinuation of automation
sales. In previous years, automation sales represented a greater proportion of
total sales than interconnect sales. The anticipated drop in total sales
however, represents in part, the results of positive strategic planning by
management to eliminate operations within the Company that are not expected to
become profitable in the near term.
Management
does not feel that revenues have been affected either positively or negatively
by inflation, and does not feel that pricing changes have resulted in material
changes to sales revenues.
Profitability:The Company recognized losses of ($1,240,932)
for the period ending December 31, 2003, and ($1,566,370) for the period ending
December 31, 2002. The reduction in loss of $325,438, or 21%, is attributable
primarily to a reduction in operating loss from ($1,344,186) in 2002 to
($988,325) in 2003, or 26%.  The
reduction in total operating loss is primarily the result of a loss on asset
impairment recorded in 2002 for $429,952.
Gross
profit for the period ending December 31, 2003 was $178,930 or 14%, compared to
$724,801, or 27%, for the same period ending December 31, 2003. Management
feels the decrease in gross profit as a percentage, is the result of fixed
operating expenses, such as plant and equipment costs, and direct salaried employment
costs, allocated to a lower revenue base. This underutilization of plant and
equipment, and personnel is a direct result of slowing sales in year 2003,
compared to year 2002.
In
year 2003, with bidding opportunities for automation projects narrowing, and
more competitors bidding on the same projects within the industry, the Company
was forced to decrease its bidding margins and to attempt high risk projects
in order to try and counteract the underutilization problem it was facing. High
risk projects are defined as larger projects with a high degree of engineering
design and mechanical difficulty. The Company defines lower risk projects as
those within its current scope of experience, sometimes reflecting an iteration
of previous automation fixtures where some design and manufacturing costs were
known, and those projects with multiple units where fixed costs can be spread
over production runs.
Selling,
general and administrative expenses decreased from $1,574,510 for the period
ending December 31, 2002, to $1,082,323 for the same respective period ending
in 2003, a decrease of  $492,187, or
31%. The decrease represents the Companys efforts to reduce overhead expenses
in year 2003. Interest expense increased from $158,037 for the period ending
December 31, 2002, to $261,434, for the period ending December 31, 2003, an
increase of 65%. The increase in interest expense is attributable primarily to
increased borrowings on convertible notes the Company was forced to enter into
to augment cash to support ongoing operating expenses.
Net
loss per common share was $0.06 for the period ending December 31, 2003 on
weighted common shares outstanding of 22,454,862, compared to $0.07 for the
period ending December 31, 2002 on weighted common shares outstanding of
21,250,289.
15

CHANGES
IN FINANCIAL CONDITION
At
December 31, 2003, current assets were $227,939, with current liabilities of
$1,563,056, resulting in a current ratio of 0.15. For the same period ending
2002, current assets were $873,517, with current liabilities of $1,178,965, and
a current ratio of 0.74.  The decrease
in the Companys current ratio was the result of a decrease in revenues and a
subsequent draw upon current resources to fund operating expenses. From 2002 to
2003, for the periods ending December 31 respectively, cash decreased from
$172,572 to $36,565, accounts receivable decreased from $478,529 to $57,573,
costs and estimated earnings in excess of billings on uncompleted contracts
decreased from $72,723 to $0.00 (the Company was no longer required to report
over or under billings as a percentage of contract completed basis, as of
December 31, 2003, with the termination of automation sales and ongoing
operations not having long term contractual obligations), and prepaid expenses
decreased from $98,457 to $16,990. An insurance claim receivable was booked as
of December 31, 2003 for $68,986, for anticipated insurance proceeds resulting
from a theft loss of equipment incurred during the closure of the Utah offices
within the fourth quarter of 2003.
In
addition to the decrease of current assets, the Company classified the current
portions of some notes payable, from long term liabilities to short term
liabilities, due to maturity dates of notes payable falling within a period of
less than one year.  The classification,
along with changes in other short term liabilities, resulted in an increase to
short term liabilities of $340,091.
The
Company did not add any capital equipment in 2003. Equipment and leasehold
improvements, at cost, net of accumulated depreciation, and other assets, at
cost, net of accumulated amortization, decreased from $913,022 in 2002 to
$624,554 in 2003, for the periods ending December 31, respectively.
Income
Taxes:The net operating loss
carry forward at December 31, 2003, for federal tax purposes of approximately
$3,680,000 begins to expire in the year 2020.
The
Company has provided a full valuation allowance related to the deferred tax
asset resulting from the net operating loss carry forward.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company continues to experience a challenge with funding for ongoing
operations, cash to pay off overdue vendor payables, and the ability to pay off
notes payable that have matured and are now past due. As of December 31, 2003,
the Company owed $291,931 in accounts payable, primarily to vendors who
provided materials for automation projects. At December 31, 2003, of the total
amount owed in vendor payables, $193,400 was past due 90 days or more.
Management has been proactively working with vendors to pay minimal amounts to
demonstrate good faith efforts to resolve the amounts outstanding. Management
has also explained to vendors with overdue invoices that the Company is still
seeking additional funding to help it settle outstanding payables. Some
creditors have sought remedy through collection agencies or agents, and several
have sought remedy through legal representation.
Without
additional funding, the Company cannot guarantee that it will be able to pay
off overdue vendor payables as current operating margins and cash flows, less
overhead expenses, are not generating excess cash flow to be applied to older,
outstanding, invoices. The Company may reach a point where current operations
create a break-even cash flow, but will still have to generate excess cash flow
in order to pay off older vendor payables. Management does not believe that
without additional funding to help pay off older outstanding invoices, the
Company will have sufficient working capital to do so in the short term.
Of
the $1,256,700 in notes payable outstanding as of December 31, 2003, $1,059,322
had matured and was overdue. The matured and overdue portion includes notes
that have defaulted. Interest payable to note holders has been paid through
July 31, 2003, with interest accruing but not paid on the same notes, from
August 1, through December 31, 2003. Interest past due on notes payable,
inclusive of interest for December 2003, at December 31, 2003, was $93,404.
16

Management
has not had extensive communication with note holders regarding the resolution
of the overdue notes and is not completely aware of the disposition of each
note holder. Some communication has occurred directly between management and
note holders and other communication has been handled by the Olympus Group
representatives (the Olympus Group represented the Company in obtaining most of
the funding that came from note holders). It is not known if note holders are
of the disposition to work with the Company while it attempts to solve its
financial challenges. To the extent the note holders are not willing to work
with the Company in this manner, management cannot guarantee that it will be
able to continue operations without placing the Company into bankruptcy
protection.
Management
is actively seeking funding to help resolve its financial challenges, but has
not yet been successful in doing so and cannot guarantee that funds will become
available to the Company.
The
Company has not entered into any commitments for capital expenditures as of
December 31, 2003 and does not foresee any commitments of this type in the
foreseeable future.
Going
Concern:As of December 31, 2003, we had a consolidated
accumulated deficit of $5,104,456. We expect to continue to incur operating
losses for at least the short term following our restructuring. We may not be
able to generate enough revenues to become profitable and we may continue to
struggle with liquidity issues due to our negative cash flows from operations,
and because we have had difficulty in the past raising capital. As a result of
these and other factors, our independent auditors, Balukoff, Lindstrom
&Co., P.A., have expressed substantial doubt about our ability to continue
as a going concern.
OFF
BALANCE SHEET ARRANGEMENTS
The
Company does not have any off-balance sheet arrangements.
COMPANY
STRATEGY
As
part of its strategic planning, management has analyzed the Companys
operations and has restructured the Company with the focus in mind of cutting
expenses to minimal levels and focusing on those operations that it feels will
be most likely to be cash positive and profitable in the short term. From that
restructuring process, the automation group operations were terminated in
November of 2003. The Interconnect group operations and the machine shop
operations were set up as profit centers and given guidance to achieve
individual profit center profitability within six months from January 1,
2004.
In
an effort to continue to cut expenses, the Company has discontinued some
benefits to employees, and has extended some salary and wage cuts to employees.
Some employees not working directly within the machine shop and interconnect
groups have been extended layoffs. Management has also reduced budgets and has
made every effort to minimize expenses where possible.
The
Company will continue to seek alternative sources of funding in order to
provide cash for ongoing operations, pay off overdue vendor invoices, and to
work with note holders in resolving those notes that are past due both in
interest payments and principal. With adequate funding, management believes
that the Company can achieve positive cash flows and profitability within six
to twelve months. Of funding that is being sought, management feels it is
important to provide financial support to marketing and sales functions. While
the Company does have customers who continue to re-order products and services,
profitability can only be achieved through expanding that customer base. Orders
for the machine shop are expected to come from local sources and from socket
manufacturing for the interconnect group sales. Orders for interconnect sales
are represented by numerous customers who are located geographically in various
locations throughout the U.S., with some satellite operations in foreign
locations. Management feels that increase in interconnect sales will require
additional expenses for traveling to and presenting to new customers in various
geographic locations.
The
Company is making attempts to obtain additional funding. It cannot guarantee
that such funding will become available and cannot guarantee therefore that
operations will be able to continue without additional funding.  In addition, if certain vendors who have
initiated collection activities or certain note holders who have notes that are
past due, elect to foreclose on their outstanding balances, the Company may be
forced into a bankruptcy position.
17

In
its efforts to obtain additional funding, the Company has entered into
negotiations with the Olympus Group, who is representing a group of the
Companys shareholders (for purposes of discussion, the group of shareholders
has been give the name of the Plocher Group, the name Plocher, which is one
of the shareholders, does not imply any liability or legal responsibility
expressed or implied to one individual but is simply used as a means of
identifying the individual members as a group). The Company feels that attempts
have been made to obtain funding with this group but efforts thus far have not
been successful. The Company continues to work with this group but cannot
guarantee that funding will occur. For a more complete discussion of this
working relationship and the contingent liability it creates, see Contingent
Liabilities below.
In
addition, the Company as of the date of this filing, has also entered into
discussions with an investment group located in Boise, Idaho. If this agreement
is consummated,, the Boise, Idaho investment group would obtain majority
ownership of the Company and provide some funding to the Company and also
provide hands-on management guidance to help the Company return to
profitability and positive cash flows.
Although
the Company is attempting to obtain funding for the needs previously mentioned
above, it cannot guarantee that this funding will become available. In the
absence of additional funding, the Company may be forced to discontinue
operations or to seek bankruptcy protection.
CONTINGENT
LIABILITIES
Plocher
Group Contingent Liability:as previously discussed, the Company in an
effort to obtain funding, entered into funding agreements with a group of
shareholders called the Plocher Group. The name Plocher Group is used only
for identification of the collective group of individuals and does not connote
any liability to one individual. The transactions and agreements although
entered into have not yet been completed nor has the Company received any
funding from these efforts. Managements position on this contingent liability
is represented by the disclosure following:
Due
  to continued operating losses and the need for additional capital in the 4th
  quarter of 2003, the Company entered into discussions with the Olympus Group
  as representatives of a group of shareholders previously identified above as
  the Plocher Group. The discussions focused on accomplishing the following
  goals: 1) providing a financing vehicle whereby existing members of the
  Plocher Group and/or new investors could provide funding for R-Tec for
  continued operational needs, 2) an indemnification agreement or Covenant Not
  To Sue, based on asserted claims of securities violations from the Plocher
  Group, and 3) the creation of a secured position for the investments made by
  the Plocher Group or others associated with them.The
  Olympus Group advised management that the Plocher Group wanted some form of
  security agreement in place as part of their agreement not to sue.  After input from legal counsel, management
  determined that it could not grant a secured position for the Plocher Groups
  original equity investment, solely for the purpose of  resolving a threatened legal action which
  management believed was not well founded. 
  However, if the Plocher Group and/or new investors would provide  additional consideration in the form of
  new funding to the Company, then Management determined it was in the best
  interest of the Company to include a covenant not to sue as part of any
  agreement with the Plocher Group. 
  This would avoid the cost and expense of threatened litigation. After
  numerous discussions between R-Tec management, the Olympus Group and legal
  counsel, it became clear to management that all three goals cited above,
  would have to be part of an agreement between the parties. Management clearly
  advised the Olympus Group, that the Company could not provide a secured
  position in its IP (intellectual properties) to the Plocher Group, without
  additional consideration or funding, and that it would not do so solely to
  satisfy the asserted threat of a shareholder lawsuit.18

With
  no other reasonable funding opportunities available to management and the
  belief that the Companys survivability in the short term was at stake
  without additional funding, management made the decision to enter into
  agreements on or about March 1, 2003 (on or about is used here due to the
  fact that different documents were signed on different dates due to the
  number of people and locations involved).The final
  agreements provided that a new limited liability company would be formed by
  the Plocher Group and other potential investors.  The express purpose of the new LLC was to provide funding to
  R-Tec by way of establishing a line of credit up to $1.2 million dollars, at
  10% interest, for a period of 36 months. The Plocher Group also signed a
  Covenant Not To Sue R-Tec as part of the agreement.  R-Tec executed a security agreement, the intent
  of which was to secure the Plocher Group for the original amount of funds
  invested, $740,000 and funds to be loaned to R-Tec through the soon to be
  established line of credit. Additionally, R-Tec was to make a UCC filing when
  the new funding came in.  Management
  clearly advised the Olympus Group on several occasions that the agreements
  would only be viable if new funding was provided to the Company. For
  additional specific details, please see documents incorporated by reference;
  1) R-Tec Holding, Inc. Line of Credit Agreement, 2) Security Agreement, and
  3) Covenant Not To Sue.Management
  now believes there are serious issues relating to the validity and
  enforceability of the agreements due to lack of or failure of
  consideration.  It does not appear
  that the Plocher Group itself or together with other investors has formed an
  LLC to provide funding to the Company. 
  It further does not appear that a line of credit has been established
  and in fact, no funding has been provided to the Company which has now found
  it necessary to explore other funding options.  Therefore, it is managements position that the agreements may
  either be void, voidable or not enforceable. 
  However, Management understands that the validity and enforceability
  of the agreements is a legal issue that may require judicial determination.CONTRACTUAL
OBLIGATIONS
The
following information is being provided regarding the Companys contractual
obligations. The information has been aggregated into categories and periods.
Payments
  Due by PeriodContractual
  Obligations
  
  Total
  
  Less than
  1 
  year
  
  1-3 years
  
  3-5 years
  
  More than
  5 yearsLong-Term Debt Obligations
  
  $
  1,253,922
  
  $
  1,153,922
  
  $
  100,000Capital Lease Obligations
  
  $
  2,778
  
  $
  2,778Operating Lease Obligations
  
  $
  83,152
  
  
  
  
  $
  83,152Purchase ObligationsOther Long-Term Liabilities
  Reflected on the RegistrantsBalance Sheet under GAAP
  
  $
  211,616
  
  $
  211,616
  *Total
  
  $
  1,551,468
  
  $
  1,368,316
  
  $
  183,15219

Notes:
*Preferred shareholder dividends represent the Other Long-Term Liabilities
listed above. The conversion of the dividends to common stock or payment by
cash to the holders of the preferred shares is at the discretion of the
Companys Board of Directors. Therefore, though listed as less than 1 year,
the liability may extend beyond one year.

20

Item 7: 
Financial Statements
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, 2003, and the
related consolidated statements of operations, cash flows, and changes in shareholders
equity (deficit) for the years ended December 31, 2003 and 2002.  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, 2003, and the
results of their operations and their cash flows for the years ended December
31, 2003 and 2002, in conformity with U.S. generally accepted accounting
principles.
The accompanying 2003 financial statements have been
prepared assuming the Company will continue as a going concern.  As discussed in Note B to the financial
statements, the shareholders deficiency, the working capital deficiency of
$1,335,117, and the operating losses raise substantial doubt its ability to
continue as a going concern. 
Managements plans concerning these matters are also described in Note
B.  The financial statements do not
include any adjustments that might result from the outcome of these uncertainties.
/s/ Balukoff, Lindstrom & Co., P.A.Balukoff,
  Lindstrom & Co., P.A.Boise, IdahoMay 7, 200421

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

December 31, 2003

Current assetsCash
  
  $
  36,565Accounts receivable (net of $ -- allowance for doubtful
  accounts)
  
  
  57,573Income taxes receivable
  
  
  11,625Insurance claim receivable
  
  
  68,986Inventory
  
  
  36,200Prepaid expenses
  
  
  16,990Total
  current assets
  
  
  227,939Equipment and leasehold
  improvements, at cost, net of accumulated depreciation
  
  
  618,340Other assets, at cost, net
  of accumulated amortization
  
  
  6,214Total
  assets
  
  $
  852,493Current liabilitiesAccounts payable
  
  $
  291,931Accrued expenses
  
  
  114,425Notes and leases payable, current portion
  
  
  1,056,700Notes payable to related parties
  
  
  100,000Total
  current liabilities
  
  
  1,563,056Accrued preferred dividends
  payable
  
  
  211,616Notes payable to related parties
  
  
  100,000Total
  liabilities
  
  
  1,874,672Shareholders deficitSeries A cumulative convertible preferred stock, par
  value $0.23437 per share, 5,000,000 authorized, 2,646,094shares issued and
  outstanding
  
  
  619,350Common stock, no par value per share, 60,000,000
  authorized, 22,878,994 shares issued and outstanding
  
  
  2,924,804Additional paid-in capital
  
  
  538,123Accumulated deficit
  
  
  (5,104,456
  )Total
  shareholders deficit
  
  
  (1,022,179
  )Total
  liabilities and shareholders equity
  
  $
  852,49322

R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS

Years Ended December 31, 2003 and 2002

2003
  
  2002Revenues
  
  $
  1,278,942
  
  $
  2,672,504Operating costs
  
  
  1,100,012
  
  
  1,947,703Gross
  profit
  
  
  178,930
  
  
  724,801Selling, general and
  administrative expenses
  
  
  1,082,323
  
  
  1,574,510Research and development
  
  
  84,932
  
  
  64,525Loss on asset impairment
  
  
  
  
  
  429,952Operating
  loss
  
  
  (988,325
  )
  
  (1,344,186
  )Gain on dispostion of
  equipment
  
  
  67,686
  
  
  Interest expense
  
  
  (261,434
  )
  
  (158,037
  )Interest income
  
  
  
  
  
  2,516(193,748
  )
  
  (155,521
  )Loss before income taxes
  
  
  (1,182,073
  )
  
  (1,499,707
  )Income taxes expense
  (benefit)
  
  
  
  
  
  Net
  loss
  
  
  (1,182,073
  )
  
  (1,499,707
  )Preferred stock dividends
  
  
  58,859
  
  
  66,663Net
  loss available to common shareholders
  
  $
  (1,240,932
  )
  $
  (1,566,370
  )Net loss per common share
  
  $
  (0.06
  )
  $
  (0.07
  )Weighted average shares
  outstanding
  
  
  22,454,862
  
  
  21,250,28923

R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2003 and 2002

2003
  
  2002Cash flows from operating
  activitiesNet loss
  
  $
  (1,182,073
  )
  $
  (1,499,707
  )Adjustments to reconcile net loss to net cash used by
  operating activitiesDepreciation and amortization
  
  
  260,569
  
  
  259,954Write-down of impaired assets
  
  
  
  
  
  429,952Gain on disposition of assets
  
  
  (67,686
  )
  
  Debt forgiveness on asset sale
  
  
  13,801Options issued for consulting services
  
  
  24,000
  
  
  82,240Common stock issued for services
  
  
  49,950
  
  
  Changes in assets and liabilitiesAccounts receivable
  
  
  420,956
  
  
  (327,681
  )Income taxes receivable
  
  
  3,670
  
  
  Costs and estimated earnings in excess of billings on
  uncompleted contracts
  
  
  72,723
  
  
  (20,696
  )Prepaid expenses
  
  
  81,466
  
  
  (22,020
  )Inventory
  
  
  (259
  )
  
  (35,941
  )Accounts payable
  
  
  184,362
  
  
  (97,238
  )Accrued expenses
  
  
  29,628
  
  
  56,306Billings in excess of costs and estimated earnings on
  uncompleted contracts
  
  
  (61,594
  )
  
  61,594Net
  cash used by operating activities
  
  
  (170,487
  )
  
  (1,113,237
  )Cash flows from investing
  activitiesPurchase of equipment and other assets
  
  
  (185
  )
  
  (408,450
  )Proceeds from disposition of assets
  
  
  12,983
  
  
  Net
  cash provided (used) by investing activities
  
  
  12,798
  
  
  (408,450
  )Cash flows from financing
  activitiesCollections on loans
  
  
  
  
  
  15,110Proceeds from common stock
  
  
  
  
  
  701,327Proceeds from notes payable
  
  
  75,000
  
  
  1,003,922Payments on debt
  
  
  (53,318
  )
  
  (356,144
  )Net
  cash provided by financing activities
  
  
  21,682
  
  
  1,364,215Net
  decrease in cash
  
  
  (136,007
  )
  
  (157,472
  )Beginning cash
  
  
  172,572
  
  
  330,044Ending
  cash
  
  $
  36,565
  
  $
  172,572Supplemental disclosures of
  cash flow informationInterest paid
  
  $
  199,279
  
  $
  143,773Noncash investing and financing activitiesPreferred stock dividends payable
  
  $
  58,859
  
  $
  66,664Note payable paid through issuance of a note payable from
  another party
  
  $
  
  
  $
  50,000Write-down of impaired assets
  
  $
  
  
  $
  429,952Debt forgiveness from sale of equipment
  
  $
  13,801
  
  $
  Common stock issued through conversion of preferred stock
  and accrued preferred dividends
  
  $
  40,772
  
  $
  Common stock issued for services
  
  $
  49,950
  
  $
  24

R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY

Years Ended December 31, 2003 and 2002

Common
  Stock
  
  Preferred
  Stock
  
  Accumulated
  Deficit
  
  Additional
  Paid-in
  Capital
  
  TotalBalance
  at December 31, 2001
  
  $
  2,132,755
  
  $
  651,100
  
  $
  (2,297,154
  )
  $
  358,540
  
  $
  845,241Net loss
  
  
  
  
  
  
  
  
  (1,499,707
  )
  
  
  
  
  (1,499,707
  )Dividends
  
  
  
  
  
  
  
  
  (66,663
  )
  
  
  
  
  (66,663
  )Common stock issuances
  
  
  701,327
  
  
  
  
  
  
  
  
  
  
  
  701,327Non employee stock options
  
  
  
  
  
  
  
  
  
  
  
  82,240
  
  
  82,240Intrinsic value of
  conversion features on notes payable
  
  
  
  
  
  
  
  
  
  
  
  73,343
  
  
  73,343Balance
  at December 31, 2002
  
  
  2,834,082
  
  
  651,100
  
  
  (3,863,524
  )
  
  514,123
  
  
  135,781Net loss
  
  
  
  
  
  
  
  
  (1,182,073
  )
  
  
  
  
  (1,182,073
  )Dividends
  
  
  
  
  
  
  
  
  (58,859
  )
  
  
  
  
  (58,859
  )Common stock issuances
  
  
  58,972
  
  
  
  
  
  
  
  
  
  
  
  58,972Preferred stock converted
  to commom stock
  
  
  31,750
  
  
  (31,750
  )
  
  
  
  
  
  
  
  Non employee stock options
  
  
  
  
  
  
  
  
  
  
  
  24,000
  
  
  24,000Balance
  at December 31, 2003
  
  $
  2,924,804
  
  $
  619,350
  
  $
  (5,104,456
  )
  $
  538,123
  
  $
  (1,022,179
  )25

R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2003 and 2002

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, and integrated
circuit testing equipment manufacturer, 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.  At December 31, 2003, the
Company had no contracts in progress.
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.

Sales of inventory related items are recorded upon shipment of the
product to the customer.
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.

26

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.
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.  All past due accounts
continue to accrue finance charges until paid. 
Trade accounts receivables of $122 are past due ninety days or more.
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.
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 had 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, 2003.  The technology acquired relates to 5 HP motor technologies, which
have not been fully developed and does not currently have alternative future
uses.  During 2003, IntorCorp dissolved.
Significant Customers and Suppliers
The Company recorded revenue from services provided to customers that
exceeded 10 percent of total revenue as follows:
2003
  
  2002Company A
  
  $
  
  
  $
  308,270Company B
  
  
  155,108
  
  
  Company C
  
  
  
  
  
  609,028Company D
  
  
  235,025
  
  
  Company E
  
  
  168,133
  
  
  $
  588,266
  
  $
  917,298The Company
has no vendors that supplied 10% or more of Company purchases.
27

Gain on Disposition of Equipment
Gain on disposition of equipment includes an insurance settlement of
$58,381 related to a theft loss recovery from an insurance company on assets
used in the Utah facility.
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,
2003, 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 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, and determining the
liability, if any, associated with the agreements discussed in Note R.  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.

Stock Based Compensation
The Company has an incentive stock option plans wherein 2,000,000
shares of the Companys common stock can be issued.  The Company granted 2,410,000 stock options vesting in one year
to key employees, officers and directors during the year ended
December 31, 2003 with an exercise price of $.25.  The Company granted 400,000 stock options
vesting in six months to non-employees during the year ended December 31,
2003 with an exercise price of $.12.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, which established
financial accounting and reporting standards for stock-based compensation.  This standard defines a fair value method of
accounting for an employee stock option or similar equity instrument.  In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 148,
which revised certain provisions of adopting a fair value method of accounting
for stock options and required certain additional disclosures regarding stock
options.  These statements give entities
the choice between adopting the fair value method or continuing to use the
intrinsic value method 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.
The Company accounts for its stock options under Accounting Principles
Board (APB) Opinion No. 25 using the intrinsic value method.  The Company
has elected not to adopt the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation
(FAS 123).  In accordance with Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, pro-forma net income, stock-based
compensation expense, and earnings per share using the fair value method are
stated as follows:
28

Years
  Ended December 31,2003
  
  2002Net loss, as
  reported
  
  $
  (1,240,932
  )
  $
  (1,566,370
  )Deduct:
  stock based compensation expense determined under fair value method, net of
  tax
  
  
  30,102
  
  
  47,205Pro forma
  net loss
  
  $
  (1,271,034
  )
  $
  (1,613,575
  )Loss per
  share:Basic and
  diluted  as reported
  
  $
  (.05
  )
  $
  (.07
  )Basic and
  diluted  pro forma
  
  $
  (.06
  )
  $
  (.08
  )Assumptions
used to calculate the income statement impact of stock options granted as if
the Company had adopted FAS 123 were as follows:
Years Ended December 31,2003
  
  2002Weighted
  average:Risk-free
  interest rate
  
  
  5.00
  %
  
  5.00
  %Expected
  life
  
  
  10 years
  
  
  10 yearsExpected
  volatility
  
  
  293
  %
  
  293
  %Expected
  dividends
  
  
  none
  
  
  noneRecently Issued Accounting Statements
In January 2003, the FASB issued FASB Interpretation Number, or FIN,
46, Consolidation of Variable Interest Entities, an interpretation of ARB 51.
FIN 46 addresses consolidation of variable interest entities, which are entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for variable interest entities
created after January 31, 2003, and for variable interest entities in which an
enterprise obtains an interest after that date. In October 2003, the FASB
deferred to the fourth quarter of 2003 from the third quarter the
implementation date of FIN 46 with respect to variable interest entities in
which a variable interest was acquired before February 1, 2003. In December
2003, the FASB issued a revision to FIN 46, known as FIN 46R, to clarify
certain provisions and exempt certain entities from its requirements. In
addition, FIN 46R deferred to the first quarter of 2004 application of its
provisions to certain entities in which a variable interest was acquired prior
to February 1, 2003. FIN 46 may be applied prospectively with a cumulative
effect adjustment as of the date on which it is first applied or by restating
previously issued financial statements with a cumulative effect adjustment as
of the beginning of the first year restated.

For any variable interest entities that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the variable interest entities initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first applies
may be used to measure the assets, liabilities and noncontrolling interest of
the variable interest entities.  The
company holds no  interests in variable
interest entities.
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
changed the accounting for costs associated with exit or disposal
activities.  The Company adopted SFAS No. 146 in fiscal year ended
December 31, 2003.  There was no material impact associated with adopting
SFAS 146.
29

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is generally effective for derivative
instruments, including derivative instruments embedded in certain contracts,
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003.  The adoption of this statement did
not have a material impact on our financial position or results of operations.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS 150 improves the accounting for
certain financial instruments that, under previous guidance, issuers could
account for as equity and requires that those instruments be classified as
liabilities (or assets in certain circumstances) in statements of financial
position.  SFAS 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entitiesall of whose
shares are mandatorily redeemable.  SFAS 150 is generally effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning after
June 15, 2003.  The adoption of this statement did not have a
material impact on our financial position or results of operations.
NOTE B  GOING CONCERN
As shown in the accompanying financial statements, the Company incurred
net losses of $1,182,073 and $1,499,707 during the years ended December 31,
2003 and 2002, respectively.  Current
liabilities exceeded current assets by $1,335,117 as of December 31, 2003.  As of December 31, 2003, the Companys
accumulated deficit is $5,104,456 and the shareholders deficit is
$1,022,179.  Those factors create an
uncertainty about the Companys ability to continue as a going concern.
The Company is dependent upon the sale of its common stock and
short-term notes to satisfy its current cash operating needs.  Although management has been successful thus
far in raising a minimal amount of capital for operations, there can be no
assurance that the Company and its management will be able to continue to sell
sufficient amounts of common stock. 
Management plans to meet its cash needs through the issuance of
additional shares of common stock and developmental funds from outside
companies. The ability of the Company to continue as a going concern is
dependent on that plans success. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.

NOTE C  INVENTORIES
Inventories at December 31, 2003 consist of:
Raw
  materials
  
  $
  316Finished
  goods
  
  
  35,884$
  36,200NOTE 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,  $86,239 and $63,288
was amortized as interest expense for the years ended December 31, 2003 and
2002, respectively.

30

Prepaid expenses at December 31, 2003 consist
of:

Prepaid rent and other prepaid items
  
  $
  9,416Prepaid interest
  
  
  7,574$
  16,990NOTE E 
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment
and leasehold improvements at December 31, 2003 consist of:

Equipment
  
  $
  908,603Vehicles
  
  
  2,633Leasehold improvements
  
  
  118,484Office equipment and furnishings
  
  
  77,7491,107,469Accumulated depreciation and amortization
  
  
  (489,129
  )$
  618,340The estimated useful lives of equipment is five to seven years.  The leasehold improvements are amortized
over the life of the leases, including extensions at the option of the lessee.  These lease lives range from two to seven
years.
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
  
  $
  15,734Equipment
  
  
  188,102Goodwill
  
  
  201,218Notes payable
  assumed
  
  
  (113,806
  )$
  291,248Goodwill 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.

31

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
  
  $
  12,025Customer
  lists
  
  
  365,975Other
  
  
  2,000$
  380,000Based 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. 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:
Goodwill
  
  Customer
  List
  
  TotalBalance as of January 1, 2002
  
  $
  201,218
  
  $
  320,228
  
  $
  521,446Amortization
  
  
  
  
  
  (91,494
  )
  
  (91,494
  )Impairment
  
  
  (201,218
  )
  
  (228,734
  )
  
  (429,952
  )Balance as of December 31, 2002
  
  $
  
  
  $
  
  
  $
  32

NOTE G  OTHER ASSETS

Other assets at December 31, 2003 consist of:
Software
  
  $
  76,327Accumulated amortization
  
  
  (70,113
  )$
  6,214The estimated useful life of software is three years.
NOTE H  NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties at December
31, 2003 consist of:
Note payable to Doug Hastings, payable in monthly interest only
  payments at 10%, until maturity in February 2005, unsecured.
  
  $
  50,000Note payable to Gary Clayton, payable in monthly interest only
  payments at 10%, until maturity in February 2005, unsecured.
  
  
  50,000Note payable to Glen Clayton, interest at 9%, payable in full with
  interest in September 2004, unsecured.
  
  
  100,000$
  200,000Maturities in future years are:
2004
  
  $
  100,0002005
  
  
  100,000$
  200,00033

NOTE I  NOTES PAYABLE

Notes payable at December 31, 2003 consist
of:
Convertible note payable, monthly interest only payments at 12%,
  principal due June 2003, convertible to common stock, unsecured.
  
  $
  100,000Convertible note payable, monthly interest only payments at 12%,
  principal due June 2003, convertible to common stock, unsecured.
  
  
  145,900Convertible note payable, monthly interest only payments at 12%,
  principal due June 2003, convertible to common stock, unsecured.
  
  
  50,000Note payable, 35% interest, due May 2002, secured by certain assets
  of the Company.
  
  
  83,000Convertible note payable, monthly interest only payments at 12%,
  principal due October 2003, convertible to common stock, unsecured.
  
  
  50,000Convertible note payable, monthly interest only payments at 12%,
  principal due August 2003, convertible to common stock, unsecured.
  
  
  25,000Convertible note payable, monthly interest only payments at 12%, principal
  due August 2003, convertible to common stock, unsecured.
  
  
  100,000Convertible note payable, monthly interest only payments at 12%,
  principal due August 2003, convertible to common stock, unsecured.
  
  
  30,000Convertible note payable, monthly interest only payments at 12%,
  principal due July 2003, convertible to common stock, unsecured.
  
  
  50,022Convertible note payable, monthly interest only payments at 12%,
  principal due October 2003, convertible to common stock, unsecured.
  
  
  25,000Convertible note payable, monthly interest only payments at 12%,
  principal due October 2003, convertible to common stock, unsecured.
  
  
  200,000Convertible note payable, monthly interest only payments at 12%,
  principal due October 2003, convertible to common stock, unsecured.
  
  
  20,000Convertible 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.  Note is in default at
  December 31, 2003 due to lack of timely interest payments.
  
  
  100,000Convertible note payable, bi-annual interest only payments at 12%
  beginning October 2003, principal due October 2005, convertible at the option
  of the holder to common stock of the Company at $.25 per share within thirty
  days prior to the maturity date, secured by certain assets of the Company.  Note is in default at December 31, 2003
  due to lack of timely interest payments.
  
  
  75,0001,053,922Less current portion
  
  
  1,053,922Long-term portion
  
  $
  Excluding the last two notes shown above and
the related party notes payable, all of the other notes are past the stated
maturity date and are now in default. 
The Company is in the process of reviewing the default situations with
the lenders.

34

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

NOTE J  CAPITAL LEASE PAYABLE
The Company leases equipment under capital
leases at December 31, 2003 as follows:
Capitalized cost
  
  $
  41,445Accumulated amortization
  
  
  28,321Amortization expense, included in depreciation expense
  
  
  8,289Future minimum lease payments due as of December 31, 2003 under the
capital lease agreements are as follows:
Total minimum lease payments - 2004
  
  $
  3,333Less amount representing interest
  
  
  555Present value of minimum lease payments
  
  
  2,778Less current portion
  
  
  2,778Long-term portion
  
  $
  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 were 
Executive Officers of the Company during 2003 and 2002.

The Company has entered into a five-year lease agreement for office
space in another state.  The 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, 2003 are:
2004
  
  $
  65,3242005
  
  
  17,8282006
  
  
  $
  83,152Rent expense for 2003 and 2002 was $72,285 and $84,195, 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 $6,000.  The Company is required to make matching
contributions of up to 3% of employee wages or $6,000. During the years ended
December 31, 2003 and 2002, the Company recorded $4,227 and $16,304
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, 2003, using a combined
deferred tax rate of 40%:
35

Deferred tax asset from:
Net operating loss carryforward
  
  $
  1,470,000Fixed assets
  
  
  58,000Stock options
  
  
  100,0001,628,000Deferred tax liability from:Valuation allowance
  
  
  (1,628,000
  )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:

2003
  
  2002Provision at
  statutory rate
  
  $
  (402,000
  )
  $
  (510,000
  )State income taxes, net of federal expense
  
  
  (61,000
  )
  
  (60,000
  )Non-deductible interest expense
  
  
  2,000
  
  
  7,000Goodwill impairment
  
  
  
  
  
  67,000Change in valuation allowance
  
  
  461,000
  
  
  496,000Income tax expense
  
  $
  
  
  $
  The net operating loss carry forward at
December 31, 2003, for federal tax purposes of approximately $3,680,000 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
2003 and 2002 for rents were $52,380 and $53,280.  The Company owes H2C2 $8,730 at December 31, 2003.
Interest expense on related party notes payable was $19,000 and $25,772 for 2003 and 2002, respectively.  Accrued interest on related party notes at December 31, 2003 is
$33,115.
Shareholders and officers of the Company
provide legal and accounting services to the Company.  The following amounts were expended:
2003
  
  2002Robert Montgomery, attorney
  
  $
  14,693
  
  $
  20,250David Stewart, accountant  officer and director resigned during 2003
  
  $
  2,165
  
  $
  28,658Amounts owed to Robert Montgomery and David
Stewart at December 31, 2003 were $7,986 and $2,165, respectively.
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. 
The agreement with Gary Clayton terminated on January 19, 2004.
36

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.  Annual
salaries of $59,000 and $69,000 were provided in the employment
agreements.  The employment agreements
provide for termination clauses which allows the Company to terminate the
employee.  Termination of the employees was
completed in November 2003.  The
termination resulted in approximately two months pay owing under the terms of
the employment agreement.
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 Company, 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.

NOTE Q  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
  Options
  
  Exercise
  price
  Per ShareOutstanding at January 1, 2002
  
  
  1,522,100
  
  
  
  $
  .50 to 1.00Granted
  
  
  2,905,720
  
  
  
  
  .50 to .70Exercised
  
  
  
  
  
  
  
  Expired
  
  
  
  
  
  
  
  Forfeited
  
  
  
  
  
  
  
  Outstanding at December 31, 2002
  
  
  4,427,820
  
  
  
  
  .50 to 1.00Granted
  
  
  2,810,000
  
  
  
  
  .12 to .25Exercised
  
  
  
  
  
  
  
  Expired
  
  
  
  
  
  
  
  Forfeited
  
  
  
  
  
  
  
  Outstanding at December 31, 2003
  
  
  7,237,820
  
  
  
  $
  .12 to 1.0037

The following table summarized information about fixed stock options
outstanding at December 31, 2003.

Options Outstanding
  
  Options ExercisableRange of
  Exercise Prices
  
  Number
  Outstanding
  
  Weighted
  Average
  Remaining
  Contractual Life
  (Years)
  
  Weighted
  AverageExercise Price
  
  Number
  Exercisable
  
  Weighted
  AverageExercise Price$.12 to $1.00
  
  7,237,820
  
  6
  
  $ .44
  
  4,827,820
  
  $ .54NOTE R  SUBSEQUENT EVENTS AND COMMITMENTS
The Company entered into an employment
agreement with Michael Montgomery, Chief Financial Officer of the Company, on
January 1, 2004.  The agreement provides
for three years of employment with a base salary ranging from $72,000 to
$80,000 depending on the assigned duties. 
In addition, the agreement provides for the issuance of 500,000 options
annually.  The exercise price for the
options is $.125 and the options vest on the date of grant.  No options had been granted as of May 7,
2004.  The Company obtained financing of
$38,670 on April 16, 2004.  The
short-term secured note is payable in full, with interest at 8%, on July 31,
2004

NOTE S  SEGMENT REPORTING
Beginning in 2003, management began reporting
segment information for the automation and interconnect segments. At that time,
management had financial information for the two segments that was available to
make operating decisions.  During the
fourth quarter of 2003, the segment information for expenses was no longer
tracked separately.  This resulted in
the Company no longer having segment information available for financial
reporting.  Accordingly, the segment information
is not provided.  The Company previously
reported no segment information in 2002. 
The 2003 data is therefore consistent with prior annual financial
reporting.  The Company terminated a
portion of the automation and other sales in November 2003.  Automation sales previously consisted of
custom automation, machine tooling, and other sales.  In November 2003, custom automation sales were terminated.  Custom automation sales, exclusive of the
machine tooling and other sales, were $481,110 and $1,797,878 in 2003 and 2002,
respectively.
NOTE T  CONTINGENT LIABILITIES
The Company has entered into agreements with
a group of investors it has called the Plocher Group, for sake of discussion.
The name Plocher does not indicate any liability to an individual, but is
solely used to aid in the discussion of a collective group of shareholders. As
of December 31, 2003, the Company had verbally discussed possible methods of
forming a funding vehicle by which the Company could receive additional funding
from the Plocher Group and other, new investors, provide security for the new
investments and the original amount extended by the Plocher Group, which was
approximately $740,000 through equity investments, and have the Plocher Group
execute a covenant not to sue. The Plocher Group had given indications that
as a disgruntled group of shareholders, it might seek legal representation.
As a subsequent event, the Company signed
contractual documents to proceed with the agreements with the Plocher Group. As
of the date of this filing, the Company has not booked a liability for the
transaction, which would result in additional long term liabilities of $740,000
and funding expenses of $740,000, due to what it believes to be a lack of
performance by the parties relative to the contractual obligations. Management
is seeking legal guidance on this issue.

38

Due
  to continued operating losses and the need for additional capital in the 4th
  quarter of 2003, the Company entered into discussions with the Olympus Group
  as representatives of a group of shareholders previously identified above as
  the Plocher Group. The discussions focused on accomplishing the following
  goals: 1) providing a financing vehicle whereby existing members of the
  Plocher Group and/or new investors could provide funding for R-Tec for
  continued operational needs, 2) an indemnification agreement or Covenant Not
  To Sue, based on asserted claims of securities violations from the Plocher
  Group, and 3) the creation of a secured position for the investments made by
  the Plocher Group or others associated with them.The
  Olympus Group advised management that the Plocher Group wanted some form of
  security agreement in place as part of their agreement not to sue.  After input from legal counsel, management
  determined that it could not grant a secured position for the Plocher Groups
  original equity investment, solely for the purpose of resolving a threatened
  legal action which management believed was not well founded.  However, if the Plocher Group and/or new
  investors would provide additional consideration in the form of new funding
  to the Company, then Management determined it was in the best interest of the
  Company to include a covenant not to sue as part of any agreement with the
  Plocher Group.  This would avoid the
  cost and expense of threatened litigation. After numerous discussions between
  R-Tec management, the Olympus Group and legal counsel, it became clear to
  management that all three goals cited above, would have to be part of an
  agreement between the parties. Management clearly advised the Olympus Group,
  that the Company could not provide a secured position in its IP (intellectual
  properties) to the Plocher Group, without additional consideration or
  funding, and that it would not do so solely to satisfy the asserted threat of
  a shareholder lawsuit.With
  no other funding opportunities available to management and the belief that
  the Companys survivability in the short term was at stake without additional
  funding, management made the decision to enter into agreements on or about
  March 1, 2003 (on or about is used here due to the fact that different
  documents were signed on different dates due to the number of people and
  locations involved).The
  final agreements provided that a new limited liability company would be
  formed by the Plocher Group and other potential investors.  The express purpose of the new LLC was to
  provide funding to R-Tec by way of establishing a line of credit up to $1.2
  million dollars, at 10% interest, for a period of 36 months. The Plocher
  Group also signed a Covenant Not To Sue R-Tec as part of the
  agreement.  R-Tec executed a security
  agreement, the intent of which was to secure the Plocher Group for the
  original amount of funds invested, $740,000 and funds to be loaned to R-Tec
  through the soon to be established line of credit. Additionally, R-Tec was to
  make a UCC filing when the new funding came in.  Management clearly advised the Olympus Group on several
  occasions that the agreements would only be viable if new funding was
  provided to the Company. For additional specific details, please see
  documents incorporated by reference; 1) R-Tec Holding, Inc. Line of Credit
  Agreement, 2) Security Agreement, and 3) Covenant Not To Sue.Management
  now believes there are serious issues relating to the validity and
  enforceability of the agreements due to lack of or failure of
  consideration.  It does not appear
  that the Plocher Group itself or together with other investors has formed an
  LLC to provide funding to the Company. 
  It further does not appear that a line of credit has been established
  and in fact, no funding has been provided to the Company which has now found
  it necessary to explore other funding options.  Therefore, it is managements position that the agreements may
  either be void, voidable or not enforceable. 
  However, Management understands that the validity and enforceability
  of the agreements is a legal issue that may require judicial determination.Item
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None

39

Item 8A.  Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures:Under the
supervision and with the participation of our executive officers, we conducted
an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the Exchange Act), within 90 days of the filing date of
this report. Based on this evaluation, our officer, who serves as chief
financial officer and interim chief executive officer, concluded that our
disclosure controls and procedures are effective in alerting him on a timely
basis to material information relating to the Company required to be included
in our reports filed or submitted under the Exchange Act.
Changes
in Internal Controls:There
have been no material changes, including corrective actions with regard to
significant deficiencies or weaknesses, in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the evaluation referenced in the preceding paragraphs.
PART III
Item 9.  Directors and Executive Officers of the Registrant
The
following information is provided regarding the names, ages, offices, dates
appointed, and business experience of the Companys directors, executive
officers, and control persons.
Name
  
  Age
  
  Position
  
  Date
  AppointedDirectorsDouglas G. Hastings
  
  47
  
  Director, President/CEO
  
  Nov. 3, 1999Gary A. Clayton
  
  47
  
  Director, VP Engineering
  
  Nov. 3, 1999Rulon L. Tolman
  
  55
  
  Director, VP Investor Relations
  
  OriginalDavid R. Stewart
  
  51
  
  Director, Audit Committee
  
  Nov. 3, 1999William E. Browand
  
  56
  
  Director
  
  July 17, 2001Executive OfficersRobert C. Montgomery
  
  57
  
  Secretary
  
  Nov. 3, 1999Michael T. Montgomery
  
  48
  
  Treasurer, CFO, VP Finance
  
  March 1, 2001The
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.
40

Resignations of
Officers:


  William E.
  Browand resigned as a member of the Companys board of directors effective
  April 12, 2002.
  David R.
  Stewart resigned as a member of the Companys board of directors effective
  September 30, 2003.
  Gary A. Clayton
  resigned as a member of the Companys board of directors and VP of
  Engineering effective January 19, 2004.
  Douglas G.
  Hastings resigned as the Companys President and Chief Executive Officer
  effective December 3, 2003. Mr. Hastings continues as a director.Appointments of
Officers:


  Michael T. Montgomery was appointed as
  Interim President and Chief Executive Officer effective January 1, 2004. He
  continues to serve also as Treasurer, Chief Financial Officer, and VP of
  Finance.
  Marc C. Miller was appointed as a member of
  the Companys board of directors effective February 2, 2004.Rescindment of Appointments:


  Marc C. Millers appointment to the
  Companys board of directors was rescinded effective April 2, 2004Family 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 a Director 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, served as a Director and as Vice President of Engineering for the
Company until his resignation, effective January 19, 2004.  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 a Director of 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, served as a Director of the Company, and served as the Companys
financial expert on the audit committee, until his resignation, effective
September 30, 2003. Mr. Stewart 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.

Michael T. Montgomery,
Boise, Idaho, is currently serving as Interim President and Chief Executive
Officer, 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 of international business management and government
negotiations. He has owned and operated several businesses prior to his
employment with the Company.

41

Robert C. Montgomery,
Boise, Idaho, is currently serving as the Companys Secretary. 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.

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.

Audit Committee
Financial Expert: 
Prior to his resignation from the Board of Directors, David Stewart
served on the Companys audit committee as its financial expert. Following Mr.
Stewarts resignation, the Company has not been able to attract a qualified
financial expert to serve on its audit committee, partly due to the Companys
inability to provide directors and officers insurance coverage. The Company is
attempting to find a qualified expert who will sit on its audit committee.

Code of Ethics:  The Company has not adopted a code of ethics
but is attempting to do so and will come into compliance. Once adopted, the
Company will also file a copy of its code of ethics and provide a copy of said
code of ethics on its internet website.

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, 2003, the Company finds the
following information is appropriately disclosed:  None of the officers, directors and 10% shareholders filed Form 4
during the year or Form 5 for calendar year 2003.

Item 10.  Executive Compensation

The 2003 salary and stock remuneration paid to the officers and
directors and other benefits received by each of them are set forth below in a
summary compensation table:

SUMMARY COMPENSATION TABLE

Long Term
  CompensationAnnual
  Compensation
  
  Awards
  
  Payouts(a)
  
  (b)
  
  (c)
  
  (d)
  
  (e)
  
  (f)
  
  (g)
  
  (h)
  
  (i)Name
  and
  Principal
  Position
  
  Year
  
  Salary($)
  
  Bonus($)
  
  Other
  Annual
  Compen-
  sation ($)
  
  Restricted
  Stock
  Award(s)
  ($)
  
  Securities
  Underlying
  Options/
  SARS (#)
  
  LTIP
  Payouts
  ($)
  
  All other
  Compen-
  sation
  ($)DouglasG.HastingsCEO/Pres
  
  
  2001
  
  $
  86,058
  
  
  
  
  
  
  
  
  
  
  
  50,000
  Options2002
  
  $
  86,058
  
  
  
  
  
  
  
  
  
  
  
  50,000
  Options2003
  
  $
  71,805
  
  
  
  
  
  
  
  
  
  
  
  500,000
  Options42

The Company
did not have any other executive officers whose total annual salary and bonus,
as so determined, exceeded $100,000.

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.

On June 12,
2003. the Company granted options to officers and board members to purchase
shares of common stock at $ .25 per share as follows: 500,000 options each to
Douglas G. Hastings, Gary A. Clayton, Rulon L. Tolman, Michael T. Montgomery,
250,000 options to David Stewart, and 150,000 options to Robert 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, 2003.

Name and Address
  of Beneficial Owner
  
  Amount & Nature
  of Benef. Owner
  Common - Preferred
  
  Percent
  Common - Preferreda.  MORE THAN FIVE PERCENT SHAREHOLDERSL. William
  Glazier
  121 Tyson Dr.
  Cottage Grove, OR 97424
  
  
  250,000
  
  
  569,345
  
  
  1.09
  %
  
  21.51
  %Ronald J.
  Tolman
  2326 Bruins Avenue
  Boise, Idaho 83704
  
  
  694,340
  
  
  600,427
  
  
  3.03
  %
  
  22.69
  %More than
  five percent
  Shareholders as a group.
  (2 persons)
  
  
  944,340
  
  
  1,169,772
  
  
  4.13
  %
  
  44.20
  %b.  DIRECTORS AND EXECUTIVE OFFICERSGary A.
  Clayton (1)(2)(3)
  1471 E. Commercial Ave
  Meridian, Idaho 83642
  
  
  4,160,659
  
  
  -0-
  
  
  18.19
  %
  
  -0-
  %Douglas G.
  Hastings (1)(2)(4)
  1471 E. Commercial Ave
  Meridian, Idaho 83642
  
  
  4,160,657
  
  
  -0-
  
  
  18.19
  %
  
  -0-
  %Rulon L.
  Tolman (1)(2)(5)
  7213 Potomac Drive
  Boise, Idaho 83704
  
  
  1,009,250
  
  
  532,478
  
  
  4.41
  %
  
  20.12
  %David R.
  Stewart (2)(6)
  9486 Fairview Ave
  Boise, Idaho
  
  
  103,490
  
  
  -0-
  
  
  0.45
  %
  
  -0-
  %Michael T.
  Montgomery (1)(7)
  3072 Maywood Ave.
  Boise, Idaho 83704
  
  
  115,000
  
  
  -0-
  
  
  0.50
  %
  
  -0-
  %Robert C.
  Montgomery (1)(10)
  2160 S. Twin Rapid Way
  Boise, Idaho 83709
  
  
  254,876
  
  
  149,506
  
  
  1.11
  %
  
  5.65
  %All Officers
  and Directors
  as a Group (6 persons)
  
  
  9,803,932
  
  
  681,984
  
  
  42.85
  %
  
  25.77
  %Total Shares
  Issued and Outstanding  as of 12/31/02
  include:Common  22,878,994    Preferred    2,646,09443

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

(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
13.93 % of the after-conversion issued and outstanding common stock.

44

Securities authorized for issuance under
equity compensation plans

Plan
  category
  
  Number of
  securities to be
  issued upon exercise of
  outstanding options,
  warrantsand rights
  
  Weighted
  average exercise
  price of outstanding options,
  warrants and rights
  
  Number of
  securities
  remaining available for future
  issuance(a)
  
  (b)
  
  (c)Year 2001Equity compensation plans
  not approved by security holders
  
  
  1,522,100
  
  
  
  $
  .70
  
  
  
  477,900Year 2002Equity compensation plans
  not approved by security holders
  
  
  1,854,020
  
  
  
  $
  .57
  
  
  
  145,980Year 2003Equity compensation plans
  not approved by security holders
  
  
  2,810,000
  
  
  
  $
  .25
  
  
  
  0Item 12.  Certain Relationships and
Related Transactions

The Company does not have any transactions involving certain relationships
in excess of $60,000.

Item 13.  Exhibits, Financial Statement
Schedules, and Reports on Form 8-K

(a)  The following exhibits are filed as a part of this Form
10-KSB:

1)
  Consolidated
  Financial StatementsThe
  Consolidated Financial Statements, the Notes to Consolidated Financial
  Statements, and the Independent Auditors Report are presented in Item
  8.  Financial Statements and
  Supplementary Data of this Form 10-KSB.
  Consolidated
  Balance Sheet as of December 31, 2003.
  Consolidated
  Statement of Operations for the years ended December 31, 2002, and 2003.
  Consolidated
  Statements of Cash Flows for the years ended December 31, 2002, and 2003.
  Consolidated
  Statements of Shareholders Equity for the years ended December 31, 2002, and
  2003.45


  Notes to
  Consolidated Financial Statements
  Independent
  Auditors Report2)
  ExhibitsA list of
  the exhibits required to be filed as part of this report is set forth in the
  Index to Exhibits, which immediately precedes such exhibits and are either
  included as part of this report or are incorporated by reference.(b) Reports on Form 8-K.

On December
  9, 2003, we filed a Form 8-K with the Securities and Exchange Commission to
  report the resignation of Douglas G. Hastings, President and CEO, and to
  announce the termination of certain operations of our custom automation
  sales.46

R-TEC HOLDING, INC.

INDEX TO EXHIBITS

Filed with the annual Report on Form 10-KSB
for the Year Ended December 31, 2003.

Number
  
  Description31.1
  
  CEO/CFO
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
  
  Section 906
  Certification of Chief Executive Officer and Chief Financial Officer of R-Tec
  Holding, Inc.99.1
  
  Form NT 10-K
  Notice of Late Filing, filed March 31, 2003, and incorporated herein by
  reference.47

Item 14.  Principal Accountant Fees and
Services

The
following information is furnished for the purpose of disclosing accounting
fees related to the Companys audit expenses and tax preparation expenses for
each of the last two fiscal years.

Audit Fees and Tax Preparation Fees of
Principal Accountants

Name of Principal Accountant
  
  Year
  
  Audit Fees
  
  Tax
  Preparation
  Fees
  
  OtherFeesBalukoff,
  Lindstrom & Co.
  
  2002
  
  $
  20,745
  
  
  
  
  
  
  $
  525Balukoff,
  Lindstrom & Co.
  
  2003
  
  $
  30,275
  
  
  
  
  
  
  $
  100Stewart
  & Co.
  
  2002
  
  
  
  
  
  $
  2,780
  
  
  $
  5,630Stewart
  & Co.
  
  2003
  
  
  
  
  
  $
  2,16548

SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

R-TEC HOLDING, INC./s/ Michael
  T. MontgomeryMichael T.
  Montgomery
  Interim President and CEO
  Chief Financial OfficerDate:  May
  7, 2004Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

R-TEC HOLDING, INC./s/ Michael
  T. MontgomeryMichael T.
  Montgomery
  May 7, 2004
  
  Interim
  President and CEO
  Chief Financial Officer/s/ Douglas
  G. HastingsDouglas G.
  Hastings
  May 7, 2004
  
  Director/s/ Rulon J.
  TolmanRulon J.
  Tolman
  May 7, 2004
  
  Director49

SUPPLEMENTAL
INFORMATION

Pursuant to Section 15(d) of the Act:

As of the date of this filing,
no annual report or proxy statement has been sent to shareholders for the year
ending December 31, 2003. The Company intends to furnish its shareholders with
this information at a subsequent date and will notify the Commission when it is
sent.

50