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

                                    FORM 10-KSB

                                    (Mark One)
           [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
           EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED April 30, 2006

         [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD _______ to __________.

                         COMMISSION FILE NUMBER: 000-28307

                              NESCO INDUSTRIES, INC.
          ---------------------------------------------------------------
          (Name of the small business issuer as specified in its charter)

            Nevada                                           13-3709558
(State or other jurisdiction of                     (IRS Employer Identification
  incorporation or organization)                                No.)

           305 Madison Avenue
           New York, New York                                   10165
(Address of Principal executive offices)                      (Zip Code)

          Issuer's telephone number, including area code: (212) 986-0886

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

                                                        Name of Each Exchange
    (Title of each class)                                on Which Registered
    ---------------------                                -------------------
Common Stock, par value $0.001                                  None

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act |_|

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer'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. |X|

Indicate by check mark whether the issuer is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes |_| No |X|

The issuer's revenues for its most recent fiscal year were $1,001,000.

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, or the average bid and asked price of such common equity, at July 7, 2006,
was approximately $600,000.

At July 7, 2006, the issuer had 20,136,225 shares of Common Stock outstanding.
Transtional Small Business Disclosure Format: Yes |_| No |X|

Documents incorporated by reference: None

<PAGE>

                INTRODUCTORY NOTE AND FORWARD-LOOKING STATEMENTS

Some of the statements contained in this report discuss our plans and strategies
for our business or state other forward-looking statements, as this term is
defined in the Private Securities Litigation Reform Act of 1995. Statements that
are not statements of historical facts may be deemed to be forward-looking
statements. The words "anticipate," "believe," "estimate," "expect," "plan,"
"intend," "should," "seek," "will," and similar expressions are intended to
identify these forward-looking statements, but are not the exclusive means of
identifying them. These forward-looking statements reflect the current views of
our management. Forward-looking statements frequently convey our current
expectations regarding, among other things,

      o     success of management;
      o     transition in business focus;
      o     achievement of operational goals;
      o     current and new products and services;
      o     dependence on a small number of customers;
      o     ability to secure financing;
      o     merger and acquisition prospects;
      o     formation of strategic relationships;
      o     current and potential claims, actions and proceedings;
      o     research and development activities;
      o     regulatory submissions and approvals;
      o     financial condition, results of operations and cash flows; and
      o     similar operating matters.

However, many factors may cause actual results, performance or achievements to
differ materially from those expressed in, or implied by, these forward-looking
statements. Such factors include inaccurate assumptions and a broad variety of
risks, uncertainties and contingencies, some of which are known and others of
which are not. Some of the known risks, uncertainties and contingencies are
discussed in "Part I, Item 1. Business - Factors and Risks that May Affect
Future Results" elsewhere in this report and should be considered together with
any forward-looking statement. No forward-looking statement is a guarantee of
future results or events, and one should avoid placing undue reliance on such
statements. We expressly disclaim any obligation or undertaking to update or
revise forward-looking statements made in this report or in our other reports
filed with the SEC.

                                     PART I

Item 1. DESCRIPTION OF BUSINESS

Business

      Overview and Corporate History

Nesco Industries, Inc. (hereinafter referred to as "Nesco" or, together with its
wholly owned subsidiaries, the "Company") is a Nevada corporation whose
principal business is conducted through its wholly-owned subsidiaries, Hydrogel
Design Systems, Inc. ("HDS") and, since January 2006, Foam Manufacturing, Inc.
("FMI"). HDS is engaged in the manufacturing, marketing, selling and
distribution of hydrogel, an aqueous polymer-based radiation ionized gel, which
is used in various medical and cosmetic consumer products. FMI is engaged in the
manufacture and sale of patented hydrophilic urethane foam products,
polyurethane gels and moisture managed foam footwear inserts for use in the
cosmetic, medical, and household markets. The Company acquired the rights to
produce the FMI products during October 2005, when it entered into an agreement
which grants it the exclusive rights to manufacture and distribute these
products in North America as described further in "Business of the Issuer"
below. Between January 2006 and April 2006, FMI's activities consisted of
start-up activities and in April 2006 FMI made its first shipment to a customer.
The Company expects FMI's operations to constitute a significant portion of its
revenues going forward and one customer is significant to FMI's revenues.
Subsequent to April 30, 2006, for the two months ended June 30, 2006, FMI's
sales to that one customer were approximately $128,000 (unaudited) out of a
total two month consolidated sales of approximately $290,000 (unaudited).


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<PAGE>

Prior to April 29, 2004, Nesco was a "shell company" having ceased business
operations and become inactive in May 2003. Prior to May 2003, Nesco was a
provider of asbestos abatement and indoor air quality testing, monitoring and
remediation services. Nesco provided services through its wholly-owned
subsidiary National Abatement Corporation ("NAC") and other wholly-owned
subsidiaries including NAC/Indoor Air Professionals, Inc. ("IAP") and NAC
Environmental Services, Inc. ("NACE").

On April 29, 2004, Nesco entered into a share exchange agreement with HDS, a
Delaware privately held corporation, whereby HDS became a majority-owned
subsidiary of Nesco and the holders of HDS common stock and debt acquired a
majority interest of Nesco. This exchange (the "Share Exchange") was completed
on May 25, 2004. The accounting for the transaction, commonly called a reverse
acquisition, resulted in a recapitalization of HDS, which was treated as the
accounting acquirer. The acquired assets and assumed liabilities of Nesco were
carried forward at their historical values which approximated fair value (with
the exception of deferred liabilities for which there was no legal continuing
obligation, which were not recorded). HDS's historical financial statements were
carried forward as those of the combined entity.

      Business of the Issuer

Through its HDS subsidiary, the Company develops, manufactures and markets high
water content, electron beam cross-linked, aqueous polymer hydrogels used for
wound care, medical diagnostics, transdermal drug delivery and cosmetics. These
gels are produced using unique proprietary manufacturing technologies which
enable the Company to develop, manufacture and market electron beam cross-linked
aqueous polymer sheet hydrogels, hereafter referred to as "gels". Through
discussions with various customers of our products and through market research,
to the best of management's knowledge and belief we are one of two known
manufacturers in the world of these gels. The Company specializes in custom gels
capitalizing on proprietary manufacturing technologies. These capabilities allow
us to manufacture gels which meet the rigid specifications of our customers, a
key requirement in gels used for delivery of active ingredients, the most
rapidly growing component of the hydrogel industry.

On October 3, 2005, the Company, on behalf of a wholly-owned subsidiary to be
formed, entered into a manufacturing agreement (the "Dicon Agreement") with an
entity affiliated with a Director of the Company (H.H. Brown Shoe Technologies,
Inc. doing business as Dicon Technologies, "Dicon"). The Agreement grants the
Company the exclusive rights to manufacture patented hydrophilic urethane foam
products, polyurethane gels and moisture managed foam footwear inserts and to
distribute, along with Dicon, these products in North America in consideration
of a 7-10% royalty based on sales. The Agreement also provides for a supply
agreement between the Company and Dicon. Products manufactured under this
Agreement are being sold for use in cosmetic, medical, and household markets
including the foot-care market under the brand name DRYZ, a registered
trademark. In December 2005, Foam Manufacturing, Inc. ("FMI") was formed as a
wholly-owned subsidiary of the Company to control this activity and in February
2006, FMI entered into a lease for a manufacturing facility. Approximately
$650,000 of equipment has been purchased from Dicon in connection with the
Agreement. FMI's activities have been funded by subsidiary senior secured notes
that mature on July 31, 2006 and an equipment note with Dicon. See Notes 4, 6, 7
and 13 of the consolidated financial statements contained in Part 2, Item 7 of
this report for additional information.

In acquiring the manufacturing rights under the Dicon Agreement we have acquired
rights to produce products that are similar to our HDS products and that address
many of the same markets, customers and end users as the HDS products.
Furthermore, there are production similarities between the FMI manufacturing
processes and the HDS manufacturing processes. We have located the FMI
manufacturing facility within close proximity to the HDS manufacturing facility.
Therefore, our strategy in acquiring the rights under the Dicon Agreement is to
achieve production, management and marketing synergies with our HDS business.

Our HDS gels exhibit significant potential in the following high growth fields:
topical therapeutics in moist wound/burn healing applications; in trans
(systemic) and intradermal (non-systemic) delivery of prescription and
non-prescription medications; cosmetic skin care; and components in medical
diagnostics. FMI manufactures products derived from "Hydrophilic Urethane
Chemistry." The hydrophilic system has two parts: a hydrophilic pre-polymer
phase and a water phase. During the water phase we introduce various water
soluble active ingredients into our products. Current ingredients incorporated
into our proprietary process include: health additives, moisturizers, super
absorbents, soaps, detergents, antibacterials, carbons, electrostatic
dissipative agents, fragrances, and waxes.


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<PAGE>

The Company has developed successful strategic relationships in each of these
categories with partners who are meaningful participants in these markets,
including the market leaders in several medical device categories and the
world's leading cosmetic companies.

Hydrogels are gel-like or colloidal substances made of water and solids. They
can be created chemically (through a combination of ultra violet cross-linking
and chemical interface), or by mixing polymer and water then exposing it to an
electron beam creating a "sheet" of water. Currently, and for the foreseeable
future, all of the hydrogel products that we produce are electron beam
cross-linked, water and polymer gels, a category in which our hydrogels have a
significant competitive advantage, in part due to the following product
characteristics: painless adhesion to the human body; stability of form and
composition; purity; reproducibility (manufacturing high quality product on a
consistent basis); compatibility with active ingredients; and high water
content.

Hydrophilic Urethane Foam comprises a prepolymer phase with a high concentration
of water to form a plastic membrane that wicks and absorbs up to 160 times its
weight. In the water phase, many ingredients can be incorporated in the foaming
process. These ingredients become an integral part of the water based membrane
and can be released over time by heat or pressure. The process lends itself to
many industries such as apparel, sporting goods, athletic, medical, footwear,
and cosmetic.

Many of the competitive products feature physical characteristics which are less
desirable than those of the Company's gels and foams. These include aggressive
skin bonding, chemical and form instability, lack of uniformity, low water
content, odor and active receptivity issues.

The Company's products are manufactured using proprietary and non-proprietary
mixing, coating, drying and cross-linking technologies. Together, these
proprietary technologies enable us to produce gels and foams that can satisfy
rigid tolerance specifications with respect to a wide range of physical
characteristics - thickness, water content, adherence, absorption, vapor
transmission, release rates - while maintaining product integrity. These
manufacturing technologies allow the Company to participate in the development
of FDA regulated medical devices. We are currently participating in other highly
regulated, confidential projects. Management believes that the Company has
sufficient capacity in its core assets to address the anticipated manufacturing
demand for all current and planned projects.

In addition to our ability to specifically regulate the aforementioned physical
characteristics of the gels and foams, we have the manufacturing technology to
offer broad choices in selection of liners, allowing customers to create even
tighter tolerances in vapor transmission and active ingredient release rates,
while personalizing color and texture, characteristics critical in the cosmetic
category.

      Products and Services

The Company manufactures and markets electron-beam cross-linked sheet gels,
hydrophilic urethane foam and for use as wound/burn dressings with and without
active ingredients, components in certain medical devices, transdermal and
intradermal delivery of medication, and topical application of non-prescription
drugs, other skin care treatments, cosmetics and other commercial products. We
market our own brand of moist wound/burn dressings under the AQUAMATRIXTM brand
name, and we are currently developing additional line extensions of this
product. In addition, the gels and foams are prepared as components for products
distributed by our customers under their brand names. In addition to
manufacturing roll stock, the Company offers its customers converting services,
which creates competitive advantage in pricing while expediting the production
process. The Company also specializes in cutting sheet gels and roll stock foam
to customers' specified shape, a converting process requiring technological
expertise and pouching.

Hydrogels and hydrophilic urethane foam are now being marketed in the United
States or abroad for many different applications:

      Moist Wound and Burn Dressings. Dressings made from hydrogels and/or foams
      have long been used for the treatment of wounds and burns. Clinical trials
      have demonstrated the benefits of moist wound healing versus traditional
      dressings. Some of these benefits include immediate anti-inflammatory


                                       3
<PAGE>

      effects, keeping the wound bed moist allowing for the freer cell flow and
      less scarring, increased absorption of exudate and accelerated healing.
      The current market for moist wound healing dressings is estimated to be in
      excess of $2 billion worldwide and growing at 10% per annum. In addition,
      "active wound healing" dressings, those with ingredients which further
      provide healing benefits, are estimated to generate global sales of over
      $600 million with annual growth of over 20%.

      Hydrogel and Foams as A Method of Drug Delivery. Patches are a relatively
      new method of delivering medication that has important advantages over
      other more traditional methods of drug delivery. As a system of drug
      delivery, hydrogel and/or foam patches are less intrusive, painless, can
      medicate for preplanned time periods, provide the potential for a release
      of medication more consistent with the body's own glandular activity,
      thereby avoiding dosage spikes and, or, digestive alteration, and minimize
      side effects apparent in more traditional delivery methodologies of
      injection or ingestion.

      Other Medical Applications. Hydrogel and foam patches are being used for
      transdermal applications such as: hormone replacement therapy and
      contraception; treatment of acne, shingles, diabetes and motion sickness;
      treatment of angina with nitroglycerin; treatment of smoking addiction
      using nicotine; and palliatives, i.e., pain relievers, such as lidocaine.

      Non-Prescription Therapeutic Applications. Hydrogel and foam patches are
      used in the medical community, and also directly marketed to consumers for
      the following uses: topical application of OTC drugs such as
      non-prescription acne treatments, pain relievers, and diet preparations;
      cough suppressants; treatment of warts, calluses and corns; pain relief.

      Cosmetic Applications. Hydrogel and foam patches and applications are
      being used to deliver cosmetics, such as skin care products to consumers
      and skin care providers for uses that include; moisturizers, face masks,
      cooling masks and applicators.

      Customers & Markets

      Moist Wound Healing. The Company markets products under its proprietary
      brand AQUAMATRIXTM as well as supplying products to developers and
      distributors of prescription and OTC wound healing products for
      redistribution to healthcare professionals and retailers. The benefits of
      the Company's hydrogel and foam wound healing products include reduced
      scarring and pain, greater speed of healing and increased absorption of
      exudate. The Company expects the markets for its wound healing products to
      continue to expand due to the growing recognition by professionals and
      consumers of the benefits of moist wound healing.

      Medical Device Manufacturers. The Company has targeted the high quality,
      medical device manufacturers, e.g. monitoring electrodes and devices,
      defibrillator pads, as a core segment of its revenue stream.

      Transdermal Delivery of Prescription Drugs and OTC Treatments. The Company
      actively seeks new applications for two types of transdermal delivery
      through patches which adhere to the skin and are impregnated with active
      ingredients; and through iontophoresis, which drives the active
      ingredients through the skin by use of controlled electrical currents.
      Iontophoresis allows for greater control over the delivery of active
      ingredients.

      We are actively involved in various development projects for use of
      hydrogels and foams in transdermal delivery of specific ingredients. We
      also sell our products to manufacturers and distributors of
      non-prescription medications.

      Cosmetics and Other Consumer Products. We currently manufacture hydrogels,
      hydrogel patches and foam products for some of the leading U.S. cosmetics
      companies, among others. These products include OTC skin care preparations
      and other products for cosmetic use.


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<PAGE>

      Direct Retailing. We are exploring various opportunities for the
      manufacture and distribution of OTC therapeutic, skin care and cosmetic
      products using hydrogel and foam products through such retailers as chain
      drug, food and mass merchandise stores under co-branding arrangements.

For the year ended April 30, 2006, the Company filled orders from approximately
16 different customers. Approximately 63% of the annual revenue is attributable
to 4 of these customers which each had revenues in excess of 10% of our annual
revenues individually with our largest customer accounting for approximately 23%
of annual revenues.

      Technology & Manufacturing

Hydrogels and Hydrophilic Urethane Foams are manufactured using similar
processes. Both are made by introducing a hydrophilic polymer (solid) into
water, creating a feed mix. Active ingredients such as OTC medication, and skin
care, wound healing or other materials can be added before or after
cross-linking. Materials that do not survive the irradiation process or
dehydration process are added after the cross-linking process is completed. Once
the products have been mixed and cross-linked, or in the case of the foams
dehydrated, they form sheets which can be delivered to customers or first cut
and shaped according to customer specifications. Management believes that many
of the processes described above are proprietary to the Company and provide
significant competitive advantages.

Proprietary Technologies

      o     Proprietary Mixing. Management believes that the Company is able to
            manufacture hydrogel feed mixes with far greater homogeneity than
            those of the competition. This is critical especially as it relates
            to the dosing of active ingredients. In addition, the Company's
            proprietary mixing technology allows for the incorporation of
            sensitive materials that may degrade if subjected to other types of
            mixing.

      o     Proprietary Coating. The Company's proprietary coating technology
            enables it to handle the gels properly even though they are
            extremely viscous (thick and resistant to flow). The Company has
            achieved coating tolerances which have allowed it to coat materials
            as thin as 0.005 inches with a margin for error of typically less
            than 5%. Thickness controls are critical with respect to the
            performance of many of the end products utilizing the Company's
            hydrogels including medical electrodes, transdermal delivery patches
            and cosmetic patches. We have also developed coating methodology
            which minimizes imperfections such as wrinkling in the end product
            by significantly reducing line tension. This proprietary know-how
            allows us to manufacture high quality, consistent product which meet
            the exacting standards of the Company's customers.

      o     Proprietary Cross-linking Technology. The Company cross-links its
            hydrogels using an electron beam accelerator. Electron beam
            cross-linking is achieved through the introduction of the high
            energy field, created by the accelerated electrons, which causes the
            release of hydrogen atoms thereby causing carbon molecule covalent
            bonding. The creation of longer chains of the polymer in the gel
            increases its molecular integrity, giving the gel characteristics
            which make it useful in a variety of products.

The Company's electron-beam cross-linking process is one of three types of
cross-linking used in the industry. The other types used are ultra violent
cross-linking and chemical cross-linking. The benefits of electron beam
cross-linking include: precise control of the amount of polymer cross-linking;
other types allow for the continuation of cross-linking over a period of time;
no need for chemical cross-linking agents which may complicate or interfere with
other additives or active ingredients; and the ability to manufacture high
quality hydrogels on a consistent basis.

The physical characteristics can be further modified by varying the percent of
polymer cross-linking and the way in which the high energy field is delivered.
There are three variables in the use of an electron beam accelerator for
cross-linking of hydrogels: time of exposure of the target material to the
electron stream; voltage (electrical potential); and amperage (strength of the
electrical current).

The Company believes that its methods of managing these three variables make it
possible to produce high quality gels matching customer specifications as to a
wide range of characteristics. These methods are proprietary to the Company.


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<PAGE>

We own and operate a Radiation Dynamics, Inc., ("RDI") Dynamitron IEA 1500-40
Industrial Electron Accelerator.

The uses for such particle beam accelerators include but are not limited to:
sterilization of medical products and devices; modification of polymers,
polymerization and de-polymerization; crosslinking of thermoplastics; crystal
modification; grafting; de-infestation of spices, fruits and vegetables; cold
pasteurization of foods, meats and seafood; sterilization of wastes; treatment
of sewage; controlled degradation of PTFE (Teflon); cold curing of resins and
adhesives; de-infestation of wood chips and pulp products; coloring gemstones;
pollution control; and treating wire, cable and tubing.

The RDI Dynamitron Industrial Electron Accelerator has been customized to handle
the cross-linking of the type of materials the Company uses, but can also be
used for several of the other potential uses such as coloring gemstones and
treating wire, cable and tubing. Replacement cost of the RDI Accelerator and
processing equipment is estimated to be in excess of $7 million. The delivery
and installation process is time-consuming with replacement estimated to take
2.5 to 3 years. The Company's equipment has a useful life of approximately 20
years and provides annual production capacity in excess of 6,000 hours. The
Company's current utilization is significantly less than capacity.

      Competition

The opportunity for aqueous polymer hydrogels is significant. Our proprietary
competitive manufacturing advantages, along with the high barrier to entry (the
substantial cost of acquiring an electron beam as compared to other
cross-linking devices and the cost and extended time required for installing
this beam) and current minimal level of competition for high performance gels,
give us the opportunity to be dominant in the outlined focus application
categories. Awareness of our product, low cost, speed to market, and unique
manufacturing techniques, are advantages which will be conveyed to our customer
base through a combination of consumer product entries, expansion within current
OEM base, institutional reach programs, e.g. trade magazines, trade shows, and
through senior management contacts. The opportunity for hydrophilic foams is
also significant. Our competitive manufacturing capabilities along with our
rights to certain patented foam based products gives us an opportunity to play
an expanding role in the growing market for such products.

      Government Regulation

There is no required government regulation with respect to our hydrogel and foam
related products at this time. While some applications of the hydrogels and
foams fall under the jurisdiction of the FDA, we are not currently manufacturing
any medical foams and the hydrogels are generally classified as Class I exempt
devices and the majority of the hydrogel products that we manufacture are
thereby exempt from the FDA filing of any regulatory submissions and/or
pre-market notification requirements (this would include 510K, NDA and PMA
submission). To the extent that any FDA regulatory submissions are required, we
file these submissions and maintain all appropriate documentation. With respect
to registering the manufacturing facility with the FDA under the Code of Federal
Regulations, 21CFR820.1, Scope: Part A, it is stated that the regulation does
not apply to manufacturers of component parts of finished devices. At the
current time, hydrogels and foams are sold as component parts to various medical
device/cosmetic manufacturers. If at any time in the future we manufacture
products which would require such filings or registration, we will take the
appropriate steps to comply.

      Sources and availability of raw materials; principal suppliers

Our principal suppliers for the two polymers that we primarily use in the
manufacture of our hydrogels, polyethylene oxide and polyvinylprolidone are Dow
Chemical and BASF, respectively. Although we have not experienced significant
production delays attributable to supply changes, we believe that, for the
polymers used to make our current hydrogels, alternative sources of supply would
be difficult to develop over a short period of time. Because we have no direct
control over our third-party suppliers, interruptions or delays in the products
and services provided by these third parties may be difficult to remedy in a
timely fashion. In addition, if such suppliers are unable or unwilling to
deliver the necessary raw material or products, or to deliver them at prices
that we find acceptable, we may be unable to redesign or adapt our technology to
work without such raw materials or products or find alternative suppliers or
manufacturers. In such events, we could experience interruptions, delays,
increased costs or quality control problems.


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<PAGE>

      Patents, Proprietary Rights and Trademarks

The Company's policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies on trade secret protection for its
confidential and proprietary information.

The Company holds no issued patents related to the hydrogel products, but has
several patents pending and holds a registered trademark on AQUAMATRIXTM which
is used on its hydrogels. Under our agreement with Dicon Technologies, Inc. we
obtained the right to manufacture and market foam products under U.S. Patent No.
5,976,616 - Polyurethane Foam Materials With Skin Conditioning Additives, U.S.
Patent No. 6,566,576 B1 - Hydrocolloid Foam Medical Dressings and Method Of
Making The Same, U.S. Patent No. 6,706,775 - Polyurethane Foam Products with
Controlled release of Agents and Additives, as well as certain other patent
applications and patents pending.

      Employees

As of July 7, 2006 the Company had nine employees, two in administration and
seven in manufacturing and quality control. Additionally, the Company has
utilized the services of temporary factory workers in the operations of its FMI
subsidiary. Approximately 10 such workers were utilized as of July 7, 2006 and
plans are being implemented to either hire a full time workforce for FMI
including potentially some of these temporary resources.

We believe we have good relations with our employees and other human resources,
and have never incurred a significant work stoppage due to any strike or protest
by our employees.

      May 25, 2004 Share Exchange

On April 29, 2004, Nesco Industries, Inc. (for purposes of this discussion of
the May 25, 2004 Share Exchange, "OLDCO") entered into a share exchange
agreement with Hydrogel Design Systems, Inc. ("HDS"), a Delaware privately held
corporation, whereby HDS became a majority-owned subsidiary of OLDCO and the
holders of HDS common stock and debt acquired a majority interest of OLDCO. This
exchange (the "Share Exchange") was completed on May 25, 2004. The accounting
for the transaction, commonly called a reverse acquisition, resulted in a
recapitalization of HDS, which was treated as the accounting acquirer. The
acquired assets and assumed liabilities of OLDCO were carried forward at their
historical values which approximated fair value (with the exception of deferred
liabilities for which there was no legal continuing obligation, which were not
recorded). HDS's historical financial statements were carried forward as those
of the combined entity (referred to in this discussion of Share Exchange, as
"Nesco"). HDS is engaged in the manufacture, marketing, selling and distribution
of aqueous polymer-based radiation ionized gels ("gels" or "hydrogels") used in
various medical and cosmetic consumer products.

Nesco had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the exchange
agreement. However, Nesco does not have the required number of authorized shares
of common stock to complete the exchange on this basis. As such, it agreed to
issue shares of its newly designated Series B Convertible Preferred Stock
("Series B Preferred Stock") instead of common stock. Upon filing of a
Certificate of Amendment to the Certificate of Incorporation to increase the
number of shares of common stock which Nesco is authorized to issue, each share
of the Series B Preferred Stock will be automatically converted into 750 shares
of Nesco common stock. Such amendment requires action by, or notification to,
shareholders. Such notification has been reflected in a preliminary information
statement filed with the Securities and Exchange Commission ("SEC") on November
16, 2004. The information statement cannot be completed until an amended
information statement is filed and reviewed by the SEC. Upon completion of this
process, the Company will file the Certificate of Amendment and issue the common
stock.


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<PAGE>

As part of this transaction, OLDCO conditionally transferred its three
wholly-owned subsidiaries, NAC, IAP and NACE under the terms of a stock purchase
and assumption agreement to a newly formed corporation, NAC Calabria Acquisition
Corporation, controlled by Ronald Kuzon, who had been an interim officer and
consultant of OLDCO. The transferee assumed all liabilities and obligations with
respect to these subsidiaries and agreed to indemnify Nesco against any claims
and, in exchange therefore, received 3,000,000 shares of common stock of OLDCO
and certain related registration rights. As additional consideration for the
indemnification by the transferee, Nesco agreed that if the transferee cannot in
good faith resell the shares of common stock in an arm's length transaction
during the twelve month period immediately following the closing for a price
equal to the lesser of (i) all liabilities resulting from the agreement between
NAC and its labor union plus legal fees or (ii) $330,000, then the Company will
repurchase from the transferee 2,400,000 of the common shares at that amount
upon written notice from the transferee requesting such. On May 25, 2005, the
Company agreed to extend the put right granted to the transferee until May 25,
2006 subject to the condition that the right may not be exercised until after
January 1, 2006. The repurchase of the 2,400,000 common shares, which are
subject to redemption by the transferee, are included in current liabilities at
an aggregate of $330,000, the maximum amount the Company would be required to
pay in the event of a redemption. On May 25, 2006, this put right expired
unexercised according to its terms.

In addition to the transfer of its subsidiaries, OLDCO was required to convert
its outstanding shareholder debt to equity. On May 11, 2004, prior to the date
of the closing, the holders of this debt in the aggregate principal amount of
$952,501 agreed to exchange the debt for an aggregate of 20,000 shares of
OLDCO's Series B Preferred Stock which is convertible into 15,000,000 shares of
Nesco's common stock. OLDCO was also required to obtain the consent to cancel an
aggregate of 602,500 special warrants prior to the closing. Certain holders of
these special warrants were granted shares of Nesco's common stock in the
exchange as part of the common advisor shares issued. OLDCO's Series A Preferred
shareholders also agreed, that upon completion of the Share Exchange, they would
convert their shares to Nesco common stock and that Nesco would have no further
obligations in respect to these preferred shares including payment of any prior
preferred share dividends. In addition, OLDCO was required to have net cash of
approximately $350,000 at the closing of the transaction as part of the terms of
the agreement. OLDCO provided approximately $208,500 as a bridge loan to HDS
prior to April 30, 2004. The bridge loan was applied to the net cash obligation
of OLDCO, which was satisfied at the closing.

On May 25, 2004, HDS common shareholders exchanged 3,240,593 shares of stock for
38,887 shares of Nesco Series B Preferred Stock which will be converted into
29,165,250 shares of Nesco common stock (a ratio of approximately 9 Nesco shares
for 1 share of HDS stock). The HDS preferred shareholders exchanged 295,853
shares of stock for 14,201 shares of Nesco Series B Preferred Stock which will
be converted into 10,650,750 shares of Nesco common stock (a ratio of
approximately 36 Nesco shares for 1 share of HDS stock). Approximately 97% of
the common and 90% of the preferred shareholders have exchanged their shares as
of April 30, 2006 which has resulted in approximately 54.1% of Nesco's voting
securities outstanding at the time of the exchange being owned by HDS
stockholders. Assuming that the remaining shareholders exchange their shares,
this will result in 55.3% of Nesco's voting securities outstanding at the time
of the exchange being owned by HDS stockholders. Upon completion of this
exchange, HDS common shareholders will exchange a total of 4,452,806 shares of
stock for 53,434 shares of Nesco's Series B Preferred Stock, which will be
converted into 40,075,167 shares of Nesco's common stock (a ratio of
approximately 9 Nesco shares for 1 share of HDS stock). The HDS preferred
shareholders will exchange a total of 522,487 shares of stock for 25,079 shares
of Nesco Series B Preferred Stock which will be converted into 18,809,574 shares
of Nesco common stock (a ratio of approximately 36 Nesco shares for 1 share of
HDS stock). The HDS stockholders, upon completion of the exchange of shares,
will receive an aggregate of 58,884,741 common shares or 55.3% of the total
shares outstanding at the time of the exchange which aggregated 106,386,847
equivalent common shares on May 25, 2004.

Concurrent with the exchange, OLDCO Series A Preferred shareholders agreed to
exchange 512,500 shares of stock for an aggregate of 20,500 shares of Nesco
Series B Preferred Stock, which will be converted into 15,375,000 shares of
Nesco common stock (a ratio of approximately 30 Nesco common shares for 1 share
of Series A preferred stock). As of April 30, 2006, 445,500 shares of Series A
Preferred shares have been exchanged for 17,820 shares of Series B Preferred
shares.

Nesco also issued an aggregate of 6,500,000 common shares to advisors for
services rendered in connection with the Share Exchange. Approximately 2,900,000
of these shares were issued to the parties who agreed to cancel their special
warrants.

Prior to the transaction, OLDCO had 7,627,105 common shares outstanding. After
giving effect to the transactions above and after such time that Nesco increases
the number of common shares it is authorized to issue, Nesco will have
approximately 106,387,000 shares of common stock outstanding as of the exchange
date.


                                       8
<PAGE>

In addition to the exchange of shares, all outstanding options/warrants of HDS
were exchanged for Nesco options/warrants based on the same ratios as the stock
exchange. An aggregate of 525,834 options and warrants for the purchase of HDS
common stock were exchanged for an aggregate of 4,732,500 options and warrants
for the purchase of common stock of Nesco (a ratio of 9 Nesco common shares for
1 share of HDS common stock). An aggregate of 545,120 options and warrants for
the purchase of HDS preferred stock were exchanged for an aggregate of
19,624,320 options and warrants for the purchase of common stock of Nesco (a
ratio of 36 Nesco common shares for 1 share of HDS preferred stock). This
resulted in the issuance of approximately 24,357,000 options/warrants. The HDS
debt holders were also granted, in consideration of an extension of term debt, a
warrant to acquire one share of Nesco common stock for each dollar of HDS debt,
for an aggregate of the issuance of 2,736,212 warrants. The total HDS term debt
of $2,736,212 was also exchanged for Nesco convertible debt and the holders may
convert this debt to approximately 28,551,000 shares of Nesco common stock.

Prior to the transaction, OLDCO had approximately 4,212,500 options and warrants
outstanding. After giving effect to the transactions above, Nesco had
approximately 30,703,000 options and warrants outstanding and debt convertible
into approximately 28,551,000 common shares as a result of the Share Exchange.

July 2004 Securities Purchase Agreement

On July 1, 2004, the Company entered into a securities purchase agreement under
the terms of an investment banking agreement with Sloan Securities Corp. with
third parties pursuant to which Nesco would issue 8% senior convertible notes,
which are convertible to common stock at $0.15 per share to investors. Each note
is issued with a five-year warrant to purchase a number of shares of the
Company's common stock equal to 100% of the number of shares of the Company's
common stock issuable at $0.25 per share or 666,667 warrants for each $100,000
of principal amount of notes purchased. As a result of the agreement, which
terminated on September 30, 2004, the Company received $2,295,000 in gross
proceeds which may be converted into an aggregate of 15,300,000 common shares
and issued warrants to purchase 15,300,000 shares. The notes matured on December
1, 2005, were not paid and are currently in default. At April 30, 2006, none of
these debentures have been converted. We relied on Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder in issuing
the notes and warrants without registration under the Act.

In connection with these notes and a related registration rights agreement, the
Company was required to file a registration statement to register the common
stock issuable upon the conversion of the notes and exercise of the warrants no
later than November 27, 2004, 60 days after the completion of the offering. The
Company did not file the required registration statement until January 27, 2005
and damages in the amount of approximately $92,000 (2% per month of the
aggregate purchase price) were required to be paid in cash under the terms of
the agreement. The holders of the notes agreed to accept this payment in the
aggregate of approximately $92,000 in common stock (556,875 shares) of the
Company. The fair value of the shares due has been charged to operations and
this expense is included in current liabilities as these shares have not been
issued as of April 30, 2006. In addition, the Company was required to have the
registration statement declared effective no later than June 27, 2005. The
Company withdrew the related registration statement in November 2005. As the
registration statement has not been declared effective, penalties in the amount
of 2% per month of the aggregate purchase price are required to be paid in cash
under the terms of the agreement. Interest accrues on the unpaid penalties at
the rate of 18% per annum for each month that they are unpaid. Penalties and
interest of approximately $548,000 have been charged to operations for the year
ended April 30, 2006 and such penalties continue to accrue at 2% per month plus
18% interest subsequent to April 30, 2006.

The Company has had discussions with the representative of the debt holders
regarding a possible rescheduling or other restructuring of this debt as well as
the penalties and interest. See Note 7 to consolidated financial statements in
Part II, Item 7 of this report for additional information.

August 2004 Standby Equity Distribution Agreement


                                       9
<PAGE>

On August 23, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, an investment firm covering the
proposed purchase up to $10,000,000 of the Company's common stock subject to a
registration statement covering the shares being declared effective by the SEC
and other matters. On January 27, 2005, a preliminary registration statement was
filed with the SEC which registration statement was subsequently withdrawn on
November 4, 2005. As such, no shares to have been, or will be, sold under this
agreement. See also, Note 8 to consolidated financial statements in Part II,
Item 7 of this report for additional details.

      Factors and Risks That May Affect Future Results

You should carefully consider the factors described below, among others, and
other information contained in this report before deciding whether to invest in
shares or obligations of our Company. Any investment in shares or obligations of
our Company involves a high degree of risk. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us, or which we currently deem immaterial
or which are similar to those faced by other companies in our industry or
business in general, may also impair our business operations. As a result of any
of the following risks, our business, financial condition or results of
operations could be materially and adversely affected. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment. This report also contains forward-looking statements that involve
risks and uncertainties. Please refer to "Forward-Looking Statements" included
elsewhere in this report.

Financial Risks

At April 30, 2006, over $7,133,000 of our debt obligations are in default, and
another $489,000 of our debt obligations are coming due on July 31, 2006, and we
do not have the ability to repay them. These amounts are growing by interest and
penalties which accrue each month.

Convertible debentures aggregating $6,424,000 at April 30, 2006 (including
$3,013,000 of which is secured by the assets of the Company) became due in
December 2005 and were not paid. Additionally approximately $489,000 of
subsidiary senior secured notes payable and interest at April 30, 2006 is due,
as amended, on July 31, 2006. The Company does not have the funds to pay these
obligations. To date the creditors have not taken any action to foreclose on the
security for such indebtedness, however, the Company has not negotiated a
forbearance or other agreement to restructure or reschedule this debt.

We have a limited operating history; anticipation of continued losses.

We have achieved only limited revenues to date and there is no assurance that we
will be able to generate substantial revenues or be profitable in the future. We
have incurred net losses since inception, including net losses of $4,399,000 and
$8,597,000 for the years ended April 30, 2006 and 2005, respectively. We expect
to continue to incur significant losses on a quarterly basis at least through
2006. As of April 30, 2006, we had an accumulated deficit of approximately
$23,681,000 and a working capital deficiency of approximately $10,214,000. We
can offer no assurance that we will achieve revenue growth or profitability.

At April 30, 2006, the Company owes related parties over $312,000 for unpaid
rent for more than one year including rent on facilities that are critical to
our business.

In order to preserve cash, the Company has ceased paying all rent related to
HDS's principal manufacturing facility and its headquarters office. Such rent is
payable to a related party. Should such related party demand that our delinquent
or current rents be paid, we would be unable to do so and could face the loss of
these facilities. In the instance of the manufacturing facility, such loss,
should it occur, could have a devastating effect on the ability to continue the
HDS operations.

Our financial condition raises substantial doubt about our ability to continue
as a going concern.

Our consolidated financial statements do not include any adjustments that might
be necessary if we are unable to continue operations due to our inability to
raise sufficient funds to maintain current and proposed operations.


                                       10
<PAGE>

Risks Related to our Business

We are dependent on proprietary know-how. We hold limited patents.

Competitors may develop or market technologies that are more effective or more
commercially attractive than ours. Our manufacturing know-how as to mixing,
coating and cross-linking can be duplicated even if it is difficult to do so.
There is no assurance that, should we apply for intellectual property
protection, we would be able to obtain such protection. Despite our efforts to
protect proprietary rights, there is no assurance that such protections may not
preclude competitors from developing and/or marketing similar products. While we
are not aware of any third party intellectual property that would materially
affect our business, our failure or inability to obtain patents and protect our
proprietary information could result in our business being adversely affected.

We are dependent on the services of key personnel the loss of which would have a
material adverse effect on us.

The operations and future success of our company depends upon the efforts of our
key employees. Because of the specialized nature of our business, we are
dependent on our ability to attract and retain qualified personnel. We have no
key man insurance for any of our employees. We face competition for personnel
from other companies with greater resources than we have. There can be no
assurance that we will be successful in hiring or retaining qualified personnel,
and our failure to do so could have a material adverse effect on our business
and financial condition.

We have only recently begun to produce and sell products under the Dicon
Agreement and the production for those products is still in the start-up phase.

In April 2006, we made our first shipment under the October 2005 Dicon
Agreement. The production of items contemplated by the Dicon Agreement involves
new equipment, facility, processes, human resources and products. As such, this
activity has many elements of a start-up operation which has risks and
uncertainties which are often unknown until first experienced.

We are dependant on significant customers including recently, Dicon

During the fiscal year ended April 30, 2006, more than 60% of our revenues were
from only four customers. Further, since starting up production under the Dicon
Agreement, Dicon has become a significant customer, constituting over 41% of our
revenues in May and June 2006. The loss of any significant customer would have a
significantly negative effect on our operations.

We are dependent on outside suppliers for raw materials.

Our products are manufactured using proprietary polymers that we obtain from
outside suppliers. It is possible that the outside suppliers may be unable to
meet our demands or may be unable to supply us with the materials necessary for
us to manufacture our products.

Risks Related to Our Industry

We are subject to governmental regulations

Inherent in the development of new medical products is the potential for delay
in that product testing, including clinical evaluation, is required before most
products can be used with humans. The manufacture, marketing, labeling,
record-keeping, claims and advertising of medical devices as well as
prescription drugs, non-prescription drugs that claims to have certain
therapeutic properties, and cosmetics are subject to regulation by the Food &
Drug Administration (the "FDA") and the Federal Trade Commission (the "FTC"). We
are also subject to state regulation on electron beam radiation services and
facilities. The expansion of our business into the manufacture and distribution
of products for consumer use will subject us to additional governmental
regulation. While Hydrogel patches are classified as Class I exempt devices by
the FDA, there can be no assurances that the FDA will not seek to regulate this


                                       11
<PAGE>

product in the future. Such action by the FDA could have a material adverse
effect on our prospects as such approval requires a number of years, costly and
time-consuming tests and other procedures. Our products are subject to
obsolescence; competition in the medical products field is intense and we
represent a very small presence.

The field of medical and health products is characterized by rapid and
significant changes. We can give no assurance that any existing or future
product of ours will be competitive and will not become obsolete in light of
future technological developments. Most of our competitors have far greater
financial, research, marketing and distribution resources and more established
channels of distribution than we do. In addition, many of our current and
potential competitors offer greater variety of products and services and can
therefore offer discounts and other incentive programs unavailable to us at this
time.

Our failure to meet the prices offered by competitors, or to be unable to meet
production demands for our products could have material adverse effect on our
business, financial condition or results of operations. The relative speed with
which we can introduce products and expand our distribution are also a
competitive factor. Additionally, many of our customers have financial ability
to establish in-house manufacturing capabilities similar to ours.

Our products risk exposure to product liability claims.

If successful in developing testing and commercializing our products, we will be
exposed to potential product liability risks, which are inherent in the testing,
manufacturing and marketing of topical therapeutic and skin care products. It is
likely we will be contractually obligated, under any license agreements we enter
into to indemnify the individuals and/or entities to whom we have licensed the
technology against claims relating to the manufacture and sale of products sold
by licensees. This indemnification liability, as well as direct liability to
consumers for any defects in the products sold, could expose us to substantial
risks and losses. We have obtained $1,000,000 of product liability insurance;
however, there can be no assurance that we will be able to maintain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities.

Other Risks

Recent trading in our stock has been limited, so investors may not be able to
sell as much stock as they want at prevailing market prices.

Recent trading volume has been limited. If limited trading in our stock
continues, it may be difficult for shareholders to sell their shares in the
public market at any given time at prevailing prices.

Future sales of shares of our common stock, including sales of shares which are
required to be registered but have not been registered, may negatively affect
our stock price.

As a result of our recent private offering, upon conversion of 8% debentures and
exercise of warrants, the investors will or have been issued approximately
30,600,006 shares of our common stock. In the future, we may issue additional
options, warrants, or other derivative securities convertible into our common
stock. Sales of substantial amounts of our common stock, or even the potential
for such sales, would lower the market price of our common stock and impair our
ability to raise capital through the sale of equity securities.

Our common stock may be affected by limited trading volume and may fluctuate
significantly which may affect the value of our shares of common stock

There is a limited public market for our common stock and there can be no
assurance that a more active trading market for our common stock will develop.
An absence of an active trading market could adversely affect our stockholders'
ability to sell our common stock in short time periods, or possibly at all. Our
common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially. These fluctuations may also cause short sellers to enter the
market from time to time in the belief that we will have poor results in the
future. We cannot predict the actions of market participants and, therefore, can
offer no assurances that the market for our stock will be stable or appreciate
over time. Our common stock is deemed to be "Penny Stock" which may make it more
difficult for investors to sell their shares.


                                       12
<PAGE>

Because we may be subject to the "penny stock" rules, the level of trading
activity in our stock may be reduced. Broker-dealer practices in connection with
transactions in "penny stocks' are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks, like shares of
our common stock, generally are equity securities with a price of less than
$5.00, other than securities registered on certain national securities exchanges
or quoted on NASDAQ. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
broker-dealers who sell these securities to persons other than established
customers and "accredited investors" must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. Consequently, these
requirements may have the effect of reducing the level of trading activity, if
any, in the secondary market for a security subject to the penny stock rules,
and investors in our common stock may find it difficult to sell their shares.

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases manufacturing facilities for approximately 16,500 square feet
in Langhorne, PA and for approximately 28,000 square feet of space in Trenton,
New Jersey under long term leases that are described below. Additionally, the
Company leases under 1,000 square feet of office space in New York, NY under a
month-to-month lease. The leases for space in Langhorne and New York are with
related parties. The related parties have not been paid rent for more than one
year on either facility. As such, these related parties are owed an aggregate of
approximately $360,000 at June 30, 2006, most of which is related to the
Langhorne facility.

In February 2006, the Company entered into a lease for an approximately 28,000
square foot manufacturing facility in Trenton, New Jersey. The lease calls for
annual rentals ranging from $159,600 in the initial year to $194,600 in the year
ending in 2012. In addition to rent, the Company is obligated to pay all costs
of occupying the building including utilities, taxes and maintenance. In
addition, additional rent may be charged for facility improvements.

On January 25, 2002, the Company entered into a lease for a manufacturing
facility in Langhorne, Pennsylvania that was purchased by an entity owned by a
related party, which provides for minimum monthly rental payments of $11,687 and
expires in 2012. The rent increases by 5% every two years for the duration of
the lease. On September 30, 2002, in consideration for extension of certain debt
due to the related party, the rent increase of 5% effective February 1, 2004 was
increased by an additional 10%. The rent increases subsequent to that date,
every two years, remain at 5% of the prior period amount inclusive of the 10%
additional one-time increase.

On April 1, 2004, the Company, along with other co-tenants, entered into a
month-to-month lease for office space for its corporate headquarters in New
York, NY with an entity majority-owned by a director of the Company, which
provided for a monthly lease payment beginning in August of 2004 of $2,276. This
lease payment was increased to $3,004 per month effective March 1, 2005 due to
reallocation of the space with other tenants.

On October 1, 1998, Nesco entered into a ten-year lease in New York, NY through
September 30, 2008 for rental of office facilities. The lease provides for
annual rent of $178,710 and escalations for scheduled rent increases and for
Nesco's proportionate share of increases in real estate taxes and maintenance
costs. On March 4, 2000, Nesco entered into a sublease agreement for the October
1998 lease with a company in which a major shareholder is a stockholder of
Nesco. The sublease expires on September 30, 2008. The sublease rent is being
paid directly to the landlord by the sublease tenant.

We believe our offices and other facilities are adequate for our current needs.
Our non-payment of rent on the manufacturing facility in Langhorne represents a
risk to our business as there is no assurance that the related party will
continue to permit us to use that facility without payment of current and/or
past amounts due.


                                       13
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

Except for the claims against former subsidiaries of Nesco, the Company and its
subsidiaries were not involved in any other material legal proceedings during
the year ended April 30, 2006.

The NAC entities, formerly subsidiaries of Nesco, are subject to a number of
claims and alleged violations. Pursuant to the stock purchase and assumption
agreement dated as of April 29, 2004, and completed as part of the terms of the
Share Exchange with HDS on May 25, 2004, between Nesco and NAC Calabria
Acquisition Corporation (the "Purchaser"), the Purchaser became responsible for
all liabilities of our previous business conducted by the NAC Entities.

On June 8, 2006, a complaint was filed against the Company in the Court of
Common Pleas of Philadelphia County, Pennsylvania seeking recovery of $71,663.52
of legal fees, plus interest and other costs, alleged to be owed since 1999. The
Company believes that this litigation is similarly covered by the
indemnification of claims as part of the Share Exchange completed on May 25,
2004.

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

During the fourth quarter of our fiscal year ended April 30, 2004, pursuant to
Nevada Revised Statutes which permits holders of a majority of the voting power
to take stockholder action by written consent, the Company requested consent to
the Share Exchange regarding HDS, obtained the required majority consent and
entered into the Share Exchange. In accordance with the terms of the share
exchange agreement we are in the process of preparing an Information Statement
to be mailed to all securities holders.


                                       14
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ISSUERS PURCHASES OF EQUITY SECURITIES

Market Information

Since September 2005 our common stock has been quoted on an inter-dealer
quotation system published by the Pink Sheets LLC. From April 1998 until
September 2005, our common stock, par value $0.001 ("Common Stock"), has been
quoted on the Electronic Bulletin Board operated by the National Association of
Securities Dealers (OTCBB: NESK), except for the period between January 2000 and
March 2002 and the period subsequent to March 2006 when our Common Stock was
quoted on an inter-dealer quotation system published by the Pink Sheets LLC.

The following table sets forth the high and low closing bid prices per fiscal
quarter quoted for our Common Stock in the last two fiscal years on the OTCBB
and subsequent to March 2006 the Pink Sheets LLC according to publicly available
information:

                                                              Closing Bid
                                                          High            Low
                                                          ----            ---
Year ended April 30, 2006
  Fourth Quarter (ended 4/30/06)                        $   0.03       $   0.01
  Third Quarter (ended 1/31/06)                         $   0.10       $   0.01
  Second Quarter (ended 10/31/05)                       $   0.25       $   0.02
  First Quarter (ended 7/31/05)                         $   0.25       $   0.08

Year ended April 30, 2005
  Fourth Quarter (ended 4/30/05)                        $   0.35       $   0.10
  Third Quarter (ended 1/31/05)                         $   0.33       $   0.10
  Second Quarter (ended 10/31/04)                       $   0.30       $   0.17
  First Quarter (ended 7/31/04)                         $   0.25       $   0.15

The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. Actual
trading in our shares has been very sporadic.

Holders

As of July 7, 2006, there were 88 record holders of our common stock.

Dividends

We have never declared or paid any cash dividends on our common stock. We
currently anticipate that future earnings, if any, will be retained to support
our business. Accordingly, we do not anticipate paying cash dividends on our
common stock in the foreseeable future.

Recent Sales and Issuance of Unregistered Securities

In the past three fiscal years we have issued the following unregistered
restricted securities in reliance on the exemptions provided by Section 4(2) and
Rule 506 of Regulation D of the Securities Act as transactions not involving
public offerings.

o     Between December 20, 2005 and June 23, 2006, the Company raised
      approximately $805,000 by issuing 11% per annum subsidiary senior secured
      notes of FMI pursuant to a note purchase agreement as amended and restated
      on February 1, 2006. Such subsidiary senior secured notes are secured by
      all the assets of FMI and, as amended in May 2006, are due on the earlier
      of July 31, 2006 or the completion of a financing of at least $500,000.
      The notes were issued to directors and other related parties, an affiliate
      as well third parties. $100,000 of the amounts borrowed from the initial
      investor in the senior secured notes may be converted into new instruments
      upon the completion of a proposed financing.


                                       15
<PAGE>

o     In December 2005, the Company issued 368 shares of its Series B preferred
      stock, convertible into 276,000 shares of the Company's common stock, in
      settlement of certain fees due to a consultant for approximately $47,000.

o     In June 2005, the Company issued 618,815 shares of its common stock to
      investors in its $2,295,000 private placement of senior secured
      convertible debt, described below, as payment of accrued interest of
      approximately $93,000.

o     On May 25, 2004, the Company entered into a one-year advisory services
      agreement with Marlin Financial Group, Inc. which provided for the
      issuance of 681,667 shares of common stock and a minimum monthly
      consulting fee of $6,250 to be credited against any other cash fees earned
      under the terms of the agreement. The agreement also provides for certain
      transaction fees to be paid to the consultant based on sales and contracts
      with strategic alliances. The fair value of the shares ($102,250 based on
      the market price of $0.15 on the date of the agreement) was charged to
      operations in the fiscal year ended April 30, 2004. On December 17, 2004,
      the Company terminated the agreement which was cancelable by either party
      after six months. On January 5, 2005, the Company issued an aggregate of
      908.89 shares of Series B Preferred shares (convertible into 681,667
      common shares) as per the agreement.

o     In March 2004, Mr. Ronald Kuzon, an interim officer and consultant
      exercised 1,000,000 warrants for $0.05 in a cashless exercise. An
      aggregate of 857,142 shares were delivered as the excess of the fair value
      $(0.35) of the stock purchased over the exercise price was used to pay for
      the shares in the aggregate of 142,858 shares.

o     In May 2004, as a condition to the share exchange, OLDCO transferred its
      wholly owned subsidiaries, NAC, IAP and NACS to a corporation controlled
      by Ronald Kuzon, a former interim officer and consultant to the Company.
      In consideration for an indemnification undertaking, the transferee
      received 3,000,000 of Nesco common stock. We also issued an aggregate of
      6,500,000 of our common shares to an advisor, a limited liability company
      owned by an affiliate of Ronald Kuzon, for services in connection with the
      Share Exchange. This advisor, under related contractual obligations,
      assigned an aggregate of 5,000,000 of these common shares to third
      parties. On May 25, 2004, we entered into a two year consulting agreement
      with an affiliate of Ronald Kuzon which provided for the issuance of
      2,000,000 of our common shares and a minimum monthly consulting fee of
      $7,500. We also issued, to two officers of HDS, in exchange for
      outstanding notes and accrued payroll, convertible 8% debentures
      convertible at $0.15 per share in the aggregate principal amounts of
      approximately $365,000 to Mr. Matthew Harriton and approximately $439,000
      to Mr. Geoffrey Donaldson, and a like number of warrants (approximately
      803,000). The HDS other debt holders were also granted, in consideration
      of an extension of term debt, a warrant to acquire one share of Nesco
      common stock for each dollar of HDS debt, for an aggregate of the issuance
      of 2,736,212 warrants. The total HDS term debt of $2,736,212 was also
      exchanged for Nesco convertible debt and the holders may convert this debt
      to approximately 28,551,000 shares of Nesco common stock, based on the
      same ratios as the share exchange agreement.

      In May 2004, as a condition to the share exchange, OLDCO was also required
      to convert its outstanding shareholder debt to equity. On May 11, 2004,
      prior to the date of the closing, the holders of this debt in the
      aggregate principal amount of $952,501 agreed to exchange the debt for an
      aggregate of 20,000 shares of OLDCO's Series B Preferred Stock which is
      convertible into 15,000,000 shares of Nesco's common stock.

o     On July 1, 2004, the Company entered into an investment banking agreement
      with Sloan Securities Corp. for the sale of up to $3,000,000 principal
      amount of the Company's 8% senior convertible notes due December 1, 2005,
      with interest payable on December 1 and June 1 semi-annually, either in
      cash or common stock, and convertible into common stock at $0.15 per share
      or an aggregate of 15,300,000 common shares. Each note was issued with a
      five-year warrant to purchase shares of the Company's common stock at
      $0.25 per share or 666,667 warrants for each $100,000 of principal amount
      of notes purchased. As a result of the agreement, which terminated on
      September 30, 2004, the Company received $2,295,000 in gross proceeds in
      connection with this agreement and issued warrants to purchase 15,300,000
      shares. Under the terms of the private placement the Company has agreed to
      undertake to register the common stock issuable upon the conversion of the
      notes and the exercise of the warrants. On December 1, 2004, the Company


                                       16
<PAGE>

      issued 390,305 shares of common stock as payment for interest due on the
      notes. On June 1, 2005, the Company issued 618,815 shares of common stock
      as payment for interest due on the notes. We relied on Section 4(2) of the
      Securities Act and Rule 506 of Regulation D promulgated thereunder in
      issuing the Notes and Warrants without registration under the Act.

      In connection with this agreement, the Company issued the broker warrants
      to acquire 5,052,600 shares of NEWCO common stock at an exercise price of
      $0.15 per share.

o     On August 23, 2004, the Company entered into a Standby Equity Distribution
      Agreement with Cornell Capital Partners, LP, an investment firm. Under the
      terms of the agreement, the investment firm was to purchase up to
      $10,000,000 of the Company's common stock, and to receive a 5% commission
      per transaction, subject to a registration statement covering the shares
      being declared effective by the SEC. Such registration statement was
      withdrawn in November 2005 and no securities were issued to, and no
      proceeds were received from, investors under this agreement. As
      consideration for entering into the Standby Equity Distribution Agreement,
      we granted Cornell Capital Partners, LP 3,266.66 shares of Series B
      Preferred Stock (convertible into 2,450,000 common shares) and paid a
      $70,000 cash consulting fee. In addition, we granted the placement agent
      66.66 shares of Series B Preferred shares (convertible into 50,000 common
      shares). Such costs were expensed in the year ended April 30, 2005.

o     In June 2002, Nesco issued 512,500 shares of our 10% Series A Convertible
      Preferred Stock ("Preferred Stock") in connection with the initial closing
      of a private placement of a minimum of 500,000 and a maximum of 1,000,000
      shares of Preferred Stock to accredited investors at $2.00 per share. Each
      share of Preferred Stock was convertible into four shares of Common Stock
      at a conversion price of $0.50 per share. KSH Investment Group, Inc.
      served as placement agent and received, among other things, a cash
      commission equal to 7.5% of the aggregate purchase price of the shares
      sold, a non-accountable expense allowance equal to 1.5% of the aggregate
      purchase price of the shares sold, and warrants to purchase 402,500 shares
      of Common Stock as commissions in connection with the June 2002 private
      placement. Under the terms of the private placement, we had agreed to
      undertake to register the Common Stock issuable upon the conversion of the
      Preferred Stock sold and the Common Stock issuable upon the exercise of
      warrants issued to the placement agent. These warrants were cancelled in
      connection with the Share Exchange with HDS. Concurrent with the Share
      Exchange, OLDCO Series A Preferred shareholders agreed to exchange these
      512,500 shares of stock for an aggregate of 20,500 shares of Nesco Series
      B Preferred, which will be converted into 15,375,000 shares of Nesco
      common stock (a ratio of approximately 30 Nesco common shares for 1 share
      of Series A preferred stock). As of April 30, 2006, 445,500 shares of
      Series A Preferred shares have been exchanged for 17,820 shares of Series
      B Preferred shares.

As described elsewhere, in connection with the share exchange agreement with
HDS, additional Series B Preferred securities have been issued as a result of
the exchange agreement.

Repurchases of Equity Securities

N/A

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

Overview, Background and History; Share Exchange Agreement

Nesco Industries, Inc. (hereinafter referred to as "Nesco" or, together with its
wholly-owned subsidiaries, the "Company") is a Nevada corporation whose
principal business is conducted through its wholly-owned subsidiaries, Hydrogel
Design Systems, Inc. ("HDS") and, since January 2006, Foam Manufacturing, Inc.
("FMI"). HDS is engaged in the manufacturing, marketing, selling and
distribution of hydrogel, an aqueous polymer-based radiation ionized gel, which
is used in various medical and cosmetic consumer products. FMI is engaged in the
manufacture and sale of patented hydrophilic urethane foam products,
polyurethane gels and moisture managed foam footwear inserts for use in the
cosmetic, medical, and household markets. The Company acquired the rights to
produce the FMI products during October 2005, when it entered into an agreement
which grants it the exclusive rights to manufacture and distribute these
products in North America as described further in Part I, Item 1, "Business of


                                       17
<PAGE>

the Issuer". Between January 2006 and April 2006, FMI's activities consisted of
start-up activities and in April 2006 FMI made its first shipment to a customer.
The Company expects FMI's operations to constitute a significant portion of its
revenues going forward and FMI has a significant customer. Subsequent to April
30, 2006, for the two months ended June 30, 2006, FMI's sales to that one
customer were approximately $160,000 out of a total two month sales of
approximately $280,000 (unaudited).

Prior to April 29, 2004, Nesco was a "shell company" having ceased business
operations and become inactive in May 2003. Prior to May 2003, Nesco was a
provider of asbestos abatement and indoor air quality testing, monitoring and
remediation services. Nesco provided services through its wholly-owned
subsidiary National Abatement Corporation ("NAC") and other wholly-owned
subsidiaries including NAC/Indoor Air Professionals, Inc. ("IAP") and NAC
Environmental Services, Inc. ("NACE").

On April 29, 2004, Nesco entered into a share exchange agreement with HDS, a
Delaware privately held corporation, whereby HDS became a majority-owned
subsidiary of Nesco and the holders of HDS common stock and debt acquired a
majority interest of Nesco. This exchange (the "Share Exchange") was completed
on May 25, 2004. The accounting for the transaction, commonly called a reverse
acquisition, resulted in a recapitalization of HDS, which was treated as the
accounting acquirer. The acquired assets and assumed liabilities of Nesco were
carried forward at their historical values which approximated fair value (with
the exception of deferred liabilities for which there was no legal continuing
obligation, which were not recorded). HDS's historical financial statements were
carried forward as those of the combined entity.

The Company had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the Share
Exchange. However, the Company did not have the required number of authorized
shares of common stock to complete the exchange on this basis. As such, it
agreed to issue shares of its newly designated Series B Preferred Stock instead
of common stock. Upon filing of a Certificate of Amendment to the Certificate of
Incorporation to increase the number of shares of common stock which the Company
is authorized to issue, each share of the Series B Preferred Stock will be
automatically converted into shares of common stock. On November 16, 2004 the
Company filed a preliminary information statement with the SEC. Various comment
letters have been exchanged with the SEC. The information statement can be
completed after the filing of an amended information statement and review by the
SEC. Upon completion of this process, the Company will file the Certificate of
Amendment and issue the common stock.

As of April 30, 2006, approximately 97% of the HDS common and 90% of the HDS
preferred shareholders have exchanged their shares, which has resulted in
approximately 54.1% of the Company's voting securities outstanding at the time
of the exchange owned by HDS stockholders. When the remaining HDS shareholders
exchange their shares, 55.3% of the Company's voting securities outstanding at
the time of the exchange would be owned by HDS stockholders. Upon completion of
this exchange, HDS common shareholders will exchange a total of 4,452,806 shares
of stock for 53,434 shares of the Company's Series B Preferred Stock, which will
be converted into 40,075,167 shares of the Company's common stock (a ratio of
approximately 9 shares of the Company's common stock for 1 share of HDS stock).
The HDS preferred shareholders will exchange a total of 522,487 shares of stock
for 25,079 shares of the Company's Series B Preferred Stock which will be
converted into 18,809,574 shares of the Company's common stock (a ratio of
approximately 36 shares of the Company's common stock for 1 share of HDS stock).
The HDS stockholders, upon completion of the exchange of shares, will receive an
aggregate of 58,884,741 common shares or 55.3% of the total shares outstanding
at the time of the exchange which aggregated 106,386,847 equivalent common
shares on May 25, 2004, the exchange date.

Concurrent with the exchange, Nesco Series A Preferred shareholders agreed to
exchange 512,500 shares of stock for an aggregate of 20,500 shares of the
Company's Series B Preferred Stock, which will be converted into 15,375,000
shares of the Company's common stock (a ratio of approximately 30 common shares
for 1 share of Series A preferred stock). As of April 30, 2006, 445,500 shares
of Series A Preferred shares have been exchanged for 17,820 shares of Series B
Preferred shares. The Company anticipates that the majority of the remaining
Series A shareholders will exchange their shares in the near future.

As part of this transaction, Nesco conditionally transferred its three
wholly-owned subsidiaries, NAC, IAP and NACE, to a consultant and interim
officer of Nesco who resigned his position as officer at the time of the
transfer. The transferee assumed all liabilities and obligations with respect to


                                       18
<PAGE>

these subsidiaries and agreed to indemnify the Company against any claims and,
in exchange therefore, received 3,000,000 shares of common stock of the Company
and certain related registration rights. As additional consideration for the
indemnification by the transferee, the Company agreed that if the transferee
cannot in good faith resell the shares of common stock in an arm's length
transaction during the twelve month period immediately following the closing for
a price equal to the lesser of (i) all liabilities resulting from the agreement
between NAC and its labor union plus legal fees or (ii) $330,000, then the
Company will repurchase from the transferee 2,400,000 of the common shares at
that amount upon written notice from the transferee requesting such. On May 25,
2005, the Company agreed to extend the put right granted to the transferee until
May 25, 2006 subject to the condition that the right may not be exercised until
after January 1, 2006. The repurchase of the 2,400,000 common shares, which are
subject to redemption by the transferee, are included in current liabilities at
an aggregate of $330,000, the maximum amount the Company would be required to
pay in the event of redemption. Such put right expired on May 26, 2006.

The accompanying consolidated financial statements of the Company reflect the
historical results of the predecessor entity, HDS, prior to May 25, 2004 and the
consolidated results of operations of the Company subsequent to the acquisition
date of May 25, 2004.

Results of Operations

Results of operations for the year ended April 30, 2006 reflect the following
changes from the prior period:

                                             April 30,
                                             ---------
                                        2006            2005           Change
                                        ----            ----           ------
Sales                               $ 1,001,000     $   738,000     $   263,000
Gross (loss)                           (140,000)       (190,000)         50,000
Stock compensation charge                67,000       3,011,000      (2,944,000)
Amortization and other                        0         136,000        (136,000)
Other operating expenses              1,114,000       1,393,000        (279,000)
Loss from operations                 (1,321,000)     (4,730,000)     (3,409,000)
Other expense                        (3,078,000)     (3,867,000)       (789,000)
Net loss                            $(4,399,000)    $(8,597,000)    $(4,198,000)

Revenues increased by approximately 36% due to the stage of development of
revenue projects in the year ended April 30, 2006 vs. 2005. Customer mix was
also a factor as four customers accounted for approximately 63% of the higher
revenues in the fiscal year ended April 30, 2006 vs. two customers accounting
for approximately 62% of revenues in the fiscal year ended April 30, 2005. The
most significant customer in the year ended April 30, 2005 reduced its purchases
in the current fiscal year by approximately 50% and that decrease was more than
replaced with other customer business. FMI products represented only
approximately $26,000 of consolidated revenues as shipments did not begin until
the last week in April 2006.

The decrease in gross (loss) of approximately $50,000 reflects two factors; (1)
approximately $173,000 of gross margin improvement on sales of HDS products due
largely to fixed overhead costs being utilized over approximately $263,000 of
higher revenues offset partially by (2) losses associated with the start up of
the production of the FMI products of approximately $123,000.

The reduction in stock compensation charge reflects stock compensation granted
in the prior year that did not recur in the current year. The reduction in
amortization and other of approximately $136,000 reflects the completion in 2005
of amortization associated with certain licensed technology. The reduction in
other operating expenses of approximately $279,000 reflects principally lower
professional costs and consulting fees subsequent to the merger and related
activity in the prior year as well as lower insurance costs and human resources.
The decrease in other expense reflects principally; (a) the charge in the year
ended April 30, 2005 of $713,000 for stock issuance costs which did not recur in
the current fiscal year and (b) the decrease of an aggregate of approximately
$654,000 of amortization of debt discount and financing costs which were fully
amortized in the third quarter of the fiscal year ended April 30, 2006, offset
by (c) increases in interest expense of approximately $53,000, (d) the permanent
impairment of available-for-sale security and (d) an increase in penalties
associated with the Company's failure to perform under a registration rights
agreement of approximately $456,000. Such registration rights penalties are
continuing at approximately $46,000 per month plus interest on the unpaid
penalties.


                                       19
<PAGE>

Trends

The Company's historical revenue run rate is not at a level of profitable
operations. Despite increases in revenues in the fiscal year ended April 30,
2006, the high fixed costs of maintaining a Good Manufacturing Practices ("GMP")
manufacturing facility (including FDA regulated medical device manufacturing)
and trained staff, operations continued to, and would likely continue to
generate operating losses, in the absence of increased revenues. Revenue levels
are highly dependant on the stage of development of customer projects. Customers
order sporadically or in small production runs of items while they perform
testing and market analysis. It is difficult to assess when large scale
production orders may be received. While losses from operations decreased
significantly in the fiscal year ended April 30, 2006, revenue levels would need
to increase significantly or other synergies would have to be developed for the
business to generate operating income.

One strategic effort to increase revenue is the October 2005 manufacturing
agreement with Dicon (See Item I, "Business of the Issuer." In the Dicon
Agreement we have acquired rights to produce and distribute, in North America,
patented hydrophilic urethane foam products, polyurethane gels and moisture
managed foam footwear inserts that have characteristics that are somewhat
similar to our HDS products. Further, these new products address many of the
same markets, customers and end users as the HDS products, namely cosmetic,
medical, and household markets. Furthermore, there are production similarities
between the manufacturing processes for these new products and the HDS
manufacturing processes. We have opened a manufacturing facility for production
of these new products within close proximity to our existing HDS manufacturing
facility. Therefore, our strategy in acquiring the rights under the Dicon
Agreement is to achieve revenue growth as well as production, management and
marketing synergies with our HDS business. The Company started selling these new
products under the Dicon Agreement in the last week of April 2006. Sales from
the last week of April 2006 through June 30, 2006 have aggregated approximately
$154,000. During July 2006, the Company added an additional $380,000 of
equipment to produce the Dicon Agreement products which equipment should become
operational during the second fiscal quarter ending October 31, 2006. The start
date for operations of this equipment is dependent on, among other things,
completion of additional electrical work which is still being evaluated. It is
expected that this additional equipment would add additional production and
sales capacity. Currently, Dicon is the significant customer for these new
products until the Company can generate its own sales and marketing
opportunities.

There are new risks and uncertainties associated with FMI including the risks of
start-up manufacturing and sales and the fact that financing for the purchase of
assets has largely been provided by a bridge loan that matures, as amended, on
July 31, 2006 and is secured by all of the FMI assets.

Liquidity, Capital Resources and Going Concern

The Company's liquidity at April 30, 2006, compared to April 30, 2005, is as
follows:

                                         April 30,      April 30,
                                           2006           2005          Change
                                           ----           ----          ------
Cash                                   $    27,000    $    22,000    $     5,000
                                       -----------    -----------    -----------
Deficit in working capital             $10,214,000    $ 6,049,000    $ 4,165,000
                                       -----------    -----------    -----------
Liabilities in excess of assets        $ 9,602,000    $ 5,431,000    $ 4,171,000
                                       -----------    -----------    -----------
Debt in default                        $ 7,133,000    $         0    $ 7,133,000
                                       -----------    -----------    -----------

In December 2005, approximately $5,031,000 face amount of convertible notes and
approximately $555,000 face amount of notes payable became due and were not
paid, including approximately $3,013,000 which is secured by the assets of the
Company. These amounts, plus interest and penalties of approximately $1,547,000
through that date, are now in default. Interest and penalties continue to accrue
at more than $83,000 per month. The Company does not have the funds to pay these
debts. The Company is attempting to (a) raise new capital and (b) negotiate an


                                       20
<PAGE>

extension of the term or other restructure of each of the above debts. In
addition, approximately $805,000 face amount ($480,000 face amount at April 30,
2006) of subsidiary senior secured notes and interest at April 30, 2006 are due
on July 31, 2006 and the Company does not have the funds to repay this loan.
Furthermore, the Company spent $50,000 of cash and incurred an additional
$330,000 of debt in June 2006 in connection with the purchase of certain "second
line" equipment under the Dicon Agreement. Debt service payments of
approximately $11,000 per month on such debt begin in September 2006 as
discussed in "Commitments for Capital Expenditures" below.

In addition, the Company has obligations under long-term operating leases as
described in Note 13 to notes to consolidated financial statements in Part II,
Item 7. Arrearages of approximately $375,000 exist for the rent in the HDS
manufacturing facility and the Company's headquarters office, which are leased
from related parties. These arrearages extend for more than one year and are
continuing. Further, the Company ceased paying cash compensation to its Chief
Executive Officer during October 2005 and is indebted to him for approximately
$106,000 of unpaid payroll at April 30, 2006. Such non-payment has continued
subsequent to April 30, 2006.

Net cash used in operating and investing activities in the years ended April 30,
2006 and 2005 was approximately $762,000 and $1,718,000, respectively. These
expenditures were largely funded in the year ended April 30, 2006 by advances of
approximately $165,000 from a related party, accounts receivable financing of
approximately $122,000 and the issuance of subsidiary senior secured notes of
approximately $480,000. In the year ended April 30, 2005, these expenditures
were largely funded by the issuance of $2,295,000 of 8% senior secured
convertible debentures due in December 2005, net of expenses and pay down of
other debts. The Company continues to experience losses from operations
subsequent to April 30, 2006.

All of these factors above, among others, indicate that the Company may be
unable to continue operations as a going concern.

The Company currently does not have the liquidity or financing available to it
to fund its operations for the next 12 months without additional capital being
raised and/or forbearance from creditors and others. In the year ended April 30,
2006, the following items impacted liquidity negatively:

      o     Operations - Losses from operations of approximately $1,321,000,
            approximately 10% of which represents start-up losses at FMI

      o     Finance - Interest and penalties on debt obligations of
            approximately $1,031,000, which interest and penalties continue to
            accrue at more than $90,000 per month

      o     Accounting charges - Normal amortization of debt discount of
            $1,731,000 increases the outstanding balance reported as debt by a
            systematic charge to earnings

      o     Capital expenditures - Purchases of equipment and deposits on a new
            lease aggregate approximately $413,000 for the FMI subsidiary

These negative impacts to liquidity, approximately $4,496,000, were partially
offset by the proceeds from issuance of subsidiary senior secured notes,
accounts receivable financing and advances from affiliates aggregating
approximately $767,000. Subsequent to April 30, 2006, an additional $325,000 was
raised through the issuance of additional senior secured subsidiary notes. Such
notes are due, as amended, on July 31, 2006 (earlier if a financing of $500,000
or more is completed) and are secured by all of the assets of FMI.

The Company intends to attempt to improve its liquidity through a combination of
measures including: (a) renegotiating the term or other restructuring of
existing indebtedness if possible, (b) increasing revenues at its Hydrogel
operation, (c) increasing Company wide revenues through operations of the Dicon
Agreement, (d) raising a significant amount of capital and (e) other measures.

Commitments for capital expenditures -

In June 2006, the Company purchased certain "second line" equipment under the
Dicon Agreement for $380,000. Such amount was paid $50,000 in cash and $330,000
under a three year note with interest at prime plus 1.5% per annum. The
installation and operation of such equipment implies the additional expenditure
on equipment and leasehold improvements of more than $175,000. There are no
other material commitments for capital expenditures.


                                       21
<PAGE>

Off-Balance Sheet Arrangements

At April 30, 2006, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. In addition, the Company does
not engage in trading activities involving non-exchange traded contracts. As
such, the Company is not exposed to any financing, liquidity, market, or credit
risk that could arise if the Company had engaged in such activities.

Critical Accounting Policies

Our critical and significant accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Notes to the Consolidated
Financial Statements. These policies have been consistently applied in all
material respects and address such matters as revenue recognition and
depreciation methods. The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. An accounting policy that we consider
to be material is the following:

      Going concern and liquidity -

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred cumulative losses of approximately $23,681,000 since
inception and utilized cash of approximately $2,144,000 for operating activities
during the two years ended April 30, 2006. The Company has a working capital
deficit of approximately $10,214,000, stockholders' deficit of approximately
$9,602,000 as of April 30, 2006 and approximately $7,133,000 of debt is
currently in default. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plan to deal
with this uncertainty is to raise capital, attempt to convert some of its debt
into equity and to improve operations through building of its customer base and
through the new manufacturing agreement with Dicon and other measures. There can
be no assurance that management's plans to raise capital, convert debt to equity
or improve operations will be successful. If management's efforts are not
successful, the Company may be unable to continue as a going concern. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R is a revision of SFAS No. 123, "Accounting for Stock Based Compensation,"
and supersedes APB No. 25. Among other items, SFAS No. 123R eliminates the use
of APB No. 25 and the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments in the financial statements based on the grant date
fair value of those awards. The effective date of SFAS No. 123R for the Company
is May 1, 2006. The Company has elected to adopt SFAS No. 123R using the
"modified prospective" method. Under the "modified prospective" method,
compensation cost is recognized in the consolidated financial statements
beginning with the effective date, based on the requirements of SFAS No. 123R
for all share-based payments granted after that date, and based on the
requirements of SFAS No. 123 for all unvested awards granted prior to the
effective date of SFAS No. 123R.

The adoption of this statement has had no effect on net loss and loss per share
due to the adoption of the "modified prospective" method for existing options
and the fact that no new options have been granted.


                                       22
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                     NESCO INDUSTRIES, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                     24

FINANCIAL STATEMENTS

     CONSOLIDATED BALANCE SHEET                                             25

     CONSOLIDATED STATEMENTS OF OPERATIONS                                  26

     CONSOLIDATED STATEMENTS OF CASH FLOWS                                  27

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT            28

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          29 - 47


                                       23
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
  Nesco Industries, Inc.

      We have audited the accompanying consolidated balance sheet of Nesco
Industries, Inc. and Subsidiaries (collectively the "Company") as of April 30,
2006, and the related consolidated statements of operations, cash flows and
changes in stockholders' deficit for each of the years in the two-year period
ended April 30, 2006. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, 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 Nesco
Industries, Inc. and Subsidiaries as of April 30, 2006, and the results of its
operations and its cash flows for each of the years in the two-year period ended
April 30, 2006, in conformity with accounting principles generally accepted in
the United States of America.

      The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2, the Company has incurred cumulative losses of approximately $23,681,000 since
inception and utilized cash of approximately $2,144,000 for operating activities
during the two-years ended April 30, 2006. The Company has a working capital
deficit of approximately $10,214,000 (including approximately $7,133,000 of debt
which is in default), and a stockholders' deficit of approximately $9,602,000 as
of April 30, 2006. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 2. These consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.


                                             /s/ Rothstein, Kass & Company, P.C.

Roseland, New Jersey
June 23, 2006

                                       24
<PAGE>

Item 1. Financial Statements

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  April 30,
                                                                                    2006
<S>                                                                             <C>
ASSETS
Current assets
  Cash                                                                          $     27,000
  Accounts receivable                                                                 85,000
  Inventories                                                                        100,000
  Prepaid expenses and other current assets                                           19,000
                                                                                ------------
      Total current assets                                                           231,000

Property and equipment, net of accumulated depreciation
  and amortization of approximately $1,833,000                                       633,000
Other assets - deposits and other                                                     49,000
                                                                                ------------
                                                                                $    913,000
                                                                                ============

LIABILITIES AND STOCKHOLDERS'  DEFICIT
Current liabilities
  Secured accounts receivable and purchase order financing,
    including $92,000 payable to a related party                                $    122,000
  Subsidiary senior secured notes payable and interest, including
    $168,000 payable to related parties                                              489,000
  Note and interest payable, in default                                              709,000
  Convertible debentures, including interest and penalties, in default
    ($3,013,000 is secured by the assets of the Company and another
    $2,579,000 is payable to related parties and current or former officers)       6,424,000
  Customer deposits                                                                  846,000
  Accounts payable and accrued expenses                                              829,000
  Stock to be issued                                                                 190,000
  Common stock subject to redemption                                                 330,000
  Due to related party and affiliates                                                506,000
                                                                                ------------
      Total current liabilities                                                   10,445,000
                                                                                ------------
Long-term liability - deferred sublease income                                        70,000
                                                                                ------------

Commitments and contingencies

Stockholders' deficit
  Series A convertible preferred stock, $.001 par value, authorized
    850,000 shares, 67,000  issued and outstanding                                        --
  Series B convertible preferred stock, $.001 par value, authorized
    150,000 shares, 117,055 issued and outstanding                                        --
  Common stock, $.001 par value, authorized 25,000,000 shares,
    17,736,225 issued and outstanding                                                 18,000
  Additional paid-in-capital                                                      14,061,000
  Accumulated deficit                                                            (23,681,000)
                                                                                ------------
      Total stockholders' deficit                                                 (9,602,000)
                                                                                ------------
                                                                                $    913,000
                                                                                ============
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       25
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                Year ended April 30,
                                                               2006             2005
                                                           ------------     ------------
<S>                                                        <C>              <C>
Revenues                                                   $  1,001,000     $    738,000

Cost of revenues                                              1,141,000          928,000
                                                           -----------------------------

Gross profit (loss)                                            (140,000)        (190,000)
                                                           -----------------------------

Operating expenses
  General and administrative                                  1,114,000        1,393,000
  Stock compensation charge                                      67,000        3,011,000
  Amortization and other expenses                                    --          136,000
                                                           -----------------------------
                                                              1,181,000        4,540,000
                                                           -----------------------------
Loss from operations                                         (1,321,000)      (4,730,000)
                                                           -----------------------------

Other income (expenses)
  Sublease income                                                47,000           47,000
  Amortization of debt discount                              (1,731,000)      (2,281,000)
  Stock issuance costs expensed                                      --         (713,000)
  Interest  and other expense                                  (351,000)        (265,000)
  Interest expense, related parties                            (132,000)        (165,000)
  Amortization of financing costs                              (294,000)        (398,000)
  Penalties under registration rights agreement                (548,000)         (92,000)
  Permanent impairment of available-for-sale securities         (69,000)              --
                                                           -----------------------------
                                                             (3,078,000)      (3,867,000)
                                                           -----------------------------
Net loss                                                   $ (4,399,000)    $ (8,597,000)
                                                           -----------------------------

Weighted average common shares
  Basic and diluted                                          17,812,000       15,743,000
                                                           -----------------------------

Net loss per common share
  Basic and diluted                                        $      (0.25)    $      (0.55)
                                                           -----------------------------
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       26
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                               Year Ended April 30,
                                                                               2006            2005
                                                                           -----------     -----------
<S>                                                                        <C>             <C>
Cash flows from operating activities
  Net loss                                                                 $(4,399,000)    $(8,597,000)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
    Stock and warrants issued for services                                      67,000       1,217,000
    Revaluation of warrants issued for services                                     --       1,794,000
    Stock issuance costs expensed                                                   --         713,000
    Depreciation and amortization                                              161,000         251,000
    Amortization of debt discount                                            1,731,000       2,281,000
    Amortization of financing costs                                            294,000         398,000
    Permanent impairment of available-for-sale securities                       69,000              --
  Changes in operating assets and liabilities:
    Accounts receivable                                                         39,000         (50,000)
    Inventories                                                                (35,000)         23,000
    Prepaid expenses and other current assets                                   32,000           1,000
    Accrued penalties and interest (included in Convertible debentures)        548,000          92,000
    Customer deposits                                                            7,000          (8,000)
    Accounts payable, accrued expenses and other                               521,000         (55,000)
    Interest payable                                                           459,000         343,000
    Due to affiliates                                                          192,000        (151,000)
    Deferred sublease income                                                   (35,000)        (47,000)
                                                                           ---------------------------

Net cash used in operating activities                                         (349,000)     (1,795,000)
                                                                           ---------------------------

Cash flows from investing activities
  Net cash acquired from merger                                                     --          86,000
  Purchase of equipment and deposit on lease                                  (413,000)         (9,000)
                                                                           ---------------------------
Net cash provided (used) by investing activities                              (413,000)         77,000
                                                                           ---------------------------

Cash flows from financing activities
  Proceeds from issuance of subsidiary senior secured notes                    480,000              --
  Proceeds from accounts receivable financing                                  336,000              --
  Payments of accounts receivable financing                                   (214,000)             --
  Proceeds from issuance of senior secured convertible debentures                   --       2,295,000
  Payments for financing costs                                                      --        (286,000)
  Payments on notes payable                                                         --        (238,000)
  Payments of stock issuance costs                                                  --         (88,000)
  Payments on loan from officer                                                     --          (7,000)
  Payments from affiliate                                                      165,000          63,000
                                                                           ---------------------------

Net cash provided by financing activities                                      767,000       1,739,000
                                                                           ---------------------------

Net increase in cash                                                             5,000          21,000
Cash
  Beginning of year                                                             22,000           1,000
                                                                           ---------------------------
  End of year                                                              $    27,000     $    22,000
                                                                           ---------------------------
Supplemental disclosure of cash flow information,
  Cash paid during the year for interest                                   $     1,000     $    89,000
                                                                           ---------------------------
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       27
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       Years Ended April 30,
                                                                        2006           2005
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
Supplemental disclosure of non-cash investing and financing,
 activities:

Stock issued for interest payment on convertible debentures         $    93,000    $    59,000
                                                                    --------------------------

Stock issued in connection with Equity Distribution Agreement       $        --    $   625,000
                                                                    --------------------------

Fair value of warrants issued to brokers                            $        --    $   405,000
                                                                    --------------------------

Debt discount related to convertible debentures                     $        --    $ 3,971,000
                                                                    --------------------------

Reclassification of note receivable (and interest), officer,
 accrued expenses, officer, and due to officer to convertible
 debentures and interest payable, officer                           $        --    $   922,000
                                                                    --------------------------

Reclassification of accounts payable to due to affiliate            $        --    $     5,000
                                                                    --------------------------

Reclassification of treasury stock to additional paid in capital    $        --    $    43,000
                                                                    --------------------------

Reclassification of additional paid in capital to series A
  convertible preferred stock                                       $        --    $        --*
                                                                    --------------------------

Reclassification of additional paid in capital to series B
  convertible preferred stock                                       $        --    $        --*
                                                                    --------------------------

Conversion of series A convertible preferred stock to series B
  convertible preferred stock                                       $        --    $     1,000
                                                                    --------------------------

Balance sheet of Nesco Industries, Inc. at the date of the
 Share Exchange (See Note 1):
  Property and equipment                                            $        --    $     5,000
                                                                    --------------------------
  Accounts payable and accrued expenses                                                177,000
  Deferred sublease income                                                             164,000
  Stockholders' equity                                                       --          7,000
                                                                    --------------------------
      Total liabilities and stockholders' equity                             --        348,000
                                                                    --------------------------
  Elimination of intercompany bridge loan                                    --       (209,000)
                                                                    --------------------------
  Cash acquired from merger                                                  --        134,000
  Expenditure of legal fees in connection with merger                        --        (48,000)
                                                                    --------------------------
  Net cash acquired from merger                                     $        --    $    86,000
                                                                    --------------------------
</TABLE>

*     Amounts round to less than $1,000 in the fiscal year ended April 30, 2005.

See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
--------------------------------------------------------------------------------
Years Ended April 30, 2006 and 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                Nesco                    HDS
                                       Series A                Series B                Series B
                                      Convertible             Convertible             Convertible
                                    Preferred Stock         Preferred Stock         Preferred Stock          Common Stock
                                ----------------------  ----------------------  ----------------------  -----------------------
                                  Shares      Amount      Shares      Amount      Shares      Amount      Shares       Amount
                                ----------  ----------  ----------  ----------  ----------  ----------  ----------   ----------
<S>                               <C>       <C>            <C>      <C>           <C>       <C>         <C>         <C>
Balances, May 1, 2004                   --  $       --          --  $       --     522,487  $       --   4,702,806   $       --

Reverse acquisition                512,500          --      94,625          --    (522,487)         --   2,924,299        7,000
Revaluation of warrants
Conversion of series A
  to series B convertible         (445,500)         --      17,820          --
  preferred stock
Conversion of officer note
  receivable to  convertible
  debentures
Issuance of common stock
  for services                                                                                           8,500,000        9,000
Issuance of common stock
  in connection with sale
  of subsidiaries                                                                                          600,000        1,000
Issuance of common stock
  for interest expense                                                                                     390,305           --
Issuance of series B
  convertible preferred
  stock for services                                         4,242          --
Debt discount on
  convertible securities
Issuance of warrants
  for services
Net loss
                                -----------------------------------------------------------------------------------------------
Balances, April 30, 2005            67,000          --     116,687          --          --          --  17,117,410       17,000

Issuuance of common stock
  for interest                                                                                             618,815        1,000
Issuance of convertible
  preferred stock for services                                 368
Stock compensation charge
Permanent impairment in
  available-for-sale security
Net loss
                                -----------------------------------------------------------------------------------------------
Balance, April 30, 2006             67,000  $       --     117,055  $       --          --  $       --  17,736,225  $    18,000
                                ===============================================================================================

<CAPTION>
                                               Accumulated
                                                 Other                             Treasury
                                 Additional      Compre-      Officer                Stock
                                  Paid-in        hensive        Note       ------------------------     Accumulated
                                  Capital         Loss       Receivable      Shares        Amount         Deficit         Total
                                -----------    ----------    ----------    ----------    ----------    ------------    -----------
<S>                             <C>            <C>           <C>             <C>         <C>           <C>             <C>
Balances, May 1, 2004           $ 6,318,000    $  (69,000)   $  (80,000)      250,000    $  (42,000)   $(10,685,000)   $(4,558,000)

Reverse acquisition               1,346,000                                  (250,000)       42,000                      1,395,000
Revaluation of warrants           1,794,000                                                                              1,794,000
Conversion of series A
  to series B convertible                --                                                                                     --
  preferred stock
Conversion of officer note
  receivable to  convertible
  debentures                                                     80,000                                                     80,000
Issuance of common stock
  for services                      986,000                                                                                995,000
Issuance of common stock
  in connection with sale
  of subsidiaries                    (1,000)                                                                                    --
Issuance of common stock
  for interest expense               58,000                                                                                 58,000
Issuance of series B
  convertible preferred
  stock for services                727,000                                                                                727,000
Debt discount on
  convertible securities          2,204,000                                                                              2,204,000
Issuance of warrants
  for services                      470,000                                                                                470,000
Net loss                                                                                                 (8,597,000)    (8,597,000)
                                --------------------------------------------------------------------------------------------------

Balances, April 30, 2005         13,902,000       (69,000)           --            --            --     (19,282,000)   (5,432,000)

Issuuance of common stock
  for interest                       92,000                                                                                 93,000
Issuance of convertible
  preferred stock for services       47,000                                                                                 47,000
Stock compensation charge            20,000                                                                                 20,000
Permanent impairment in                                                                                                         --
  available-for-sale security                      69,000                                                                   69,000
Net loss                                                                                                 (4,399,000)    (4,399,000)
                                --------------------------------------------------------------------------------------------------

Balances, April 30, 2006        $14,061,000    $       --    $       --            --    $       --    $(23,681,000)   $(9,602,000)
                                ==================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       29
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Organization and Nature of Operations

Nesco Industries, Inc. (hereinafter referred to as "Nesco" or, together with its
wholly owned subsidiaries, the "Company") is a Nevada corporation whose
principal business is conducted through its wholly-owned subsidiaries, Hydrogel
Design Systems, Inc. ("HDS") and, since January 2006, Foam Manufacturing, Inc.
("FMI"). HDS is engaged in the manufacturing, marketing, selling and
distribution of hydrogel, an aqueous polymer-based radiation ionized gel, which
is used in various medical and cosmetic consumer products. FMI is engaged in the
manufacture and sale of patented hydrophilic urethane foam products,
polyurethane gels and moisture managed foam footwear inserts for use in the
cosmetic, medical, and household markets. The Company acquired the rights to
produce the FMI products during October 2005, by agreement granting it the
exclusive rights to manufacture and distribute these products in North America
as described further in Note 4.

Prior to April 29, 2004, Nesco was a "shell company" having ceased business
operations and become inactive in May 2003. Prior to May 2003, Nesco was a
provider of asbestos abatement and indoor air quality testing, monitoring and
remediation services. Nesco provided services through its wholly-owned
subsidiary National Abatement Corporation ("NAC") and other wholly-owned
subsidiaries including NAC/Indoor Air Professionals, Inc. ("IAP") and NAC
Environmental Services, Inc. ("NACE").

On April 29, 2004, Nesco entered into a share exchange agreement with HDS, a
Delaware privately held corporation, whereby HDS became a majority-owned
subsidiary of Nesco and the holders of HDS common stock and debt acquired a
majority interest of Nesco. This exchange (the "Share Exchange") was completed
on May 25, 2004. The accounting for the transaction, commonly called a reverse
acquisition, resulted in a recapitalization of HDS, which was treated as the
accounting acquirer. The acquired assets and assumed liabilities of Nesco were
carried forward at their historical values, which approximated fair value (with
the exception of deferred liabilities for which there was no legal continuing
obligation, which were not recorded). HDS's historical financial statements were
carried forward as those of the combined entity. See Note 11.

The accompanying consolidated financial statements of the Company reflect the
historical results of the predecessor entity, HDS, prior to May 25, 2004 and the
consolidated results of operations of the Company subsequent to the acquisition
date of May 25, 2004. The common stock and per share information in the
condensed consolidated financial statements and related notes have been
retroactively adjusted to give effect to the reverse acquisition on May 25,
2004. See also Note 11. The following unaudited supplemental pro forma condensed
financial information is presented to illustrate the effects of the acquisition
of HDS on the historical operating results for the year ended April 30, 2005 as
if the acquisition had occurred at the beginning of the period:

                                               Year ended
                                             April 30, 2005
                                             --------------
                        Revenues             $      738,000
                        Net loss             $   (8,641,000)
                        Net loss per share   $        (0.52)

The above information is presented for illustrative purposes only and is not
necessarily indicative of the condensed consolidated results of operations that
actually would have been realized had HDS and Nesco been a combined company
during the specified periods.

All amounts in the consolidated financial statements have been rounded to the
nearest $1,000.

2.    Going concern and liquidity

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred cumulative losses of approximately $23,681,000 since
inception and utilized cash of approximately $2,144,000 for operating activities
during the two years ended April 30, 2006. The Company has a working capital


                                       30
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

deficit of approximately $10,214,000, stockholders' deficit of approximately
$9,602,000 as of April 30, 2006 and approximately $7,133,000 of debt is
currently in default. These factors, among others, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plan to deal
with this uncertainty is to raise capital, attempt to convert some of its debt
into equity and to improve operations through building of its customer base and
through the new manufacturing agreement with Dicon Technologies ("Dicon") (See
Note 4) and other measures. There can be no assurance that management's plans to
raise capital, convert debt to equity or improve operations will be successful.
If management's efforts are not successful, the Company may be unable to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.

3.    Summary of significant accounting policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.

Revenue Recognition

Revenues are generally recognized as product is shipped to a customer. In cases
where a customer requests a development project for a gel or a gel to be used as
a component of a new product, the Company will recognize revenue at the time the
project is completed.

Accounts Receivable

Accounts receivable are presented net of any allowance for doubtful accounts.
The Company periodically evaluates its accounts receivable and establishes an
allowance for doubtful accounts based on history, collections and current
conditions.

Inventories

Inventories, consisting principally of raw materials, are stated at cost on the
first-in, first-out basis, which does not exceed market value. Excess or
obsolete inventories are reduced to net realizable value.

Property and Equipment

Property and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed using the straight-line method over the
estimated lives of the related assets or the remaining term of the lease, which
ever is shorter.

The Company provides for depreciation and amortization over the following
estimated useful lives:

       Machinery and equipment                       10 years
       Office equipment and fixtures                 3 - 7 years
       Leasehold improvements                        Lease term
       Purchased Technology                          7 years


                                       31
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loss Per Share

The Company complies with Statement of Financial Accounting Standard ("SFAS")
No. 128 "Earnings per Share", which requires basic loss per common share to be
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted loss per common share incorporates the
dilutive effect of common stock equivalents on an average basis during the
period. The calculation of diluted net loss per share excludes potential common
shares if the effect is anti-dilutive. Therefore, basic and diluted loss per
share were the same for the years ended April 30, 2006 and 2005.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Income Taxes

The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred income tax assets to the
amount expected to be realized.

Fair Value of Financial Instruments

The fair value of the Company's assets and liabilities, which qualify as
financial instruments under SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," approximate the carrying amounts presented in the
balance sheets.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of
credit risk are cash and accounts receivable arising from its normal business
activities. The Company routinely assesses the financial strength of its
customers and third party payors and, believes that its accounts receivable
credit risk exposure is limited. The Company places its cash with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk.

Impairment of Long-Lived Assets

Certain long-lived assets of the Company are reviewed at least annually to
determine whether there are indications that their carrying value has become
impaired, pursuant to guidance established in SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations (undiscounted and without interest charges). If an impairment
is deemed to exist, the assets will be written down to fair value. Management
also reevaluates the periods of amortization to determine whether events and
circumstances warrant revised estimates of useful lives.

Stock-Based Compensation

The Company complies with the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148.


                                       32
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans and, accordingly, no
compensation cost has been recognized because stock options granted under the
plans were at exercise prices which were equal to or above the market value of
the underlying stock at date of grant. Had compensation for the Company's stock
options been determined as provided by SFAS No. 123 using the Black-Scholes
option pricing model, the Company's consolidated net loss would have been
adjusted to the pro forma amounts indicated below:

                                                          2006          2005
                                                          ----          ----
Net loss, as reported                                 $(4,399,000)  $(8,597,000)
Stock-based compensation determined under
 fair valued based method, net of related tax effect     (60,000)     (242,000)
                                                      -----------   -----------
Net loss, pro forma                                   $(4,459,000)  $(8,839,000)
                                                      ===========   ===========

Loss per common share, basic and diluted
  As reported                                         $     (0.24)  $     (0.55)
  Pro forma                                           $     (0.24)  $     (0.56)

The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal year ended April 30, 2005: no dividend
yield, expected volatility of 59%, risk-free interest rate of 1.38% and
three-year expected lives.

Comprehensive Income

The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income". SFAS 130 governs the financial statement presentation of
changes in shareholder's equity resulting from non-owner sources. Accumulated
other comprehensive income as reported in the accompanying balance sheets
represents unrealized losses on available-for-sale securities. During the year
ended April 30, 2006, the Company determined that the impairment of its
investment in an available-for-sale security was permanent. Accordingly, this
impairment has been charged to operations for the year ended April 30, 2006 with
an offsetting reduction of the accumulated other comprehensive loss to zero.

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." SFAS No.
123R is a revision of SFAS No. 123, "Accounting for Stock Based Compensation,"
and supersedes APB No. 25. Among other items, SFAS No. 123R eliminates the use
of APB No. 25 and the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments in the financial statements based on the grant date
fair value of those awards. The effective date of SFAS No. 123R for the Company
is May 1, 2006. The Company has elected to adopt SFAS No. 123R using the
"modified prospective" method. Under the "modified prospective" method,
compensation cost is recognized in the consolidated financial statements
beginning with the effective date, based on the requirements of SFAS No. 123R
for all share-based payments granted after that date, and based on the
requirements of SFAS No. 123 for all unvested awards granted prior to the
effective date of SFAS No. 123R.

The adoption of this statement has had no effect on net loss and loss per share
due to the adoption of the "modified prospective" method for existing options
and the fact that no new options have been granted.

4.    Manufacturing Agreement and Related Activities

On October 3, 2005, the Company, on behalf of a wholly-owned subsidiary to be
formed, entered into a manufacturing agreement (the "Agreement") with an entity
affiliated with a Director of the Company (H.H. Brown Shoe Technologies, Inc.


                                       33
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

doing business as Dicon). The Agreement grants the Company the exclusive rights
to manufacture patented hydrophilic urethane foam products, polyurethane gels
and moisture managed foam footwear inserts and to distribute, along with Dicon,
these products in North America in consideration of a 7-10% royalty based on
sales. The Agreement also provides for a supply agreement between the Company
and Dicon. Products to be manufactured under this Agreement will be sold for use
in cosmetic, medical, and household markets including the foot-care market under
the brand name DRYZ, a registered trademark. In December 2005, FMI
Manufacturing, Inc. ("FMI") was formed as a wholly-owned subsidiary of the
Company to control this activity and in February 2006, FMI entered into a lease
for a manufacturing facility (Note 13). In April 2006, under the Agreement, the
Company purchased certain "first line" equipment from Dicon for a purchase price
of $270,000. In June 2006, the Company purchased $380,000 of "second line"
equipment, paying Dicon $50,000 and entering into a secured three-year note
payable to Dicon for the remaining $330,000. FMI's activities have been funded
by subsidiary senior secured notes that mature on July 31, 2006 and the
equipment note with Dicon, which are discussed in Notes 6 and 7.

5.    Property and equipment and purchased technology

Property and equipment

Property and equipment, at cost, consist of the following at April 30, 2006:

         Machinery and equipment                   $ 1,933,000
         Office equipment and fixtures                  97,000
         Leasehold improvements,                       436,000
                                                   -----------
                                                     2,466,000
         Less: accumulated depreciation
           and amortization                         (1,833,000)
                                                   -----------
                                                   $   633,000
                                                   ===========

Capital expenditures associated with the FMI business were approximately
$385,000 during the fiscal year ended April 30, 2006. Subsequent to April 30,
2006, the Company exercised its option to purchase an additional approximately
$380,000 of equipment for the FMI business, before delivery and installation
costs, as discussed in Note 4. Depreciation expense for the years ended April
30, 2006 and 2005 amounted to approximately $161,000 and $166,000, respectively.

Purchased Technology

In 1997 the Company purchased technology for net consideration, as amended,
approximating $797,000. For the year ended April 30, 2005 amortization expense
related to the purchased technology amounted to approximately $85,000 and it was
fully amortized at April 30, 2005.

6.    Short-term financing

Subsidiary Senior Secured Notes

Between December 20, 2005 and April 30, 2006, the Company raised approximately
$480,000 by issuing 11% per annum subsidiary senior secured notes of FMI
pursuant to a note purchase agreement as amended and restated on February 1,
2006. Such subsidiary senior secured notes are secured by all the assets of FMI
and, as amended in May 2006, are due on the earlier of July 31, 2006 or the
completion of a financing of at least $500,000. The notes were issued to
directors and other related parties, an affiliate as well a third party.
$100,000 of the amounts borrowed from the initial investor in the subsidiary
senior secured notes may be converted into new instruments upon the completion
of a proposed financing. Subsequent to April 30, 2006, additional subsidiary
senior secured notes were issued thereby raising the principal amount
outstanding to $805,000 at June 23, 2006.


                                       34
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Secured Accounts Receivable and Purchase Order Financing

Beginning in November 2005, the Company began raising short-term financing
through financing its accounts receivable. Under this program, specific accounts
receivable are sold at a discount and the Company retains the right to
repurchase the accounts, subject to a 2% per month financing charge.
Additionally, beginning in April 2006, borrowings under this arrangement were
extended to customer purchase orders. The Company records this as a financing
transaction in which the receivables sold are carried on the consolidated
balance sheet and the amount to be repaid is reflected as a short-term debt. At
April 30, 2006, approximately $92,000 of this liability was payable to a related
party. All accounts receivable sold at April 30, 2006, were subsequently
repurchased by the Company.

7.    Notes and convertible debentures payable and in default

Note and Interest Payable, in default

On January 24, 1997, HDS entered into a financing agreement with a customer for
the purchase of $600,000 of manufacturing equipment from a third party. The
agreement consisted of a promissory note in the amount of $600,000 bearing
interest at 8% per annum and principal and interest due between three (3) and
six (6) years from the anniversary date, depending upon the amount of product
the customer ordered from the Company. The note has been amended several times,
the most recent of which was on April 21, 2004. In that amendment, the lender
agreed to amend and restate the note in the amount of $793,053 upon the
completion of the Share Exchange with Nesco which occurred on April 29, 2004.
The amended note bore interest at 11%, per annum (the default rate) until an
aggregate interest payment of $84,000 was made on July 27, 2004. Thereafter,
interest forward until the maturity date, December 31, 2005, is at 8%, per annum
payable at maturity. In addition, the lender agreed to release its security
position on the collateral 90 days after receipt, on August 13, 2004, of a
payment of $200,000 against the principal balance. The balance due on the note
at April 30, 2006 is approximately $709,000 consisting of approximately $555,000
in principal and $154,000 of accrued interest.

This note was not paid on the amended maturity date of December 31, 2005 and is
now in default. The Company intends to attempt to negotiate an extension of the
term of the debt. Interest expenses for the years ended April 30, 2006 and 2005
approximated $45,000 and $76,000, respectively.

Convertible Debentures, Including Interest and Penalties Payable, in Default

The Company has the following convertible debentures outstanding at April 30,
2006:

<TABLE>
<CAPTION>
                                                             Face         Registration     Accrued
Due to                           Due date                   amount          penalties      interest       Total
------                           --------                   ------          ---------      --------       -----
<S>                              <C>                      <C>              <C>            <C>           <C>
Senior secured parties           December 1, 2005         $2,295,000       $  548,000     $  170,000    $3,013,000
Officers and related parties     December 31, 2005         2,111,000               --        468,000     2,579,000
Other third parties              December 31, 2005           625,000               --        207,000       832,000
                                                          ----------       ----------     ----------    ----------
      Subtotal                                            $5,031,000       $  548,000     $  845,000    $6,424,000
                                                          ==========       ==========     ==========    ==========
</TABLE>

The original debt discount, and amortization of debt discount for the years
ended April 30, 2006 and 2005 and annual interest expense on these instruments
follows:

<TABLE>
<CAPTION>
                                                    Amortization
                               Original Debt    Year ended April 30,        Annual
Due to                           Discount        2006          2005        Interest
------                           --------        ----          ----        --------
<S>                             <C>           <C>           <C>           <C>
Senior secured parties          $2,112,000    $  952,000    $1,202,000    $  184,000
Officers and related parties     1,287,000       540,000       747,000       169,000
Other third parties                571,000       239,000       332,000        50,000
                                ----------    ----------    ----------    ----------
      Total                     $3,970,000    $1,731,000    $2,281,000    $  403,000
                                ==========    ==========    ==========    ==========
</TABLE>


                                       35
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The debt discount has been fully amortized at April 30, 2006.

The conversion features and related warrant exercise prices are as follows:

<TABLE>
<CAPTION>
                                                                   Total shares      Total shares
                                  Conversion        Warrant         issuable on     issuable under
Description                          price           price           conversion        warrants
-----------                          -----           -----           ----------        --------
<S>                              <C>                 <C>             <C>              <C>
Senior secured parties               $0.15           $0.25           15,300,000       15,300,000
Officers and related parties     $0.08 - $0.15       $0.15           21,050,747        2,111,230
Other third parties                  $0.08           $0.15            7,500,000          625,000
                                                                     ----------       ----------
      Total                                                          43,850,747       18,036,230
                                                                     ==========       ==========
</TABLE>

These convertible debentures were not paid at their maturity dates in December
2005 and are therefore now in default. The Company is having discussions with
the holders regarding an extension of the term of the debt.

Additional information about the convertible debentures listed above follows:

Convertible Debentures - Senior Secured Parties

In June 2004 the Company borrowed $100,000 under bridge loans bearing interest
at 8%. The debt holders were also granted warrants to acquire 666,667 common
shares at $0.15 per share. These loans were later converted into convertible
debentures in connection with the investment banking agreement discussed below.
The fair value of the bridge loan warrants of approximately $40,000 was charged
to debt discount in the quarter ended July 31, 2004.

Pursuant to an investment banking agreement entered into on July 1, 2004 with
Sloan Securities Corp., the Company sold $2,295,000 principal amount of the
Company's 8% senior secured convertible notes due December 1, 2005. Interest on
such senior secured convertible notes is payable semi-annually on December 1 and
June 1, either in cash or common stock, and such notes are convertible into
15,300,000 shares of common stock at $0.15 per share. The notes are secured by
all of the assets of the Company. The notes were issued with a five-year warrant
to purchase 1 share of the Company's common stock at $0.25 per share for each
share of common stock issuable upon conversion of the senior secured convertible
notes. Approximately $1,108,000 of the proceeds was attributed to the fair value
of the warrants and $1,004,000 to the intrinsic value of the beneficial
conversion feature of the convertible debt, with the remaining balance of
$183,000 recorded as long-term debt. On December 1, 2004, the Company issued
390,305 shares of common stock as payment for the interest due in the aggregate
of approximately $59,000. In June 2005, the Company issued 618,815 shares of
common stock as payment for the interest due in the aggregate of approximately
$93,000.

In connection with these notes and a related registration rights agreement, the
Company was required to file a registration statement to register the common
stock issuable upon the conversion of the notes and exercise of the warrants no
later than November 27, 2005, 60 days after the completion of the offering. The
Company did not file the required registration statement until January 27, 2005
and damages in the amount of approximately $92,000 (2% per month of the
aggregate purchase price) were required to be paid in cash under the terms of
the agreement. The holders of the notes agreed to accept this payment in the
aggregate of approximately $92,000 in common stock (556,865 shares) of the
Company. The fair value of the shares due has been charged to operations and
this expense is included in current liabilities as these shares have not been
issued as of April 30, 2006. In addition, the Company was required to have the
registration statement declared effective no later than June 27, 2005. As the
registration statement has not been declared effective, penalties in the amount
of 2% per month of the aggregate purchase price are required to be paid in cash
under the terms of the agreement. Interest accrues on the unpaid penalties at
the rate of 18% per annum for each month that they are unpaid. Penalties and
interest of approximately $548,000 have been charged to operations for the year
ended April 30, 2006.


                                       36
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Financing fees in connection with this agreement approximated $285,000. In
addition, the Company issued the warrants to a broker to acquire 5,052,600
shares of Nesco common stock at an exercise price of $0.15 per share. Such
warrants had a fair value at the date of issuance of approximately $407,000.
These fees and warrant costs were charged to operations as deferred finance
costs over the term of the convertible notes, $294,000 and $398,000 in the years
ended April 30, 2006 and 2005, respectively.

Convertible Debentures - Officers and Related Party

Related Party - As of April 30, 2004, a related party had loaned HDS an
aggregate of $1,308,000. HDS issued a series of convertible debentures in
connection with these loans between the period of October 12, 1999 and August 7,
2003. On April 19, 2004, the related party agreed, upon consummation of the
Share Exchange, to extend the due dates of these debentures until December 31,
2005 and to exchange these debentures for 8% convertible debt of Nesco based on
the same ratios in the Share Exchange (a ratio of approximately 9 Nesco common
shares for 1 common share of HDS stock and 36 Nesco common shares for 1
preferred share of HDS stock). On May 25, 2004 the exchange was completed. In
consideration for an extension and exchange of the debt, the debt holder was
also granted a warrant to acquire one share of Nesco common stock at an exercise
price of $0.15 for a term of five years for each dollar of HDS debt. Of the
total $1,308,000 debt exchanged, approximately $75,000 was attributed to the
fair value of the warrants, $1,121,000 was attributed to the intrinsic value of
the beneficial conversion feature and the remaining $112,000 was recorded as a
long-term debt.

In addition, in May 2004 this party exchanged an aggregate of 331,500 options
and warrants of HDS for an aggregate of 10,566,000 warrants of Nesco based on
the same ratios in the Share Exchange. These options/warrants are currently
exercisable at prices that range between $0.08 -$0.39 and expire between six and
seven years. Compensation expense approximating $889,000 was recorded on May 25,
2004 for the increase in the fair value of these vested HDS options/warrants as
a result of the exchange. The increase in the fair value was estimated on the
date of the share exchange using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, expected volatility of 59%, risk-free
interest rate of 1.38% and two to three-year expected lives.

Officers - As of April 30, 2004, HDS had outstanding debt due to two officers in
the aggregate of approximately $803,000, which was comprised or approximately
$552,000 in unpaid payroll and $251,000 in net notes payable including accrued
interest. In April 2004, the officers agreed to exchange this debt for 8%
convertible debentures of Nesco in connection with the Share Exchange in May
2004. This debt is convertible into common shares of Nesco at approximately
$0.15 per share (the market price on the date of exchange). In consideration for
an extension and exchange of the debt, the debt holders were also granted a
warrant to acquire one share of Nesco common stock at an exercise price of $0.15
for a term of five years for each dollar of HDS debt. Of the total of
approximately $803,000 in debt, approximately $46,000 was attributed to the fair
value of the warrants, approximately $46,000 was attributed to the intrinsic
value of the beneficial conversion feature and the remaining balance of
approximately $711,000 was recorded as long-term debt. In December 2005, one of
these officers resigned from the Company.

In addition, one of the officers exchanged an aggregate of 133,334 options of
HDS for an aggregate of 1,200,000 warrants of Nesco based on the same ratios in
the Share Exchange. These options were exercisable at $0.39 per share until they
expired in January 2006. Compensation expense approximating $23,000 was recorded
on May 25, 2004 for the increase in the fair value of these vested HDS
options/warrants as a result of the exchange.

The increase in the fair value of warrants and options in connection with the
above debentures was estimated on the date of the Share Exchange using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield, expected volatility of 59%, risk-free interest rate of 1.38% and two to
three-year expected lives.

Convertible Debentures - Other Third Parties


                                       37
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of April 30, 2004, HDS had outstanding 8% convertible debentures in the
aggregate of $625,000, of which $325,000 were issued to a broker and $300,000
were issued to a series of investors in connection with a private placement in
2002. The debentures were due on October 31, 2003. On April 19, 2004, the debt
holders agreed to exchange these debentures for 8% convertible debt of Nesco due
on December 31, 2005 based on the same ratios in the Share Exchange (a ratio of
approximately 9 Nesco common shares for 1 common share of HDS stock and 36 Nesco
common shares for 1 preferred share of HDS stock). On May 25, 2004 the exchange
was completed. This debt is convertible at approximately $0.08 per share into an
aggregate of approximately 7,500,000 shares of Nesco. In consideration for the
extension and exchange of the debt, the debt holders were also granted a warrant
to acquire one share of Nesco common stock at an exercise price of $0.15 for a
term of five years for each dollar of HDS debt for an aggregate of the issuance
of 625,000 warrants. Of the approximately $625,000 of debt exchanged,
approximately $36,000 was attributed to the fair value of the warrants,
approximately $536,000 was attributed to the intrinsic value of the beneficial
conversion feature and the remaining balance of $53,000 was recorded as
long-term debt.

In addition, these parties, inclusive of broker warrants, exchanged an aggregate
of 431,619 options and warrants of HDS for an aggregate of 11,015,820 warrants
of Nesco based on the same ratios in the Share Exchange. These options/warrants
are currently exercisable at prices that range between $0.08 -$0.39 and expire
between six and seven years. Compensation expense approximating $872,000 was
recorded on May 25, 2004 for the increase in the fair value of these vested HDS
options/warrants as a result of the exchange.

The increase in the fair value of warrants and options in connection with the
above debentures was estimated on the date of the share exchange using the
Black-Scholes option pricing model with the following assumptions: no dividend
yield, expected volatility of 59%, risk-free interest rate of 1.38% and two to
three-year expected lives.

Other Long Term Debt -

On June 23, 2006, the Company executed a secured note payable to Dicon for
$330,000 for the purchase of certain equipment. The note bears interest at the
prevailing prime rate, adjusted quarterly starting in December 2006, plus 1.5%.
Monthly payments of principal and interest become due beginning in September
2006 and continue until maturity at August 31, 2009. Prime rate for the first
payment was agreed to be 8% and the initial monthly payments will be
approximately $11,000. The Company granted Dicon a first security interest in
the underlying equipment which was purchased for a total price of $380,000.

In accordance with EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" the Company has
determined that the value of its derivative instruments have an immaterial
value.

8.    Standby Equity Distribution Agreement and Stock Issuance Costs Expensed

On August 23, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, an investment firm. Under the terms
of the agreement, the investment firm committed to purchase up to $10,000,000 of
the Company's common stock and the equity line was to be drawn down upon a
registration statement covering the shares being declared effective by the
Securities and Exchange Commission ("SEC"). As consideration for entering into
the Standby Equity Distribution Agreement, the Company granted Cornell Capital
Partners, LP 3,266.66 shares of Series B Convertible Preferred Stock
(convertible into 2,450,000 common shares) and paid a $70,000 cash consulting
fee. In addition, the Company granted the placement agent 66.66 shares of Series
B Preferred Stock (convertible into 50,000 common shares). The fair value of the
shares ($625,000) as well as $17,500 in fees and the $70,000 cash consulting fee
associated with this agreement were recorded on the balance sheet as stock
issuance costs in the quarter ended October 31, 2004.

On November 16, 2004 the Company filed a preliminary information statement with
the SEC to allow the Company to effect an increase the number of common shares
it is authorized to issue. This needed to be completed before the Company could


                                       38
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

have the required registration statement declared effective by the SEC. On
January 27, 2005, a preliminary registration statement was filed. Between
December 2004 and November 2005, various comments and responses were exchanged
between the SEC and the Company on the information statement and the
registration statement. On November 4, 2005, the Company decided to withdraw the
registration statement covering the shares to be sold, thereby effectively
terminating the planned issuance of shares to Cornell Capital Partners. LP. The
Company expensed the approximately $713,000 of stock issuance costs as of April
30, 2005.

9.    Customer deposits

At April 30, 2006, of the approximately $846,000 of customer deposits,
approximately $839,000 are from one customer. This customer made a
non-refundable deposit to be applied to future purchases from the Company until
December 31, 2009. To the extent that any portion of the deposits is not used
for purchases by the end of calendar year 2009, the deposits would be forfeited.

10.   Due to related party and affiliates

Due to related party and affiliates at April 30, 2006 of approximately $506,000
consists primarily of temporary advances, unpaid rent and real estate taxes due
to an entity owned by a related party of the Company. See also, Note 13.

11.   Stockholders' deficit

Capitalization

Our authorized capital consists of 25,000,000 shares of common stock $0.001 par
value. Shares outstanding at April 30, 2006 include the current outstanding
common shares in the aggregate of 20,136,225 shares less the 2,400,000 shares
which are subject to redemption (see Share Exchange below). In addition, we are
authorized to issue 850,000 shares of our Series A Convertible Preferred Stock
("Series A Preferred Stock") and 150,000 shares of our Series B Convertible
Preferred Stock ("Series B Preferred Stock") respectively. As of April 30, 2006,
there were 67,000 shares of our Series A Stock outstanding and 117,054.94 shares
of our Series B Preferred Stock outstanding.

Holders of common stock are entitled to one vote for each share of common stock
owned on all matters to be voted on by stockholders. Our Articles of
Incorporation do not contain any special voting provisions, and no corporate
action requires a greater than majority vote of stockholders. Cumulative voting
is not permitted in the election of directors. The holders of common stock are
entitled to receive such dividends, if any, as may be declared from time to time
by the Board of Directors, in its discretion, from funds legally available
therefore. The common stock has no preemptive or other subscription rights, and
there are no conversion rights or redemption provisions. All outstanding shares
of common stock are validly issued, fully paid, and non-assessable.

Each share of Series A Preferred Stock shall be automatically converted into 30
shares of our common stock upon the filing of an amendment to our Articles of
Incorporation to increase the number of shares of common stock we are authorized
to issue. Each share of our Series A Preferred Stock shall have 30 votes per
share on all matters to be voted on by all stockholders. Each share of Series A
Preferred Stock when voting as a class shall be entitled to one vote per share.
Until exchange for common shares as contemplated by the exchange agreement, upon
any liquidation or dissolution, holders of Series A Preferred Stock shall be
entitled to receive $2.00 per share plus an amount equal to all dividends
accrued but unpaid.

Each share of Series B Preferred Stock shall be automatically converted into 750
shares of our common stock upon the filing of an amendment to our Articles of
Incorporation to increase the number of shares of common stock we are authorized
to issue sufficient to convert the then outstanding shares of Series B Preferred
Stock. Each share of our Series B Preferred Stock shall have 750 votes per share
on all matters to be voted on by all stockholders. Each share of Series B
Preferred Stock when voting as a class shall be entitled to one vote per share.
Shares of Series B Preferred Stock shall rank junior to shares of Series A
Preferred Stock.


                                       39
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options and Warrants

The Company's 1999 Stock Option Plan (the "1999 Plan") provides that key
employees are eligible to receive incentive stock options or nonqualified stock
options and that directors and advisors shall be eligible to receive
nonqualified options. Under the 1999 Plan, the Company may grant options to
purchase up to a total of 1,000,000 shares of common stock. As of April 30,
2006, there were 1,000,000 options available for future grants. For options
granted to greater than 10% shareholders, the exercise price of the options must
be fixed at not less than 110% of the fair market value on the date of grant.
The maximum term of these options may not exceed five years from the date of
grant.

The following table summarizes the options and warrants granted to officers,
employees consultants and convertible debt holders for the two year period ended
April 30, 2006:

                      Number of shares under option/warrant

<TABLE>
<CAPTION>
                                                                                                                    Weighted
                                                                                            HDS Warrants            Average
                                                    Nesco                  HDS          Common       Preferred   Exercise price
                               Total        Options       Warrants       Options         Stock          Stock      per share
                           -----------    -----------    -----------   -----------    -----------    -----------    --------
<S>                         <C>             <C>           <C>             <C>            <C>            <C>         <C>
Outstanding,
  May 1, 2004                1,070,954             --             --       358,334        167,500        545,120    $   3.26

Options and warrants due
  to reverse acquisition    26,895,866      3,375,000     24,591,820      (358,334)      (167,500)      (545,120)       0.12

Options cancelled             (750,000)      (750,000)            --            --             --             --        0.61

Warrants granted            24,039,484             --     24,039,484            --             --             --        0.21

Options granted              5,180,000      5,180,000             --            --             --             --        0.16
                           -------------------------------------------------------------------------------------------------

Outstanding,
  April 30, 2005            56,436,304      7,805,000     48,631,304            --             --             --        0.16

Options expired             (1,050,000)    (1,050,000)            --            --             --             --        0.25
                           -------------------------------------------------------------------------------------------------

Outstanding,
  April 30, 2006            55,386,304      6,755,000     48,631,304            --             --             --    $   0.16
                           =================================================================================================
</TABLE>

The following table summarizes information about the stock options and warrants
granted to officers, employees, consultants and convertible debt holders at
April 30, 2006:

<TABLE>
<CAPTION>
                     Options and Warrants Outstanding      Options and Warrants Exercisable
                     --------------------------------      --------------------------------
                      Number      Weighted    Weighted            Number      Weighted
                    Outstanding    Average     Average         Exercisable     Average
Range of Exercise    April 30,    Remaining   Exercise           April 30,    Exercise
     Prices            2006         Term        Price              2006         Price
-----------------   ----------    ---------     -----           ----------      -----
<S>                 <C>           <C>           <C>             <C>             <C>
  $0.05 - $0.15     37,348,798    4.3 years     $0.11           35,348,798      $0.10
  $0.25 - $0.39     18,037,506    3.2 years      0.27           18,037,506       0.27
                    -----------------------------------------------------------------
                    55,386,304                  $0.16           53,386,304      $0.16
                    =================================================================
</TABLE>

Share Exchange -

On May 25, 2004, HDS consummated the Share Exchange with Nesco whereby HDS
became a majority-owned subsidiary of Nesco, and the holders of HDS common stock
and debt acquired a majority interest of Nesco. Because the former HDS


                                       40
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

stockholders own a majority of the voting stock of Nesco (common stock and
Series B preferred stock convertible into common stock), HDS is considered for
accounting purposes to be the acquirer in the transaction. The accounting for
the transaction, commonly called a reverse acquisition, resulted in a
recapitalization of HDS.

Nesco had intended to issue shares of its common stock in exchange for the
equity securities of HDS in certain ratios as provided for in the exchange
agreement. However, Nesco does not have the required number of authorized shares
of common stock to complete the exchange on this basis. As such, it agreed to
issue shares of its newly designated Series B Preferred Stock instead of common
stock. Upon filing of a Certificate of Amendment to the Certificate of
Incorporation to increase the number of shares of common stock which Nesco is
authorized to issue, each share of the Series B Preferred Stock will be
automatically converted into shares of Nesco common stock. Such amendment
requires action by, or notification to, shareholders. Such notification has been
reflected in a November 16, 2004 preliminary information statement filed with
the SEC. The information statement cannot be completed until an amended
information statement is filed. Upon completion of this process, the Company
will file the Certificate of Amendment and issue the common stock.

At the time of the transaction, HDS common shareholders exchanged 3,240,593
shares of stock for 38,887 shares of Nesco Preferred B Stock, which will be
converted into 29,165,250 shares of Nesco common stock (a ratio of approximately
9 Nesco shares for 1 share of HDS stock). The HDS preferred shareholders
exchanged 295,853 shares of stock for 14,201 shares of Nesco Preferred B Stock,
which will be converted into 10,650,750 shares of Nesco common stock (a ratio of
approximately 36 Nesco shares for 1 share of HDS stock). Approximately 97% of
the common and 90% of the preferred shareholders have exchanged their shares as
of April 30, 2006 which has resulted in approximately 54.1% of Nesco's voting
securities outstanding at the time of the exchange owned by HDS stockholders.
Assuming that all the remaining HDS shareholders exchange their shares in the
future, the former HDS shareholders would own 55.3% of Nesco's voting securities
outstanding at the time of the exchange. Upon completion of this exchange, HDS
common shareholders will exchange a total of 4,452,806 shares of stock for
53,434 shares of Nesco Preferred B Stock, which will be converted into
40,075,167 shares of Nesco common stock (a ratio of approximately 9 Nesco shares
for 1 share of HDS stock). The HDS preferred shareholders will exchange a total
of 522,487 shares of stock for 25,079 shares of Nesco Preferred B Stock which
will be converted into 18,809,574 shares of Nesco common stock (a ratio of
approximately 36 Nesco shares for 1 share of HDS stock). The HDS stockholders,
upon completion of the exchange of shares, will receive an aggregate of
58,884,741 common shares or 55.3% of the total shares outstanding at the time of
the exchange which aggregated 106,386,847 equivalent common shares on May 25,
2004.

In addition, Nesco was required to convert its outstanding shareholder debt to
equity. On May 11, 2004, prior to the date of the closing, the holders of this
debt in the aggregate principal amount of approximately $953,000 agreed to
exchange the debt for an aggregate of 20,000 shares of Nesco's Series B
Preferred Stock, which is convertible into 15,000,000 shares of Nesco's common
stock. Nesco was also required to obtain the consent to cancel an aggregate of
602,500 special warrants prior to the closing. Certain holders of these special
warrants were granted shares of Nesco common stock in the exchange as part of
the common advisor shares issued. Nesco's Series A Preferred shareholders also
agreed that upon completion of the exchange agreement they would convert their
shares to Nesco's common stock and that Nesco would have no further obligations
with respect to these preferred shares including payment of any prior preferred
share dividends. In addition, Nesco was required to have net cash of
approximately $350,000 at the closing of the transaction as part of the terms of
the Share Exchange. Nesco provided approximately $208,500 as a bridge loan to
HDS prior to April 30, 2004. This bridge loan was applied to the net cash
obligation of Nesco, which was satisfied at the closing.

Concurrent with the exchange, Nesco Series A Preferred shareholders agreed to
exchange 512,500 shares of stock for an aggregate of 20,500 shares of Nesco
Preferred B Stock, which will be converted into 15,375,000 shares of Nesco
common stock (a ratio of approximately 30 Nesco common shares for 1 share of
Series A preferred stock). As of April 30, 2005, 445,500 shares of Series A
Preferred shares have been exchanged for 17,820 shares of Series B Preferred
shares.


                                       41
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of this transaction, Nesco conditionally transferred its three wholly
owned subsidiaries, NAC, IAP and NACE, to a consultant and interim officer of
Nesco who resigned his position as officer at the time of the transfer. The
transferee assumed all liabilities and obligations with respect to these
subsidiaries and agreed to indemnify Nesco against any claims and, in exchange
therefore, received 3,000,000 shares of common stock of Nesco and certain
related registration rights. As additional consideration for the indemnification
by the transferee, Nesco agreed that if the transferee cannot in good faith
resell the shares of common stock in an arm's length transaction during the
twelve month period immediately following the closing for a price equal to the
lesser of (i) all liabilities resulting from the agreement between NAC and its
labor union plus legal fees or (ii) $330,000, then the Company will repurchase
from the transferee 2,400,000 of the common shares at that amount upon written
notice from the transferee requesting such. On May 25, 2005, the Company agreed
to extend the put right granted to the transferee until May 25, 2006 subject to
the condition that the right may not be exercised until after January 1, 2006.
The repurchase of the 2,400,000 common shares, which are subject to redemption
by the transferee, are included in current liabilities at an aggregate of
$330,000, the maximum amount the Company would be required to pay in the event
of redemption. Such repurchase right expired unexercised on May 25, 2006.

In connection with the Share Exchange, Nesco also issued an aggregate of
6,500,000 common shares (with a fair value of approximately $975,000 based on
the market price of $0.15 on the date of the exchange) to an advisor, a limited
liability corporation owned by an affiliate of an interim officer and
consultant, for services rendered in connection with the Share Exchange. This
advisor, under related contractual obligations, assigned an aggregate of
5,000,000 of these common shares to third parties. Approximately 2,900,000 of
these shares were issued to the parties who agreed to cancel their special
warrants of Nesco. Nesco also incurred additional costs related to the exchange
approximating $48,000. Approximately $328,000 of these costs, the net amount of
cash received from the Nesco acquisition, were charged to equity, and the
balance of $695,000 was recorded as a charge to operations in the year ended
April 30, 2005.

Prior to the transaction, Nesco had 7,627,105 common shares outstanding. After
giving effect to the transactions above and after such time that Nesco increases
the number of common shares it is authorized to issue, Nesco would have
approximately 106,387,000 shares outstanding as of the exchange date.

In addition to the exchange of shares, all outstanding options/warrants of HDS
were exchanged for Nesco options/warrants based on the same ratios as the stock
exchange. An aggregate of 525,834 options and warrants for the purchase of HDS
common stock were exchanged for an aggregate of 4,732,500 options and warrants
for the purchase of common stock of Nesco (a ratio of 9 Nesco common shares for
1 share of HDS common stock). An aggregate of 545,120 options and warrants for
the purchase of HDS preferred stock were exchanged for an aggregate of
19,624,320 options and warrants for the purchase of common stock of Nesco (a
ratio of 36 Nesco common shares for 1 share of HDS preferred stock). This
resulted in the issuance of approximately 24,357,000 Nesco options/warrants.
These options/warrants are currently exercisable at prices that range between
$0.08 -$0.39 and expire between one and seven years. Compensation expense
approximating $1,794,000 was recorded on May 25, 2004 for the increase in the
fair value of the vested HDS options/warrants as a result of the exchange. The
increase in the fair value was estimated on the date of the Share Exchange using
the Black-Scholes option pricing model with the following assumptions: no
dividend yield, expected volatility of 59%, risk-free interest rate of 1.38% and
two to three-year expected lives.

The HDS debt holders were also granted, in consideration of an extension of term
debt, a warrant to acquire one share of Nesco common stock at an exercise price
of $0.15 for a term of five years for each dollar of HDS debt, for an aggregate
issuance of 2,736,212 warrants. The total HDS term debt of approximately
$2,736,000 was also exchanged for Nesco convertible debt and the holders may
convert this debt to approximately 28,551,000 shares of Nesco common stock.
Approximately $156,000 of the total debt exchanged was attributed to the fair
value of the warrants and approximately $1,703,000 was attributed to the
intrinsic value of the beneficial conversion feature. These amounts were
recorded as equity components. The remaining balance of approximately $877,000
was recorded as long-term debt. For the years ended April 30, 2006 and 2005 the
amortization of the debt discount approximated $623,000 and $1,080,000,
respectively.


                                       42
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prior to the transaction, Nesco had approximately 4,212,500 options and warrants
outstanding. After giving effect to the transactions above, Nesco had
approximately 30,703,000 options and warrants outstanding and debt convertible
into approximately 28,551,000 common shares as a result of the exchange
agreement.

Loss Per Share

Basic loss per share excludes dilution and is calculated by dividing the net
loss attributable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted loss per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock and resulted in the
issuance of common stock. Because the Company incurred a net loss, diluted net
loss per share was the same as basic net loss per share for the years ended
April 30, 2005 and 2004, since the effect of any potentially dilutive securities
would be antidilutive.

The loss per common share at April 30, 2006 includes the current outstanding
common shares in the aggregate of 20,136,225 shares less the 2,400,000 shares
which are subject to redemption (see Share Exchange above). It does not include
117,055 shares of Series B preferred shares which will be converted into
87,791,250 common shares, 67,000 shares of Series A preferred shares which will
be converted into 2,010,000 common shares and 2,916,308 common shares for the
prior HDS common and preferred holders who have not yet exchanged their shares.
Although the Series A and Series B preferred shares will be automatically
exchanged for common shares upon the filing of a Certificate of Amendment to the
Certificate of Incorporation to increase the number of shares of common stock
which the Company is authorized to issue, they have been excluded from loss per
common share, in accordance with the Emerging Issues Task Force ("EITF") 03-6 as
these securities have no contractual obligation to share in the losses of the
Company. The following supplemental pro forma information is presented to
illustrate the effects on loss per share of the conversion of the Series A and
Series B preferred stock for the years ended April 30, 2006 and 2005.

                                                April 30, 2006   April 30, 2005
                                                 -------------    -------------
Net loss                                         $  (4,399,000)   $  (8,597,000)
Weighed average common shares outstanding
  basic and diluted                                111,020,000      104,850,000
Loss per common share, basic and diluted         $        (.04)   $        (.08)

The loss per common shares does not include an aggregate of 55,386,304 warrants
and options outstanding and 43,850,747 shares issuable under the terms of
convertible debt. The effect of these securities would be antidilutive.

12.   Income taxes

Income taxes have been accounted for under SFAS No. 109. At April 30, 2006, the
Company had net operating loss carryforwards of approximately $19,500,000 to
offset future income subject to tax. These result in an estimated $6,630,000 of
federal, and $1,170,000 million of state, deferred tax assets at April 30, 2006.
A full valuation allowance ($7,800,000) has been established for these deferred
tax assets since their realization is considered unlikely. The difference
between the tax provision at the federal corporation tax statuary rate (34%) and
the rate, zero, included in the Company's consolidated financial statements
occurs because the Company has not had taxable income and does not have the
ability to utilize loss carryforwards.

The increase in valuation allowance of $735,000 and $3,480,000 for the years
ended April 30, 2006 and 2005, respectively, is primarily attributable to the
Company's additional net operating losses incurred. At April 30, 2006, the
Company has federal and state net operating loss carryforwards of approximately
$19,500,000, which expire beginning in 2012 (see, however, below).


                                       43
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in the ownership of a majority of the fair market value of the Company's
common stock would likely delay or limit the utilization of existing net
operating loss carryforwards. The Company believes, based upon limited analysis,
that such change may have occurred in 2004. However, the amount of such
limitation has not been determined.

13.   Commitments and contingencies

Employment Agreements

On May 19, 2004, the Company entered into an employment agreement with an
officer. The agreement provides for annual compensation of $120,000 increasing,
as amended to $200,000 effective January 1, 2005 with a 10% increase each year
on December 31 during the term of the agreement and bonuses to be paid as
determined by the Board of Directors. The term of the agreement, as amended,
extends until December 31, 2009. In addition, the officer was granted
nonqualified options, effective the date of the closing of the Share Exchange,
to purchase 5,000,000 shares of common stock for a period of 5 years. The option
is immediately exercisable for the purchase of 2,000,000 shares and exercisable
as to an additional 1,000,000 shares commencing on each of the first, second,
and third anniversaries of the closing date, respectively, provided that
optionee remains an employee of the Company. The options are exercisable at the
"Applicable Trading Price" in the Share Exchange which was computed to be $0.15
per share.

Consulting Agreements

On May 25, 2004, the Company entered into a two-year consulting agreement with
an affiliate of an interim officer and consultant of Nesco which provided for
the issuance of 2,000,000 shares of common stock and a minimum monthly
consulting fee of $7,500 to be credited against any other cash fees earned under
the terms of the agreement. The agreement also provides for certain transaction
fees to be paid to the consultant based on sales and contracts with strategic
alliances. The fair value of the 2,000,000 shares of common stock ($300,000
based on the market price of $0.15 on the date of the agreement) was charged to
operations in the quarter ended July 31, 2004. As of the prior fiscal year end,
April 30, 2005, the Company had prepaid approximately $23,000 in consulting fees
associated with this agreement. At, April 30, 2006, approximately $35,000 was
owed under this agreement and on May 25, 2006, the agreement expired.

On May 25, 2004, the Company entered into a one-year advisory services agreement
which provided for the issuance of 681,667 shares of common stock and a minimum
monthly consulting fee of $6,250 to be credited against any other cash fees
earned under the terms of the agreement. The agreement also provides for certain
transaction fees to be paid to the consultant based on sales and contracts with
strategic alliances. The fair value of the shares (approximately $102,000 based
on the market price of $0.15 on the date of the agreement) was charged to
operations in the quarter ended July 31, 2004. On December 17, 2004, the Company
terminated the agreement which was cancelable by either party after six months.
On January 5, 2005, the Company issued an aggregate of 908.89 shares of Series B
Preferred shares (convertible into 681,667 common shares) as per the agreement.

On November 1, 2004, the Company entered into a one-year advisory services
agreement which provides for compensation of $10,000 per month, of which $1,800
was payable in cash and $8,200 was payable, at the Company's discretion, in cash
or in common stock of the Company. The common stock payment was based each month
on the closing bid price of the Company's common stock on the first day of the
month for which payment is due. The consultant has customary piggyback
registration rights with respect to any shares issued under this agreement. As
of April 30, 2006 the Company has accrued the monthly minimum compensation of
$1,800. The fair value of the shares due under the agreement (approximately
$98,000, calculated on a monthly basis to be 1,100,837 shares) has been charged
to operations and this expense is included in current liabilities as these
shares have not been issued as of April 30, 2006. This agreement expired under
its terms at October 31, 2005.


                                       44
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On November 15, 2004, the Company entered into a one-year consulting agreement
for research and public relations services which provided for the issuance of
276,000 shares of restricted common stock and a one-time consulting fee of $500.
The fair value of the shares due under the agreement (approximately $47,000
based on the market price of $0.17 on the date of the agreement) has been
charged to operations. This expense was included in current liabilities as these
shares had not been issued. In December 2005, the Company issued 368 shares of
Series B Preferred shares in settlement of approximately $47,000 of this
liability. Such shares are convertible into 276,000 shares of common stock of
the Company.

On December 14, 2004, the Company entered into two four-month consulting
agreements for advisory services related to financial matters and marketing.
Each agreement provides for the payment of a monthly fee of $7,800 and the
issuance of a five-year warrant to purchase 40,000 shares of the common stock of
the Company exercisable at the closing price on the date of the agreement
($0.15). The warrants vest at the rate of 10,000 shares per month. The fair
value of the warrants ($12,000) were charged to operations in the fiscal year
ended April 30, 2005.

On December 20, 2004, the Company entered into a one-year advisory services
agreement which provides for compensation in the form of a five year warrant to
purchase 204,000 shares of the common stock of the Company at an exercise price
of $0.15. The warrants vest at the rate of 1/3 immediately, 1/3 on the six month
anniversary of the agreement and 1/3 one year from the agreement date. The fair
value of the warrants were charged to operations as they vested including
approximately $20,000 and $10,000 in the fiscal years ended April 30, 2006 and
2005, respectively.

Leases, Including Leases With Related Parties

HDS leases with related parties - On January 25, 2002, HDS entered into a lease
for a manufacturing facility that was purchased by an entity owned by a related
party. This lease, as amended in 2004, provides for minimum monthly rental
payments of approximately $14,000 with increases of 5% every two years beginning
in February 2006 and expires in 2012.

Additionally, on April 1, 2004, HDS, along with other co-tenants, entered into a
month-to-month lease for office space with an entity majority-owned by a
director of the Company, which, as amended, provides for a monthly lease payment
of approximately $3,000 per month since February 28, 2004.

Foam Manufacturing lease - In February 2006, FMI executed a six year lease for
approximately 28,000 square feet of space calling for minimum annual rentals
ranging from approximately $160,000 in the initial year to approximately
$195,000 in the sixth year plus all costs to operate the premises including
utilities, maintenance and taxes. The Company paid a lease deposit of
approximately $27,000 to secure its payment of the lease.

Rent expense and minimum lease commitments - Rent expense for the years ended
April 30, 2006 and 2005 was approximately $250,000 and $196,000, respectively,
including $210,000 and $196,000, respectively, that was payable to related
parties. Unpaid rent payable to related parties totaled approximately $312,000
at April 30, 2006 including all of the rent, insurance and taxes charged for the
fiscal year ended April 30, 2006 and approximately $101,000 of the rent and
insurance charged for the prior year.

Minimum annual lease payments on long term operating leases, excluding
utilities, maintenance and taxes are as follows:

                                 Total        FMI Lease       HDS Lease
                                 -----        ---------       ---------
Year ending April 30,
       2007                   $  332,000     $  161,000      $  170,000
       2008                      340,000        168,000         172,000
       2009                      354,000        175,000         179,000
       2010                      363,000        182,000         181,000
       2011                      379,000        189,000         190,000
       2012                      284,000        146,000         138,000
                              ----------     ----------      ----------
          Total               $2,052,000     $1,021,000      $1,030,000
                              ==========     ==========      ==========


                                       45
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred sublease income - On October 1, 1998, Nesco entered into a ten-year
lease through September 30, 2008 for the rental of office facilities. The lease
provides for escalations for scheduled rent increases and for the Company's
proportionate share of increases in real estate taxes and maintenance costs. On
March 4, 2000, Nesco entered into a sublease agreement for the October 1998
lease with a company in which a prior major shareholder of Nesco is a
stockholder. The sublease expires on September 30, 2008. The sublease rent is
being paid directly to the landlord by the sublease tenant.

Aggregate future minimum rental payments and sublease payments under the
operating lease set forth above as of April 30, 2006 are as follows:

                                    Rent Payment       Sublease income
                                    ------------       ---------------
Year ending April 30,
       2007                           $ 179,000           $ 179,000
       2008                             179,000             179,000
       2009                              45,000              45,000
                                      ---------           ---------
          Total                       $ 403,000           $ 403,000
                                      =========           =========

In June 2000, Nesco received a payment for future rent of approximately $398,000
from the subtenant under the sublease with respect to the October 1998 lease.
This payment was recorded as deferred sublease income and will be recognized as
revenue on a straight-line basis over the lease term. At April 30, 2006,
deferred sublease income is approximately $117,000, of which approximately
$47,000 is included in accounts payable and accrued liabilities.

Litigation

In June 2006, the Company received a complaint from a law firm seeking payment
of approximately $72,000 of fees alleged to be billed to the Company, together
with interest and costs. The Company believes this action is subject to the
indemnification granted to the Company in connection with the transfer of the
former Nesco businesses to a former interim officer (See Share Exchange above).
Except for this claim and the claims against former subsidiaries of Nesco, as
described in Nesco's April 30, 2004 10-KSB filing, the Company and its
subsidiaries were not involved in any other material legal proceedings during
the year ended April 30, 2006.

The NAC entities, formerly subsidiaries of Nesco, are subject to a number of
claims and alleged violations. Pursuant to the stock purchase and assumption
agreement dated as of April 29, 2004, and completed as part of the terms of the
Share Exchange with HDS on May 25, 2004, between Nesco and NAC Calabria
Acquisition Corporation (the "Purchaser"), the Purchaser became responsible for
all liabilities of our previous business conducted by the NAC Entities.

14.   Significant customers

Customers accounting for 10% or more of revenue for the years ended April 30,
2006 and 2005 are as follows:

                                          April 30,
                                       2006       2005
                                       ----       ----
       Customer A                    $228,000   $  8,000
       Customer B                     173,000    353,000
       Customer C                     120,000    107,000
       Customer D                     114,000      6,000
                                     --------   --------
                                     $635,000   $474,000
                                     ========   ========


                                       46
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts receivable from these customers aggregated approximately $39,000 at
April 30, 2006. Sales to Dicon under the manufacturing agreement discussed in
Note 4 began in April 2006.


                                       47
<PAGE>

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

      Changes in Registrant's Certifying Accountant.

On October 6, 2004, the Company dismissed BP Audit Group, as its independent
registered public accounting firm, and engaged Rothstein Kass as its new
independent registered public accounting firm for the fiscal year ending April
30, 2005. BP Audit Group audited the Company's financial statements (OLDCO) for
fiscal year ending April 30, 2004. Rothstein Kass was the public accounting firm
for HDS, the accounting acquirer as a result of the reverse acquisition, for the
years ending April 30, 2004 and 2003 and was retained as the auditors of Nesco
on October 6, 2004.

BP Audit Group's report on the Company's financial statements (OLDCO) for the
fiscal year ended April 30, 2004 did not contain an adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles, except that the report on the Company's
financial statements for the fiscal year ended April 30, 2004 raised a
substantial doubt about the ability of the Company to continue as a going
concern due to losses from operations and net working capital and stockholders'
equity deficiencies.

During the Company's two most recent fiscal years, and the subsequent interim
period preceding BP Audit Group's dismissal, the Company had no disagreements or
reportable events with the BP Audit Group on any matter of accounting
principles, or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of the BP
Audit Group would have caused them to make reference thereto in their reports on
the financial statements for such years.

During the Company's two most recent fiscal years, and the subsequent interim
period preceding BP Audit Group's dismissal, the Company has not consulted with
Rothstein Kass regarding any matters or reportable events described in Items 304
(a)(2) of Regulation S-B.

ITEM 8A. CONTROLS AND PROCEDURES

The Securities and Exchange Commission defines the term disclosure controls and
procedures to be a company's controls and other procedures that are designed to
ensure that information required to be disclosed in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commissions' rules and forms. The Company maintains such a system of
controls and procedures in an effort to ensure that all information which it is
required to disclose in the reports it files under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified under the SEC's rules and forms and to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to our management,
including principal executive and financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.

After receiving and considering comments received from the SEC, in December
2005, the Company's management and the Audit Committee of the Company's Board of
Directors concluded that the Company needed to restate certain of the Company's
consolidated financial statements to correct errors in the application of
accounting principles with respect to the accounting for deferred stock issuance
costs. Such restatement is described in more detail in Note 2 to the Company's
Consolidated Financial Statements included in its Form 10-KSB/A for the fiscal
year ended April 30, 2005. In addition, the Company's limited cash resources
have inhibited the Company's efforts to devote the resources necessary to file
its periodic reports with the SEC in a timely fashion during significant periods
of 2005 and into 2006.

Controls over: (a) the application of accounting policies and (b) timely
preparation and filing of periodic reports, are within the scope of internal
controls. As a result of considering the comments received from the SEC about
the untimely filings and resulting in the restatement described above,
management concluded in December 2005 that there were material weaknesses in the
Company's internal controls, as defined by the Public Company Accounting
Oversight Board. The material weaknesses related to the issues described above
are being remediated as a result of processes being implemented by the Company,
consulting resources being devoted to financial reporting, and raising capital
which permits the Company to apply additional resources to its financial
reporting and disclosure obligations.


                                       48
<PAGE>

Based on an evaluation performed, the Company's principal executive officer and
principal financial officer, have concluded that the disclosure controls and
procedures were not effective as of April 30, 2005, to provide reasonable
assurance of the achievement of these objectives stated above. Changes were
implemented to address this deficiency as described below and as a result of an
evaluation performed, the Company's principal executive and principal financial
officer have concluded that the disclosure controls and procedures were
effective as of April 30, 2006 to provide reasonable assurance of the
achievement of these objectives stated above.

There were changes in the Company's internal control over financial reporting
during the fiscal year ended April 30, 2006, that has materially affected, or is
reasonably likely to materially affect, the Company's control over financial
reporting including the following (a) in January 2006, the Company's Chief
Financial Officer resigned, (b) additional capital has been raised which has in
part been devoted to improving the Company's internal controls, (c) in March
2006, the Company retained a financial reporting consultant to assist it with
its SEC reporting and compliance, (d) processes and procedures over financial
reporting have been improved and as a result, (e) the Company is now current
with its reporting to the SEC.

Inherent Limitations on Effectiveness of Internal Controls

The Company's management, including the chief executive officer and chief
financial officer, do not expect that our Disclosure Controls or our internal
control over financial reporting will prevent or detect all errors and all fraud
that could occur. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. The design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.

ITEM 8B. OTHER INFORMATION

No reports were filed on Form 8-K during the quarter ended April 30, 2006.


                                       49
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

Our directors and executive officers are as follows:

      Name                  Age    Position with the Company
      ----                  ---    -------------------------
      Matthew Harriton      42     President, Principal Executive and Principal
                                    Financial Officer and Director
      Arlen Reynolds        64     Chairman of the Board and Director
      Gene E. Burelson      65     Director
      Wayne M. Celia        51     Director
      Joel S. Kanter        49     Director

      Matthew L. Harriton became our Chairman of the Board of Directors, Chief
Executive Officer and President in May 2004 and Chief Financial Officer in
January 2006. He has served as Chief Executive Officer of HDS since October
1996, and also serves as Chief Executive Officer, Chief Financial Officer and
Director of Embryo Development Corporation, a company formerly involved in the
medical device development industry, since January 1996. Prior to joining Embryo
Development Corporation, Mr. Harriton's professional experience included
positions at CIBC Wood Gundy Securities Corporation, Coopers & Lybrand, and The
First Boston Corporation. He is a graduate of Lehigh University and received his
M.B.A. from Duke University's Fuqua School of Business.

      Arlen Reynolds became a director in December 2004 and our Chairman in
June2005. He is currently and has been since 1997, a private investor and
strategic advisor to healthcare companies. From 1995 to 1997, Mr. Reynolds was
President of TeamCare, Inc., an institutional pharmacy company. From 1972 to
1995, he served as CEO of, among others, Brookwood Medical Center in Birmingham,
Alabama and Park Plaza Hospital in Houston, Texas. Mr. Reynolds serves on the
boards of several private companies and not-for-profit charitable organizations.

      Gene E. Burelson became a director in December 2004. From June 2002 to the
present he has been a private investor in healthcare companies. From January
2000 to June 2002, he served as Chairman of the Board of Directors of Mariner
Post-Acute Network Inc., an operator of long term health care facilities. From
October 1989 to November 1997 he served as Chairman of the Board of GranCare
Inc., and from December 1990 to February 1997, its President and CEO. Mr.
Burelson is involved with several private health care companies as an investor
and member of the board of directors.

      Wayne M. Celia became a director in December 2004. He has been President
of Dicon Technologies, a wholly-owned subsidiary of Berkshire Hathaway, Inc.
since 1997. From 1975 until 1997, Mr. Celia founded Dicon Inc., WP Industries,
TekPak Inc. and Dicon Systems Inc. Dicon has been acquired by Berkshire
Hathaway.

      Joel S. Kanter became a director in December 2004. Since July 1986, he has
served as President of Windy City Inc., a privately held investment firm. Mr.
Kanter serves on the Board of Directors of several public companies including
Echo Healthcare Acquisition Corp., Encore Medical Corporation, Prospect Medical
Group, Inc., Magna-Lab Inc. and I-Flow Corporation, as well as a number of
private concerns.

      Geoffrey Donaldson, who became a Director in December 2004, resigned on
December 19, 2005. Since January 2000, and through December 19, 2005, Mr.
Donaldson had been Chief Operating Officer of the Company.

      Richard Selinfreund, who became a Director in October 2004, resigned on
December 12, 2005.

      Karen Nazzareno, who served as our Controller since 1996 and our Chief
Financial Officer since 2004, resigned in January 2006.


                                       50
<PAGE>

All directors currently serve for one-year terms and until their successors have
been elected and qualified. Unless expressly agreed otherwise, officers are
elected annually and serve at the discretion of the Board of Directors.

We have an Audit Committee that was established by our Board of Directors for
the purpose of overseeing our accounting and financial reporting processes and
audits of our consolidated financial statements by our independent auditors. The
Audit Committee is made up of Mr. Kanter (Chairman), Mr. Reynolds and Mr.
Burelson. We believe that each of the members of the Audit Committee meets the
independence requirements of the SEC. Each of the members of the Audit Committee
is financially literate and has accounting and finance experience and Mr. Joel
S. Kanter is deemed an "audit committee financial expert" within the meaning of
Securities and Exchange Commission regulations as defined in Item 401 of
Regulation S-B.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires that our directors
and executive officers, and any persons who own ten percent or more of our
Common Stock, file with the Securities and Exchange Commission ("SEC") initial
reports of ownership and reports of changes in ownership of our Common Stock and
other equity securities. Such persons are required by SEC regulations to furnish
us with copies of all such reports that they file.

To our knowledge, based on a review of the Section 16 reports, no person has
failed to file reports required under Section 16(a) of the Exchange Act during
fiscal 2005.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth, for the Company's last three fiscal years, all
compensation awarded to, earned by or paid to all persons serving as the
Company's chief executive officer ("CEO") or interim CEO in fiscal 2005 and the
most highly compensated executive officers of the Company other than the CEO or
interim CEO whose salary and bonus payments exceeded $100,000 in fiscal 2005.


<TABLE>
<CAPTION>
                                                            Annual Compensation
                                                            -------------------
                                                                                                      Long Term
                                       Year                                                         Compensation
                                       Ended                                         Other             Options/
Name & Principal Position            April 30,     Salary ($)     Bonus ($)     Compensation ($)       SAR (#)
-------------------------            ---------     ----------     ---------     ----------------       -------
<S>                                     <C>         <C>              <C>              <C>             <C>
Matthew Harriton (Chief Executive       2006        $203,000         --               $ 0                 --
and Chief Financial Officer)            2005        $143,700         --               $ 0             5,000,000
                                        2004        $ 75,000         --               $ 0                 --
</TABLE>

(1)   Approximately $106,250 and $75,000 of salary for the years ended April 30,
      2006 and April 30, 2004 were accrued but not paid. The $75,000 outstanding
      at April 30, 2004 was converted to debt as part of the terms of the share
      exchange agreement.

Except as set forth above, no other options or warrants have been issued to our
officers and directors named in the above summary compensation table during the
last three fiscal years.

Options/SAR Grants in Last Fiscal Year

      During fiscal 2006 no option grants were made to the named executive
officers.


                                       51
<PAGE>

Aggregated Option/SAR Exercises in Fiscal 2006 and Fiscal 2006 Year-End
Option/SAR Value

Information relating to the number and value of options exercised during the
year and held at year end by such named executive officers is set forth in the
following table:

<TABLE>
<CAPTION>
                                                                            Value of Unexercised
                                                    Number of Unexercised       In-the Money
                       Shares                        Options/SARs at F/Y     Options/SARs at F/Y
                     Acquired on        Value       End (#) Exercisable/     End ($)Exercisable/
                    Exercise (#)     Realized($)        Unexercisable           Unexercisable
                    ----------------------------------------------------------------------------
<S>                       <C>            <C>         <C>                         <C>
Matthew Harriton          0              $0          4,000,000/1,000,000         $-0-/$-0-
</TABLE>

(1)   Shares of Common Stock. Mr. Harriton was granted 5,000,000 options in
      connection with his employment agreement on May 19, 2004 of which
      2,000,000 are immediately exercisable and 1,000,000 are exercisable on
      each of the first, second and third anniversaries of the agreement.

(2)   Based on the closing price (estimated to be $0.03) of shares quoted on
      April 28, 2006.

Long-Term Incentive Plans

Not Applicable.

Compensation of Directors

During the fiscal years ended April 30, 2006 and 2005, no director received any
compensation for services provided in such capacity. Directors are reimbursed
for reasonable expenses incurred by them in connection with their activities on
behalf of Nesco.

Employment Contracts and Termination of Employment and Change in Control
Arrangements

On May 19, 2004 we entered into an employment agreement with Mr. Matthew
Harriton for a term of three years with an automatic one year extension. The
agreement provides for an annual base salary of $120,000 with annual increases
of 10%. The agreement also provides for an annual performance bonus based on an
annual operating profit in excess of $500,000. The agreement provides for
certain payments in the event of death, disability or change in control. In
addition, the officer was granted a nonqualified option, effective the date of
the closing of the share exchange agreement, to purchase 5,000,000 shares of
common stock for a period of 5 years. The option is immediately exercisable for
the purchase of 2,000,000 shares and exercisable as to an additional 1,000,000
shares commencing on each of the first, second, and third anniversaries of the
closing date, respectively, provided that optionee remains an employee. The
options are exercisable at the "Applicable Trading Price" based on a formula
contained in the Share Exchange which resulted in an option price, based on the
average bid closing price for 30 consecutive trading days prior to the closing,
of $0.15.

On November 22, 2004, this employment agreement was amended and restated. The
amended and restated agreement provides for annual compensation of $200,000
effective January 1, 2005, with a 10% increase each year on December 31 during
the term of the agreement. The annual performance bonus was eliminated and
bonuses now are to be paid at the discretion of the Board of Directors. The
agreement was also extended to December 31, 2009. All other terms remained the
same as in the original agreement.

Mr. Harriton has not collected cash compensation required under this agreement
since October 2005 and is owed approximately $106,000 at April 30, 2006.

Report on Repricing of Options/SARS
None.


                                       52
<PAGE>

lTEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Beneficial Ownership

      On June 30, 2006 the authorized voting stock of the Company consisted of
25,000,000 shares of common stock, par value $0.001, 850,000 shares of Series A
preferred stock and 150,000 shares of Series B preferred stock. Each share of
common stock is entitled to one vote; each share of Series A Stock is entitled
to 30 votes and each share of Series B Stock is entitled to 750 votes. On June
30, 2006 there were 20,136,225 shares of common stock, 67,000 shares of Series A
Stock and 117,055 shares of Series B Stock issued, outstanding and entitled to
vote. For this purpose, each outstanding share of Series A Stock has been
treated as having been converted into 30 common shares and each outstanding
share of Series B Stock has been treated as having been converted into 750
common shares. The Company is in the process of increasing its authorized common
number of shares to 400,000,000 shares at which time Series A and Series B stock
will be exchanged for common shares. Upon conversion, these shares would
aggregate 109,661,357 common shares.

      The following table sets forth the beneficial ownership as of June 30,
2006 with respect to the beneficial ownership of the Company's common stock by
officers and directors, individually and as a group, and all holders of more
than 5% of the common stock. For this purpose, each outstanding share of Series
A Stock has been treated as having been converted into 30 shares of common stock
and each outstanding share of Series B Preferred Stock has been treated as
having been converted into 750 shares of common stock. Unless otherwise
indicated, all shares are beneficially owned and sole investment and voting
power is held by the beneficial owners indicated.

Name and Address of                      Amount and Nature of           Percent
Beneficial Owner                        Beneficial Ownership (1)       of Class
--------------------------------------------------------------------------------

Santo Petrocelli, Sr. (2)(7)                  19,741,667                17.80%

Cornell Capital Partners L.P.
101 Hudson Street
Jersey City, New Jersey 07302 (4)             12,074,739                10.15%

Richard Harriton (5)(7)                       27,840,007                20.29%

Matthew Harriton (3)(7)                        8,910,244                  7.7%

Gene E. Burelson (7)                                 -0-                    *

Wayne M. Celia (7)                                   -0-                    *

Joel S. Kanter (7)                                   -0-                    *

Arlen Reynolds (7)                                   -0-                    *

KSH Strategic Investments
575 Jericho Turnpike
Jericho, NY  11753 (6)                        10,316,500                 8.90%

Directors and Officers
as a Group (8 persons)                        13,052,959                 10.9%

*     Less than 1% unless otherwise indicated.

(1)   As used herein, the term beneficial ownership with respect to a security
      is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as
      consisting of sole or shared voting power (including the power to vote or
      direct the vote) and/or sole or shared investment power (including the
      power to dispose or direct the disposition of) with respect to the
      security through any contract, arrangement, understanding, relationship or
      otherwise, including a right to acquire such power(s) during the next 60
      days. Unless otherwise noted, beneficial ownership consists of sole
      ownership, voting and investment rights. Additionally, the number of
      shares shown assumes the conversion or exercise of all Series A Stock,
      Series B Preferred Stock, Convertible Debentures, warrants and vested
      options.


                                       53
<PAGE>

(2)   Mr. Petrocelli was the Chairman and a director until June 22, 2004. The
      above number of shares beneficially owned includes 2,900,000 shares owned
      of record by Petrocelli Industries, Inc. and 566,667 shares owned by SMFS
      Corp. Mr. Petrocelli is the President and Chief Executive Officer of
      Petrocelli Industries, Inc., and beneficially owns 25% of its outstanding
      capital stock. The other 75% is owned by members of Mr. Petrocelli's
      family. Mr. Petrocelli is the President of SMFS Corp. In addition, the
      number of shares beneficially owned includes 1,000,000 shares issuable
      upon the exercise of a warrant issued in March 2002 to Mr. Petrocelli and
      275,000 shares issuable upon the exercise of a warrant issued in December
      2003 to Petrocelli Industries, Inc.

(3)   Mr. Matthew Harriton is our President, Chief Executive Officer, Chief
      Financial Officer and a director. Prior to the Share Exchange with HDS and
      currently, Mr. Harriton remains as CEO and a director of the Company. Mr.
      Harriton is also CEO and a director and the holder of approximately 32.1%
      of the outstanding common and Class B shares of Embryo Development Corp.,
      a public company traded under the symbol "EMBR" which holds a 4.44%
      beneficial interest in us. The above number of shares beneficially owned
      includes 2,430,647 shares issuable upon the conversion of debt, 364,597
      shares issuable upon exercise of a warrant granted for the extension of
      debt, and 4,000,000 of a total of 5,000,000 shares issuable upon exercise
      of a warrant granted as part of Mr. Harriton's employment agreement in May
      2004, 2,000,000 of which are not exercisable until after the second
      anniversary of his employment agreement.

(4)   The above number of shares beneficially owned by Cornell Capital includes
      4,666,669 shares issuable upon the conversion of a debenture, and
      4,666,669 shares issuable upon the exercise of warrants granted in
      conjunction with a convertible debenture. Marc Angelo and Troy Willow, the
      President and Senior Vice President, Capital Markets, respectively, of
      Cornell Capital Partners L.P. hold voting and investment control over the
      shares held by Cornell.

(5)   The above number of shares beneficially owned by Mr. Richard Harriton
      includes 15,696,000 shares issuable upon the conversion of debentures, and
      11,874,007 shares issuable upon the exercise of warrants granted in
      conjunction with convertible debentures and for the extensions of
      debenture debt of HDS. Both the convertible debenture and the related
      warrants have been converted to our debt and warrants. Mr. Richard
      Harriton is a related party of Mr. Matthew Harriton, a director and
      officer (See (3) above).

(6)   The above number of shares beneficially owned by KSH Strategic Investment
      Fund includes 3,900,000 shares issuable upon the conversion of a
      debenture, 2,417,500 shares issuable upon the exercise of warrants granted
      in conjunction with a convertible debenture and for the extensions of such
      debenture debt of HDS. Both the convertible debenture and the related
      warrants have been converted to our debt and warrants. Cary Sucoff and
      Harvey Kohn, each a manager of KSH Strategic Investment Fund, hold voting
      and investment control over the shares held by KSH. Strategic Investment
      Fund.

(7)   The address for these individuals is c/o Nesco Industries, Inc., 305
      Madison Avenue, Suite 4510, New York, New York 10165

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information as of April 30, 2006 with respect to
compensation plans and individual compensation arrangements under which the
Company's common stock is authorized for issuance.


                                       54
<PAGE>

<TABLE>
<CAPTION>
                                    Number of securities to    Weighted average exercise
                                    be issued upon exercise       price of outstanding         Number of securities
                                    of outstanding options,      options, warrants and       remaining available for
Plan Category                         warrants and rights                rights                   future issuance
                                              (a)                         (b)                           (c)
                                    --------------------------------------------------------------------------------
<S>                                        <C>                           <C>                         <C>
Equity compensation plans approved            -0-                         --                         1,000,000
by security holders (1)

Equity compensation plans not
approved by security holders              5,000,000(2)                   $0.15                           --
                                    --------------------------------------------------------------------------------
Total                                      5,000,000                     $0.15                       1,000,000
                                    ================================================================================
</TABLE>

(1) The Company's 1999 Incentive Stock Option Plan ("1999 Plan"), which has been
approved by the Company's Board of Directors and shareholders, expires on June
14, 2009.

(2) Includes options granted to Chairman Matthew Harriton in May 2004
exercisable for up to 5,000,000 shares of common stock of which 2,000,000 are
immediately exercisable and 1,000,000 are exercisable on each of the first,
second and third anniversaries of the agreement at an exercise price of $0.15.
These options expire in May 2009.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationships and related transactions of the Company for the prior two fiscal
years are as follows :

      Between December 20, 2005 and June 23, 2006, the Company raised
approximately $805,000 by issuing 11% per annum subsidiary senior secured notes
of FMI pursuant to a note purchase agreement as amended and restated on February
1, 2006. Such subsidiary senior secured notes are secured by all the assets of
FMI and, as amended in May 2006, are due on the earlier of July 31, 2006 or the
completion of a financing of at least $500,000. The notes were issued to
directors (Gene Burleson, $50,000, Arlen Reynolds, $20,000) and other related
parties and affiliates (Kanter Family Foundation, $25,000, Richard Harriton,
$70,000), as well third parties (Chicago Investments, Inc., $390,000 and CIBC,
solely as Trustee for T-555, $250,000). $100,000 of the amounts borrowed from
the initial investor in the senior secured notes may be converted into new
instruments upon the completion of a proposed financing.

      Beginning in November 2005, the Company began raising short-term financing
through financing its accounts receivable. Under this program, specific accounts
receivable are sold at a discount and the Company retains the right to
repurchase the accounts, subject to a 2% per month financing charge.
Additionally, beginning in April 2006, borrowings under this arrangement were
extended to customer purchase orders. The Company records this as a financing
transaction in which the receivables sold are carried on the consolidated
balance sheet and the amount to be repaid is reflected as a short-term debt. At
April 30, 2006, approximately $92,000 of this liability was payable to Richard
Harriton.

      The Company had an aggregate balance due to an affiliate, Embryo
Development Corp., in connection with an $850,000 8% revolving line of credit,
which expired in September 2002. The balance due on this obligation was
approximately $15,000 at April 30, 2004. Subsequent to April 30, 2004, the
balance with accrued interest has been paid in full. Embryo Development Corp.
held approximately 11.4% of the common stock of HDS prior to the Share Exchange
and currently holds approximately 4.44% of the common stock of the Company as a
result of the exchange. HDS was a majority-owned subsidiary of Embryo
Development Corp. Since the inception of HDS, Embryo Development Corp.'s equity
interest has decreased as financings have occurred. Matthew Harriton, our
President, Chief Executive Officer, Chief Financial Officer and director, is
also CEO and a director and the holder of approximately 32.1% of the outstanding
common and Class B shares of Embryo Development Corp.

      On January 25, 2002, the manufacturing facility of HDS was purchased by an
entity owned by a related party, Mr. Richard Harriton, the father of Mr. Matthew
Harriton, the then CEO and President of HDS and currently the CEO and President
of the Company. In addition, Mr. R. Harriton has a beneficial ownership in the


                                       55
<PAGE>

Company of approximately 20.29% upon conversion of all outstanding warrants and
debt issued to him and holds debt in the amount of $1,308,000 convertible to
15,696,000 shares of common stock as a result of the Share Exchange. On January
25, 2002, HDS entered into a lease with 2150 Cabot, LLC, an entity owned by Mr.
R. Harriton, which provides for minimum monthly rental payments of $11,687 and
expires in 2012. The rent increases by 5% every two years for the duration of
the lease. On September 30, 2002, in consideration for extension of certain debt
due, the rent increase of 5% effective February 1, 2004 was increased by an
additional 10%. The rent increases subsequent to that date, every two years,
remain at 5% of the prior period amount inclusive of the 10% additional one-time
increase. HDS also entered into a month to month lease for office space with
another entity, Park Avenue Consulting, owned by Mr. R. Harriton in December 1,
2001 which terminated in April 2004. Unpaid rents of approximately $312,000,
$77,000 and $229,000 were due to Mr. R. Harriton on these leases as of April 30,
2006, 2005 and 2004, respectively. In addition, Mr. Harriton made temporary
advances to the Company during 2006 and 2005, of which approximately $243,000
and $78,000, respectively, is due to Mr. Harriton at April 30, 2006 and 2005.

      As of April 30, 2004, Mr. Richard Harriton had loaned HDS an aggregate of
$1,308,000. HDS issued a series of convertible debentures in connection with
these loans between the period of October 12, 1999 and August 7, 2003. On April
19, 2004, Mr. Harriton agreed, upon consummation of the Share Exchange, to
extend the due dates of these debentures until December 31, 2005 and to exchange
these debentures for 8% convertible debt of Nesco based on the same ratios in
the Share Exchange (a ratio of approximately 9 Nesco common shares for 1 common
share of HDS stock and 36 Nesco common shares for 1 preferred share of HDS
stock). On May 25, 2004 the exchange was completed. This debt is convertible at
approximately $0.08 per share into an aggregate of approximately 15,696,000
shares of Nesco. Mr. Harriton, was also granted, in consideration for an
extension and exchange of the debt, a warrant to acquire one share of Nesco
common stock at an exercise price of $0.15 for a term of five years for each
dollar of HDS debt for an aggregate of the issuance of 1,308,000 warrants. The
balance due on the note at April 30, 2006 is approximately $1,652,000 consisting
of approximately $1,308,000 in principal, approximately $344,000 of accrued
interest. Interest expense was approximately $105,000 for each of the years
ended April 30, 2006 and April 30, 2005. In addition, Mr. Harriton exchanged an
aggregate of 331,500 options and warrants of HDS for an aggregate of 10,566,000
warrants of Nesco based on the same ratios in the Share Exchange. These
options/warrants are currently exercisable at prices that range between $0.08
-$0.39 and expire between six and seven years. Compensation expense
approximating $889,000 was recorded on May 25, 2004 for the increase in the fair
value of these vested HDS options/warrants as a result of the exchange.

      At April 30, 2004 we had notes payable, including interest, of
approximately $370,000 due to Mr. Matthew Harriton, the President and CEO of
HDS. The notes were at an interest rate of 10% per annum and collateralized by
the accounts receivable of HDS. On May 1, 1999, 200,000 options, which were
previously granted to Mr. M. Harriton under the terms of an employment
agreement, were exercised at a price of $0.40 and 200,000 shares of common stock
were issued. We received a promissory note dated May 1, 1999 from Mr. M.
Harriton in the amount of $80,000 for payment of the shares. The note matured on
May 1, 2004, with interest at 8% and was secured by the related securities. On
May 25, 2004, this note and related interest in the aggregate amount of $112,000
was cancelled and applied as a reduction of the notes due to the officer. At
April 30, 2004, HDS also owed Mr. M. Harriton approximately $113,000 in accrued
payroll. On May 25, 2004, the remaining aggregate balance of approximately
$365,000 due to Mr. M. Harriton on that date was exchanged for convertible 8%
debentures of Nesco which mature in December 2005. This debt is convertible at
approximately $0.15 per share into an aggregate of approximately 2,431,000
shares of Nesco. Mr. Harriton, was also granted, in consideration for an
extension and exchange of the debt, a warrant to acquire one share of Nesco
common stock at an exercise price of $0.15 for a term of five years for each
dollar of HDS debt for an aggregate of the issuance of approximately 365,000
warrants. The balance due on the note at April 30, 2006 is approximately
$421,000 consisting of approximately $365,000 in principal, approximately
$56,000 of accrued interest. Interest expense was approximately $27,000 for each
of the years ended April 30, 2006 and April 30, 2005.

      At April 30, 2004, HDS owed Mr. Geoffrey Donaldson, the COO of HDS until
December 19, 2005, approximately $439,000 in accrued payroll. On May 25, 2004,
this obligation due to Mr. G. Donaldson was exchanged for a convertible 8%
debenture of Nesco which matures in December 2005. This debt is convertible at
approximately $0.15 per share into an aggregate of approximately 2,924,000
shares of Nesco. Mr. Donaldson, was also granted, in consideration for an
extension and exchange of the debt, a warrant to acquire one share of Nesco
common stock at an exercise price of $0.15 for a term of five years for each
dollar of HDS debt for an aggregate of the issuance of approximately 439,000
warrants. The balance due on the note at April 30, 2006 is approximately


                                       56
<PAGE>

$507,000 consisting of approximately $439,000 in principal, approximately
$68,000 of accrued interest. Interest expense was approximately $34,000 for the
each of years ended April 30, 2006 and 2005. In addition, Mr. Donaldson
exchanged an aggregate of 133,334 options of HDS for an aggregate of 1,200,000
warrants of Nesco based on the same ratios in the Share Exchange. These options
are currently exercisable at $0.39 and expire in January 2006. Compensation
expense approximating $23,000 was recorded on May 25, 2004 for the increase in
the fair value of these vested HDS options/warrants as a result of the exchange.

      On May 25, 2004, the Company entered into a two-year consulting agreement
with JMK Associates, an affiliate of Ronald Kuzon who was interim officer and
consultant of OLDCO which provided for the issuance of 2,000,000 shares of
common stock and a minimum monthly consulting fee of $7,500 to be credited
against any other cash fees earned under the terms of the agreement. The
agreement also provides for certain transaction fees to be paid to the
consultant based on sales and contracts with strategic alliances. The fair value
of the 2,000,000 shares of common stock ($300,000 based on the market price of
$0.15 on the date of the agreement) was charged to operations in the quarter
ended July 31, 2004. As of April 30, 2006, the Company owes Mr. Kuzon
approximately $34,000 in consulting fees associated with this agreement, net of
expenses advanced on his behalf.

      On May 25, 2004, the Company entered into a one-year advisory services
agreement with Marlin Financial Group, Inc. which provided for the issuance of
681,667 shares of common stock and a minimum monthly consulting fee of $6,250 to
be credited against any other cash fees earned under the terms of the agreement.
The agreement also provides for certain transaction fees to be paid to the
consultant based on sales and contracts with strategic alliances. The fair value
of the shares ($102,250 based on the market price of $0.15 on the date of the
agreement) was charged to operations in the quarter ended July 31, 2004. On
December 17, 2004, the Company terminated the agreement which was cancelable by
either party after six months. On January 5, 2005, the Company issued an
aggregate of 908.89 shares of Series B Preferred shares (convertible into
681,667 common shares) as per the agreement.

      On July 1, 2004, the Company entered into an investment banking agreement
with Sloan Securities Corp. for the sale of up to $3,000,000 principal amount of
the Company's 8% senior secured convertible notes due December 1, 2005, with
interest payable on December 1 and June 1 semi-annually, either in cash or
common stock, and convertible into common stock at $0.15 per share. The notes
are secured by the assets of the Company. Each note was issued with a five-year
warrant to purchase shares of the Company's common stock at $0.25 per share or
666,667 warrants for each $100,000 of principal amount of notes purchased. As a
result of the agreement, which terminated on September 30, 2004, the Company
received $2,295,000 in gross proceeds in connection with this agreement
convertible into 15,300,000 common shares and issued warrants to purchase
15,300,000 shares. Under the terms of the private placement the Company agreed
to undertake to register the common stock issuable upon the conversion of the
notes and the exercise of the warrants. The balance due on the notes at April
30, 2006 is approximately $2,465,000 consisting of approximately $2,295,000 in
principal, approximately $170,000 of accrued interest. Interest expense for the
years ended April 30, 2006 and 2005 was approximately $183,000 and $136,000. On
December 1, 2004, the Company issued 390,305 shares of common stock as payment
for the interest due in the aggregate of approximately $59,000. Financing fees
in connection with this agreement approximated $286,000 and were amortized over
the term of the convertible notes. At April 30, 2006, none of this debt had been
converted.

      In connection with this agreement, the Company issued the broker warrants
to acquire 5,052,600 shares of Nesco common stock at an exercise price of $0.15
per share. The fair value of the warrants ($405,000) was charged to operations
over the life of the underlying debt.

      Additionally, under the terms of a related registration rights agreement,
the Company was required to file a registration statement to effectively
register the common stock issuable upon the conversion of the notes and exercise
of the warrants no later than 60 days after the termination of the offering. As
the Company did not file the required registration statement until January 27,
2005, liquidated damages in the amount of 2% per month of the aggregate purchase
price were required to be paid in cash under the terms of the agreement. The
holders of the notes agreed to accept this payment in the aggregate of $91,800
in common stock of the Company. The fair value of the shares due ($91,800) has
been charged to operations and this expense is included in current liabilities
as these shares have have not been issued at April 30, 2006. The Company was
also required to have such registration statement declared effective by July 27,


                                       57
<PAGE>

2005. In November 2005, the Company withdrew the registration statement.
Penalties of 2% per month accrue for the failure to have the registration
statement declared effective. Interest on the unpaid penalties accrues at 18%
per annum. Accrued penalties and related interest on penalties were
approximately $548,000 at April 30, 2006 and continue to accrue at approximately
$47,000 per month plus interest.

      On August 23, 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP, an investment firm. Under the terms
of the agreement, the investment firm has committed to purchase up to
$10,000,000 of the Company's common stock at a purchase price equal to 98% of
the market price at the time of purchase. The investment firm is entitled to a
5% commission per transaction. The equity line could be drawn down upon (a) an
increase in the authorized shares of the Company and (b) a registration
statement covering the shares being declared effective by the SEC. Amending the
Certificate of Incorporation requires vote of, or notification to, shareholders.
On November 16, 2004 the Company filed a preliminary information statement with
the Securities and Exchange Commission ("SEC") to allow the Company to increase
the number of common shares it is authorized to issue. On November 4, 2005, the
Company withdrew the registration statement thereby effectively terminating the
financing. No proceeds were or will be raised under this financing.

      As consideration for entering into the Standby Equity Distribution
Agreement, we granted Cornell Capital Partners, LP 3,266.66 shares of Series B
Preferred Stock (convertible into 2,450,000 common shares) and paid a $70,000
cash consulting fee. In addition, we granted the placement agent 66.66 shares of
Series B Preferred shares (convertible into 50,000 common shares). The fair
value of the shares ($625,000) as well as $17,500 in fees and the $70,000 cash
consulting fee associated with this agreement were recorded on the balance sheet
as stock issuance costs in the quarter ended October 31, 2004. Such costs were
charged to operations in the fiscal year ended April 30, 2005.

      On November 1, 2004, the Company entered into a one-year advisory services
agreement with Strategic Corporate Initiative, Ltd. which provides for
compensation of $10,000 per month, of which $1,800 shall by payable in cash and
$8,200 shall be payable, at the Company's discretion, in cash or in common stock
of the Company. The common stock payment shall be based each month on the
closing bid price of the Company's common stock on the first day of the month
for which payment is due. The consultant shall have customary piggyback
registration rights with respect to any shares issued under this agreement As of
April 30, 2006 the Company has accrued the monthly minimum compensation of
$1,800. The fair value of the shares due under the agreement ($98,400) has been
charged to operations ($46,200 in each year ended April 30, 2006 and 2005) and
this expense is included in current liabilities as these shares have not been
issued at April 30, 2006.

      On November 15, 2004, the Company entered into a one-year consulting
agreement with Waterville Investment Research, Inc. for research and public
relations services which provided for the issuance of 276,000 shares of
restricted common stock and a one-time consulting fee of $500. The fair value of
the shares due under the agreement ($46,920 based on the market price of $0.17
on the date of the agreement) has been charged to operations and this expense is
included in current liabilities as these shares have not been issued at April
30, 2005. In December 2005, the Company issued 368 Preferred B shares of the
Company (which are convertible into 276,000 shares of common stock) in order to
settle this obligation in stock.

      On December 14, 2004, the Company entered into two four-month consulting
agreements with Barry Constantine and Jordan Warshafsky for advisory services
related to financial matters and marketing. Each agreement provides for the
payment of a monthly fee of $7,800 and the issuance of a five-year warrant to
purchase 40,000 shares of the common stock of the Company exercisable at the
closing price on the date of the agreement ($0.15). The warrants vest at the
rate of 10,000 shares per month. The fair value of the warrants ($12,000) were
charged to operations in the fiscal year ended April 30, 2005. These agreements
were not paid according to their terms and in February 2006, the Company reached
a settlement with Mr. Constantine and Mr. Warshafsky calling for 6 monthly
payments of $1,593.75 and $943.75, respectively followed by six monthly payments
of $4,781.25 and $2,831.25, respectively.

      On December 20, 2004, the Company entered into a one-year advisory
services agreement with Ira Siegel which provides for compensation in the form
of a five year warrant to purchase 204,000 shares of the common stock of the
Company at an exercise price of $0.15. The warrants vest at the rate of 1/3
immediately, 1/3 on the six month anniversary of the agreement and 1/3 one year
from the agreement date. The fair value of the warrants was charged to
operations as they vested, $20,400 and $10,200, respectively, in the fiscal
years ended April 30, 2006 and 2005.


                                       58
<PAGE>

ITEM 13. EXHIBITS

A. Exhibits

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

3.1(a)            Articles of Incorporation as amended

3.2(a)            Bylaws as amended

3.3(b)            Certificate of Designation of 10% Series A Convertible
                  Preferred Stock

3.4(d)            Amendment to Certificate of Designations Series A Preferred
                  Stock

3.5(c)            Certificate of Designations Series B Preferred Stock

3.6(c)            Amendment to Articles of Incorporation

3.7               Form of Warrant

3.8               Form of 8% Convertible Debenture

4.1(a)            Common Stock Certificate

4.2(a)            1999 Incentive Stock Option Plan

10.1(c)           Share Exchange Agreement by and among HDS, Nesco, HDS
                  Signatory Stockholders and Nesco Signatory Stockholders dated
                  April 29, 2004.

10.2(d)           Stock Purchase and Assumption Agreement dated as of May 13,
                  2004 as amended between Company and NAC Calabria Acquisition
                  Corporation

10.3(d)           Accounts Receivable Transfer Agreement dated as of May 28,
                  2004 as Registrant and the NAC entities

10.4(d)           Employment Agreement between Company and Matthew Harriton
                  dated as of May 19, 2004.

10.5(d)           Stock Option Agreement between Company and Matthew Harriton
                  dated as of May 25, 2004.

10.6(e)           Amended and Restated Employment Agreement between Company and
                  Matthew Harriton dated as of November 22, 2004.

10.7              Advisory Services Agreement between Company and JMK Associates
                  dated as of May 25, 2004.

10.8(h)           Securities Purchase Agreement between Company and Sloan
                  Securities Corp. dated as of July 1, 2004.

10.9(h)           Standby Equity Distribution Agreement between Company and
                  Cornell Capital Partners, LP dated as of August 23, 2004.

10.10(h)          Registration Rights Agreement between Company and Cornell
                  Capital Partners, LP dated as of August 23, 2004.

10.11(i)          Placement Agent Agreement between Company and Newbridge
                  Securities Corporation, Cornell Capital Partners, LP dated as
                  of August 23, 2004.

10.12(i)          Agreement between H.H. Brown Shoe Technologies, Inc. doing
                  business as Dicon Technologies, Hydrogel Design Systems, Inc.
                  and a wholly owned subsidiary of Hydrogel Design Systems, Inc.
                  to be formed and dated October 3, 2006.

10.13(i)          Addendum to Agreement between H.H. Brown Shoe Technologies,
                  Inc. doing business as Dicon Technologies, Hydrogel Design
                  Systems Inc. and a wholly owned subsidiary of Hydrogel Design
                  Systems, Inc. to be formed and dated January 18, 2006.

10.14(i)          Amended and Restated Note Purchase Agreement by and Between
                  Foam Manufacturing, Inc., Chicago Investments, Inc. and The
                  Additional Investors Party Hereto, dated February 1, 2006

10.15(i)          Commercial lease dated February 1, 2006 between Hamilton
                  Transit Corporate Center and Foam Manufacturing Inc.

10.16*            Promissory Note dated June 23, 2006 between Hydrogel Design
                  Systems, Inc. and Foam Manufacturing Inc. in favor of H.H.
                  Brown Shoe Technologies, Inc. (doing business as Dicon
                  Technologies, Inc.) and related Security Agreement dated June
                  23, 2006.*

10.16*            Security Agreement dated June 23, 2006 between Hydrogel Design
                  Systems, Inc., Foam Manufacturing Inc. and H.H. Brown Shoe
                  Technologies, Inc. (doing business as Dicon Technologies,
                  Inc.) and related Security Agreement dated June 23, 2006.*

16.1              (g) Letter from BP Audit Group re: Change in Company's
                  Certifying Accountant

99.2(f)           HDS Audited Consolidated Financial Statements for the years
                  April 30, 2004 and 2003.

31                Certification of Principal Executive and Financial Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


                                       59
<PAGE>

32                Certification of Principal Executive and Financial Officer
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

----------

(a)   Filed as Exhibits with the Company's Registration Statement on Form 10-SB
      filed with the SEC on November 30, 1999, and incorporated by reference
      herein.
(b)   Filed as an Exhibit with the Company's Annual Report on Form 10-KSB filed
      with the SEC on August 13, 2002, and incorporated by reference herein.
(c)   Filed as an Exhibit with the Company's Current Report on Form 8-K filed
      with the SEC on June 9, 2004, and incorporated by reference herein.
(d)   Filed as an Exhibit with the Company's Quarterly Report on Form 10-QSB
      filed with the SEC on October 22, 2004, and incorporated by reference
      herein.
(e)   Filed as an Exhibit with the Company's Quarterly Report on Form 10-QSB
      filed with the SEC on March 22, 2005, and incorporated by reference
      herein.
(f)   Filed as an Exhibit with the Company's Current Report on Form 8-K/A
      (Amendment No.1) filed with the SEC on August 9, 2004, and incorporated by
      reference herein.
(g)   Filed as an Exhibit with the Company's Current Report on Form 8-K/A
      (Amendment No. 1) filed with the SEC on October 20, 2004, and incorporated
      by reference herein.
(h)   Filed as Exhibits with the Company's Registration Statement on Form SB-2
      filed with the SEC on January 31, 2005, and incorporated by reference
      herein.
(i)   Filed as an exhibit to the Company's Form 10-QSB for the three and six
      months ended October 31, 2005 filed with the SEC on April 28, 2006.

* Filed herewith.

ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following is a summary of the fees billed to the Company by its independent
accountants, Rothstein Kass & Company, P.C. applicable to the fiscal years ended
April 30, 2006 and 2005:

      Fee category                     2006              2005
      ------------                     ----              ----
      Audit fees                      $75,700           $75,000
      Audit-related fees                   --                --
      Tax fees                             --                --
      All other fees                       --                --
                                      -------           -------
      Total fees                      $75,700           $75,000
                                      =======           =======

Audit fees: Consists of fees for professional services rendered by our principal
accountants for the annual audit of the Company's financial statements and the
review of quarterly financial statements or services that are normally provided
by our principal accountants in connection with statutory and regulatory filings
or engagements.

Audit-related fees: Consists of fees for assurance and related services by our
principal accountants that are reasonably related to the performance of the
audit or review of the Company's financial statements and are not reported under
"Audit fees."

Tax fees: Consists of fees for professional services rendered by our principal
accountants for tax advice.

All other fees: Consists of fees for products and services provided by our
principal accountants, other than the services reported under "Audit fees,"
"Audit-related fees" and "Tax fees" above.


                                       60
<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                               NESCO INDUSTRIES, INC.

                                               By:/s/ Matthew Harriton
                                                  ------------------------------
                                                  Matthew Harriton, President

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.

Signature                              Title                       Date
---------                              -----                       ----

/s/ Matthew Harriton          President and Director               July 27, 2006
----------------------        Principal Executive
Matthew Harriton              And Principal Financial Officer


/s/ Arlen Reynolds            Chairman of the Board, Director      July 25, 2006
----------------------
Arlen Reynolds


/s/ Gene E. Burelson          Director                             July 27, 2006
----------------------
Gene E. Burelson


/s/ Wayne Celia               Director                             July 31, 2006
----------------------
Wayne Celia

/s/ Joel S. Kanter            Director                             July 25, 2006
----------------------
Joel S. Kanter


                                       61

<PAGE>

                                INDEX TO EXHIBITS

No.                                Description
---                                -----------
31.1  Certification of Principal Executive Officer pursuant to Exchange Act Rule
      13a - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.

32.1  Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.