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


                                  FORM 10-KSB/A
                                  Amendment # 1


                                   (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, 2005

        [ ] 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.
                             ----------------------
             (Exact name of registrant 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)

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

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

                              (Title of each class)
                               -------------------
                         Common Stock, par value $0.001


Check  whether the issuer is not require 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  registrant 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  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

Indicate by check mark whether the  registrant 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 $738,498.

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 October 12,
2005, was $2,013,622.

At October 12,  2005,  the  registrant  had  20,136,225  shares of Common  Stock
outstanding. Traditional Small Business Disclosure Format: Yes [ ] No [X]

Documents incorporated by reference: None



<PAGE>
                                TABLE OF CONTENTS

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<TABLE>
<CAPTION>

                                                                                    Page
                                                                                    ----
PART I
<S>            <C>                                                                     <C>
Item 1.        Description of Business................................................  4

Item 2.        Description of Property................................................ 11

Item 3.        Legal Proceedings...................................................... 12

Item 4.        Submission of Matters to a Vote of Security Holders.................... 12

PART II

Item 5.        Market for Common Equity, Related Stockholder Matters
               And Small Business Issuers Purchases of Equity Securities.............. 13

Item 6.        Management's Discussion and Analysis or Plan of Operation.............. 16

Item 7.        Financial Statements  ................................................. 25

Item 8.        Changes In and Disagreements With Accountants on
               Accounting and Financial Disclosure.................................... 26

Item 8A.       Controls and Procedures ............................................... 26

PART III

Item 9.        Directors, Executive Officers, Promoters and Control Persons; Compliance
               with Section 16(a) of the Exchange Act .................................27

Item 10.       Executive Compensation................................................. 29

Item 11.       Security Ownership of Certain Beneficial Owners and
               Management and Related Stockholder Matters............................. 32

Item 12.       Certain Relationships and Related Transactions......................... 36

Item 13.       Exhibits .............................................................. 40

Item 14.       Principal Accountant Fees and Services................................. 42

Signatures     ....................................................................... 43

Exhibit 31

Exhibit 32
</TABLE>
                                        1
<PAGE>


FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB of Nesco Industries,  Inc. for the fiscal year
ended  April 30,  2005  contains  statements  that  constitute  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995.  These  statements  can be  identified  by  introductory  words such as
"expects," "plans," "intends,"  "believes,"  "will,"  "estimates,"  "forecasts,"
"projects" or words of similar meaning,  and by the fact that they do not relate
strictly to historical or current facts.  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.

Any or all of our  forward-looking  statements  may turn out to be  wrong.  Many
factors  may cause  actual  results to differ from  forward-looking  statements,
including inaccurate assumptions and a broad variety of risks and uncertainties,
some of  which  are  known  and  others  of  which  are  not.  Known  risks  and
uncertainties  include those  identified  from time to time in our reports filed
with the Securities and Exchange Commission ("SEC"),  which 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.

                                EXPLANATORY NOTE


The Annual Report on Form 10-KSB for the year ended April 30, 2005 was initially
filed with the  Securities and Exchange  Commission  ("SEC") on October 27, 2005
(the "Originally Filed 10-KSB").  This Amendment No. 1 is being filed to reflect
restatements to the following  consolidated  financial statements:  consolidated
balance sheet as of April 30, 2005 and the consolidated statements of operations
changes in  stockholders'  deficit  and cash flows for the year ended  April 30,
2005. On December 21, 2005, we announced that we would restate our  consolidated
financial  statements  for the year  ended  April  30,  2005  and our  condensed
consolidated financial statements for the quarter ended July 31, 2005 to reflect
adjustments  determined  to be  necessary as a result of the decision to expense
$712,500 of deferred stock issuance costs associated with the proposed  issuance
of shares whose  issuance was dependant on the  effectiveness  of a registration
statement that we have withdrawn. Accordingly, the deferred stock issuance costs
are now treated as an expense to the consolidated  financial  statements for the
year ended April 30, 2005 and an adjustment to consolidated  accumulated deficit
at April 30, 2005 and July 31, 2005. For a description of the  restatement,  see
"Restatement" in Note 2. to the accompanying  Consolidated  Financial Statements
in this Amendment No. 1.

This Amendment No. 1 amends and restates Item 2 of Part I "August 2004 Standby
Equity Distribution Agreement" and Items 5 ("Recent Sales and Issuances of


                                        2
<PAGE>
Unregistered Securities"), 6, 7 and 8A of Part II of the Originally Filed 10-KSB
and Exhibits 31.1, 31.2, 32.1 and 32.2.  Except as expressly stated by reference
to a later date, no other  Information in the  Originally  Filed 10-KSB has been
amended to reflect events that have occurred at a later date. Accordingly,  this
Form 10-KSB/A continues to describe  conditions and events as of the date of the
Originally Filed 10-KSB.

For a discussion of events and developments subsequent to April 30, 2005, see:

o    our  Quarterly  Report on Form 10-QSB for the three  months  ended July 31,
     2005; and

o    our other filings subsequent to December 21, 2005.



                                        3
<PAGE>
                                     PART I

Item 1.  DESCRIPTION OF BUSINESS

Business

     Corporate History

NESCO Industries,  Inc.  (hereinafter referred to as "OLDCO"), a Nevada publicly
traded  corporation was  incorporated in March 1993.  Prior to ceasing  business
operations and becoming  inactive in May 2003,  OLDCO was a provider of asbestos
abatement and indoor air quality testing,  monitoring and remediation  services.
In the fiscal year ended April 30, 2003,  OLDCO  consolidated  the operations of
its various  subsidiaries,  through  which it provided  services,  into a single
environmental  services  operating  unit  organized  under  the  banner  of  its
wholly-owned subsidiary National Abatement Corporation.  Prior to consolidation,
OLDCO  operated  through  its  wholly-owned  subsidiaries,   National  Abatement
Corporation  ("NAC"),  NAC/Indoor  Air  Professionals,   Inc.  ("IAP")  and  NAC
Environmental Services, Inc. ("NACE").

On April 29, 2004,  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
approximates  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 (hereinafter referred to as "NEWCO","we" "us", or "the "Company"). 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.

NEWCO 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, because NEWCO did not have the required number of authorized
shares of common  stock to complete  the  exchange  on this basis,  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 NEWCO is
authorized  to  issue,  each  share of the  Series  B  Preferred  Stock  will be
automatically  converted into shares of Nesco common stock. On November 16, 2004
NEWCO filed a preliminary information statement with the Securities and Exchange
Commission  ("SEC").  On December  16, 2004,  the SEC  responded  with  comments
pertaining to the preliminary  information statement.  On February 25, 2005, the
Company  responded to these comments and received  further  additional  comments
from the SEC on March 15, 2005,  May 19, 2005 and July 5, 2005.  The Company has
responded  to the last  comments  received  (July 5, 2005) on August 5, 2005 and
received  final  comments  from the SEC on  August  23,  2005.  The  information
statement  can be completed  once the 10-KSB for the fiscal year ended April 30,
2005 is filed.  Upon  completion  of this  process,  the  Company  will file the
Certificate of Amendment and issue the common stock.

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 NEWCO 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, NEWCO agreed that if the transferee cannot in

                                       4
<PAGE>
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.

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
NEWCO'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 NEWCO 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 exchange  agreement,  they
would  convert  their  shares to NEWCO common stock and that NEWCO 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 NEWCO Preferred B Stock which will be converted into 29,165,250
shares of NEWCO  common  stock (a ratio of  approximately  9 NEWCO  shares for 1
share of HDS stock). The HDS preferred  shareholders exchanged 295,853 shares of
stock for 14,201 shares of NEWCO  Preferred B Stock which will be converted into
10,650,750  shares  of NEWCO  common  stock (a ratio of  approximately  36 NEWCO
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, 2005 which
has resulted in approximately 54.1% of NEWCO's voting securities  outstanding at
the time of the exchange owned by HDS stockholders. The Company anticipates that
the remaining  shareholders will exchange their shares in the near future, which
will result in 55.3% of NEWCO'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  NEWCO  Preferred  B  Stock,  which  will be  converted  into
40,075,167 shares of NEWCO common stock (a ratio of approximately 9 NEWCO 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 NEWCO  Preferred B Stock which
will be  converted  into  18,809,574  shares of NEWCO  common  stock (a ratio of
approximately 36 NEWCO 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 NEWCO
Preferred  B Stock,  which will be  converted  into  15,375,000  shares of NEWCO
common stock (a ratio of  approximately  30 NEWCO  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.  The Company  anticipates  that the majority of the  remaining  Series A
shareholders will exchange their shares in the near future.

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

                                       5
<PAGE>

Prior to the transaction,  OLDCO had 7,627,105 common shares outstanding.  After
giving effect to the transactions above and after such time that NEWCO increases
the  number  of  common  shares  it is  authorized  to  issue,  NEWCO  will 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 NEWCO  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 NEWCO (a ratio of 9 NEWCO 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 NEWCO (a
ratio of 36  NEWCO  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 NEWCO  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 NEWCO  convertible debt and the holders may
convert this debt to approximately 28,551,000 shares of NEWCO common stock.

Prior to the transaction, OLDCO had approximately 4,212,500 options and warrants
outstanding.   After  giving  effect  to  the  transactions   above,  NEWCO  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.

     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 $.15 per share to  investors  for an
aggregate  of a minimum of $250,000  and a maximum of  $3,000,000.  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 (maximum  20,000,000  shares) at $.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  which may be
converted into an aggregate of 15,300,000  common shares and issued  warrants to
purchase  15,300,000  shares. The notes mature on December 1, 2005. At April 30,
2005, 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.  Under the
terms of the  securities  purchase  agreement  we have  agreed to  undertake  to
register  the common stock  issuable  upon the  conversion  of the notes and the
exercise of the warrants.


         August 2004 Standby Equity Distribution Agreement


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  can be drawn  down  upon a
registration  statement covering the shares being declared effective by the SEC.
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.  This  needed to be
completed  before the  Company  could  have a  registration  statement  declared
effective by the SEC. On January 27, 2005, a preliminary  registration statement
was  filed  with the SEC.  Between  December  2004 and  November  2005,  various

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comments and responses were exchanged  between the SEC and the Company regarding
the information statement and the registration  statement.  On November 4, 2005,
the Company  determined  to withdraw  the  registration  statement  covering the
shares to have been sold, thereby  effectively  terminating the planned issuance
of shares. See also, Notes 2 and 9 to consolidated  financial statements in Part
2, Item 7 of this report for additional details.


     Business of the Issuer

As previously  stated,  in fiscal 2004, OLDCO did not conduct any business,  but
actively sought new business opportunities, resulting in the consummation of the
share exchange agreement with HDS and the formation of NEWCO or the Company.

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.

Our 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.

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.

Many of the competitive products feature physical characteristics which are less
desirable  than those of the  Company's  gels.  These  include  aggressive  skin
bonding, chemical and form instability,  lack of uniformity,  low water content,
and active receptivity issues. Some of these products do offer higher absorptive
and adherence characteristics than our gels.

The gels are manufactured using proprietary mixing, coating and cross-linking
technologies. Together, these proprietary technologies enable us to produce gels
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

                                       7
<PAGE>

proprietary 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 gel, we have the manufacturing  technology to offer broad
choices in  selection of gel 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 and
patches  for  use  as  moist  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 and cosmetics.  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 are prepared
as components for products distributed by our customers under their brand names.
In  addition  to  manufacturing  hydrogel,  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 to customers' specified shape, a converting process requiring technological
expertise and pouching.

Hydrogel  patches are now being marketed in the United States or abroad for many
different applications:

     Moist Wound and Burn  Dressings.  Dressings  made from  hydrogels 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
     effects,  keeping the wound bed moist  allowing for the freer cell flow and
     less scarring,  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%.

     Hydrogels as A Method of Drug Delivery.  Hydrogel  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 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 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 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  patches  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.

                                       8
<PAGE>

     Customers & Markets

     Moist Wound Healing.  The Company  markets  products under its  proprietary
     brand AQUAMATRIXTM as well as supplying hydrogel products to developers and
     distributors  of  prescription  and OTC moist wound  healing  products  for
     redistribution to healthcare  professionals and retailers.  The benefits of
     moist wound healing  products include reduced scarring and pain and greater
     speed of  healing.  The  Company  expects  the  markets for its moist 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 in  transdermal  delivery of specific  ingredients.  We also sell
     hydrogel  products to manufacturers  and  distributors of  non-prescription
     medications.

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

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

For the year ended April 30, 2005, the Company filled orders from  approximately
19 different customers.  Approximately 62% of the annual revenue is attributable
to 2 of these  customers  which both had revenues in excess of 10% of our annual
revenues  individually  with our largest  customer  accounting for 48% of annual
revenues.

     Hydrogel Technology & Manufacturing

Hydrogel is  manufactured  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  radiation  are added  after the
cross-linking  process  is  completed.  Once the  hydrogels  have been mixed and
cross-linked,  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.

                                       9
<PAGE>

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.

We own and operates 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

                                       10
<PAGE>

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.

     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.

     Government Regulation

There is no required government  regulation on hydrogel related products at this
time. While hydrogels fall under the jurisdiction of the FDA, they 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,  hydrogel is sold as a component part 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.

     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.

     Employees

As of October 12, 2005 the Company had eleven employees, five in administration,
finance and marketing, and six in manufacturing and quality control.

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

ITEM 2. DESCRIPTION OF PROPERTY

On October 1, 1998,  OLDCO 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
OLDCO's  proportionate  share of increases in real estate taxes and  maintenance
costs. On March 4, 2000, OLDCO entered into a sublease agreement for the October
1998 lease with a company in which a major shareholder of OLDCO is a stockholder

                                       11
<PAGE>
of NEWCO. The sublease expires on September 30, 2008. The sublease rent is being
paid directly to the landlord by the sublease tenant.

On January  25,  2002,  the  Company  entered  into a lease for a  manufacturing
facility in  Langhorne,  PA 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.

We believe our offices and other facilities are adequate for our current needs.

ITEM 3. LEGAL PROCEEDINGS

Except for the claims against former  subsidiaries of OLDCO, the Company and its
subsidiaries  were not involved in any other material legal  proceedings  during
the year ended April 30, 2005.

The NAC entities,  formerly  subsidiaries  of OLDCO,  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  agreement  with  HDS on May 25,  2004,  between  OLDCO  and NAC
Calabria  Acquisition  Corporation  (the  "Purchaser"),   the  Purchaser  became
responsible  for all liabilities of our previous  business  conducted by the NAC
Entities.

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,  OLDCO requested  consent to the
share exchange  agreement  regarding HDS, obtained the required majority consent
and entered into the share exchange  agreement.  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.

                                       12
<PAGE>
PART II

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

Market Information

Since April 1998, 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). For the period between January 2000 and March
2002, our Common Stock was quoted on an inter-dealer  quotation system published
by the Pink Sheets LLC.  Effective  September,  2005,  our Common Stock is again
being published by the Pink Sheet LLC quotation system.

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 :

                                                      Closing Bid
                                                High              Low
                                                ----              ---
Year ended April 30, 2005
-------------------------
    First Quarter  (ended 7/31/04)              $0.25             $.15
    Second Quarter (ended 10/31/04)             $0.30             $.17
    Third Quarter  (ended 1/31/05)              $0.33             $.10
    Fourth Quarter (ended 4/30/05)              $0.35             $.10

Year ended April 30, 2004
-------------------------
    First Quarter  (ended 7/31/03)              $0.12             $0.10
    Second Quarter (ended 10/31/03)             $0.45             $0.45
    Third Quarter  (ended 1/31/04)              $0.45             $0.05
    Fourth Quarter (ended 4/30/04)              $0.35             $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 October 12, 2005, there were 85 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  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  securities  in
transactions not registered under the Securities Act of 1933:

     o    In  June  2002,  OLDCO  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

                                       13
<PAGE>

          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.  We relied on Section
          4(2) of the  Securities  Act and Rule 506 of  Regulation D promulgated
          thereunder  in issuing  the  shares of  Preferred  Stock and  warrants
          without  registration  under the Act.  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 agreement with HDS. Concurrent with the exchange, OLDCO
          Series A  Preferred  shareholders  agreed to  exchange  these  512,500
          shares of stock for an aggregate of 20,500 shares of NEWCO Preferred B
          Stock,  which will be converted into 15,375,000 shares of NEWCO common
          stock (a ratio of  approximately 30 NEWCO 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.

     o    In March 2004,  Mr. Ronald Kuzon,  an interim  officer and  consultant
          exercised  1,000,000  warrants  for $.05 in a  cashless  exercise.  An
          aggregate of 857,142  shares were  delivered as the excess of the fair
          value $(.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 our common shares. 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 agreement.  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 $.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 NEWCO  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
          NEWCO  convertible  debt and the  holders  may  convert  this  debt to
          approximately  28,551,000  shares of NEWCO common stock,  based on the
          same ratios as the share exchange agreement.

     o    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 NEWCO'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 $.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 $.25 per  share or  666,667

                                       14
<PAGE>

          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
          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.

          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 $.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
          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 can be drawn  down upon a  registration
          statement  covering the shares being declared effective by the SEC. 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).  As  discussed  further  in  Note  2 to
          consolidated   financial   statements,   the  Company   withdrew   its
          registration  statement  in November  2005 and has  expensed the costs
          associated with this agreement as of April 30, 2005.

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 OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Share Exchange Agreement and Acquisition

NESCO Industries,  Inc.  (hereinafter referred to as "OLDCO"), a Nevada publicly
traded  corporation,  prior to ceasing business operations and becoming inactive
in May 2003,  was a provider  of  asbestos  abatement  and  indoor  air  quality
testing, monitoring and remediation services.

On April 29, 2004,  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
approximates  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 (hereinafter referred to as "NEWCO" "we", "us" or "the "Company"). HDS is

                                       15
<PAGE>

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.


NEWCO 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, because NEWCO did not have the required number of authorized
shares of common  stock to complete  the  exchange  on this basis,  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 NEWCO is
authorized  to  issue,  each  share of the  Series  B  Preferred  Stock  will be
automatically  converted into shares of NEWCO common stock. On November 16, 2004
NEWCO filed a preliminary information statement with the Securities and Exchange
Commission  ("SEC").  On December  16, 2004,  the SEC  responded  with  comments
pertaining to the preliminary  information statement.  On February 25, 2005, the
Company  responded to these comments and received  further  additional  comments
from the SEC on March 15, 2005,  May 19, 2005 and July 5, 2005.  The Company has
responded  to the last  comments  received  (July 5, 2005) on August 5, 2005 and
received  comments  from the SEC on August 23,  2005.  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 NEWCO  Preferred  B Stock,  which will be
converted into 29,165,250 shares of NEWCO common stock (a ratio of approximately
9 NEWCO  shares  for 1 share  of HDS  stock).  The  HDS  preferred  shareholders
exchanged  295,853 shares of stock for 14,201 shares of NEWCO Preferred B Stock,
which will be converted into 10,650,750 shares of NEWCO common stock (a ratio of
approximately  36 NEWCO 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, 2005 which has resulted in  approximately  54.1% of NEWCO's  voting
securities  outstanding at the time of the exchange  owned by HDS  stockholders.
The Company  anticipates  that the remaining  shareholders  will exchange  their
shares  in the near  future,  which  will  result  in 55.3%  of  NEWCO'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 NEWCO
Preferred  B Stock,  which will be  converted  into  40,075,167  shares of NEWCO
common stock (a ratio of approximately 9 NEWCO 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 NEWCO  Preferred  B Stock  which will be  converted  into
18,809,574  shares  of NEWCO  common  stock (a ratio of  approximately  36 NEWCO
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,  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 NEWCO'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 NEWCO  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 exchange  agreement,  they would convert their shares to
NEWCO's  common  stock and that NEWCO  would have no  further  obligations  with
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.  This bridge loan was applied to the net cash  obligation  of
OLDCO, which was satisfied at the closing.

                                       16
<PAGE>

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 NEWCO
Preferred  B Stock,  which will be  converted  into  15,375,000  shares of NEWCO
common stock (a ratio of  approximately  30 NEWCO  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.  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,  OLDCO  conditionally  transferred its three wholly
owned  subsidiaries,  NAC, IAP and NACE, to a consultant and interim  officer of
OLDCO 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  NEWCO 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,  NEWCO  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.

In connection with the share exchange agreement,  NEWCO also issued an aggregate
of 6,500,000  common  shares (with a fair value of $975,000  based on the market
price of $.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 exchange agreement. 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 OLDCO.
NEWCO 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 OLDCO acquisition,  were charged to equity, and the balance of $695,000
was recorded as a charge to operations in the quarter ended July 31, 2004.

Prior to the  transaction,  the OLDCO had 7,627,105  common shares  outstanding.
After  giving  effect to the  transactions  above and after such time that NEWCO
increases the number of common shares it is authorized to issue, NEWCO will 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 NEWCO  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 NEWCO (a ratio of 9 NEWCO 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 NEWCO (a
ratio of 36  NEWCO  common  shares  for 1 share of HDS  preferred  stock).  This
resulted in the issuance of  approximately  24,357,000  options/warrants.  These
options/warrants  are  currently  exercisable  at prices that range between $.08
-$.39 and expire between one and eight 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.

                                       17
<PAGE>


The HDS debt holders were also granted, in consideration of an extension of term
debt, a warrant to acquire one share of NEWCO Common Stock at an exercise  price
of $.15 for a term of five years 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 NEWCO  convertible debt and the holders may convert this debt
to approximately 28,551,000 shares of NEWCO common stock. Approximately $156,000
of the total debt exchanged was attributed to the fair value of the warrants and
$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 $877,000 was recorded as long-term  debt.  For the year ended April 30, 2005,
the amortization of debt discount approximated $1,080,000.


Prior to the transaction, OLDCO had approximately 4,212,500 options and warrants
outstanding.   After  giving  effect  to  the  transactions   above,  NEWCO  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.

NEWCO's fiscal year ends on April 30 and,  therefore,  references to fiscal 2005
and fiscal 2004 refer to the fiscal  years  ending  April 30, 2005 and April 30,
2004, respectively.

The  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 Newco  subsequent to the acquisition date
of May 25, 2004.

Results of Operations

Revenues for the year ended April 30, 2005 were $738,000 as compared to $623,000
for the year ended April 30, 2004. This increase of  approximately  $115,000 was
primarily  attributable  to one customer for which  revenues were  approximately
$353,000  as  compared  to  $73,000  in the prior year due to the start of a new
product  development  project.  This  increase was offset by the loss of another
customer in the current year which had revenues of approximately $195,000 in the
prior year.  Cost of revenues  for the year ended  April 30, 2005  increased  by
$16,000 from $912,000 to $928,000. Cost of revenues consists primarily of direct
labor and other  manufacturing  fixed costs.  The increase relates to additional
costs of materials due to the increased revenues. Although revenues increased by
18%, the cost of revenues only increased by  approximately 2% primarily to lower
allocation  of  depreciation  of  manufacturing  equipment as some assets became
fully  depreciated in the current period.  The majority of the Company's cost of
revenues are fixed costs such as salaries and plant costs.  The gross margin for
the year ended April 30, 2005 was  ($190,000)  and compared with  ($289,000) for
the year ended April 30, 2004. The negative gross margin is  attributable to the
amount  of  direct  fixed  costs  such  as  rent,  equipment   depreciation  and
manufacturing  overhead (primarily labor) which approximate  $180,000 quarterly.
At such time that the Company  can  generate  additional  revenue to cover these
fixed  costs,  the margin  should  improve as  increased  revenue will result in
little,  if any,  corresponding  increase  to these  fixed  costs.  The  Company
anticipates that as a result of additional  capital resources that revenues will
increase   in  the  future  and  these  fixed  costs  as  well  as  general  and
administrative expenses will be covered.

General and administrative  expenses for the year ended April 30, 2005 increased
to $4,404,000  from $662,000 for the year ended April 30 2004.  This increase of
$3,742,000  includes a charge of  approximately  $1,215,000 for stock issued for
consulting and other services and a charge of  approximately  $1,794,000 for the
revaluation  of the HDS  outstanding  warrants  which were  exchanged  for NEWCO
warrants at the time of the merger. The balance of the increase is primarily due
to ongoing  consulting  fees and executive  salaries and employee  benefits from
agreements entered into as a result of the merger of approximately  $338,000 and
increased  professional fees as a result of increased reporting requirements and
other  services  needed  as a result  of the  share  exchange  of  approximately
$255,000.  In addition insurance costs increased by approximately $47,000 due to
increased  premiums in directors and officers  insurance in connection  with the
exchange  and rent  increased by  approximately  $25,000 as per the terms of the
lease for the year ended April 30, 2005.

                                       18
<PAGE>


The net loss for the year ended  April 30, 2005  increased  to  $8,597,000  from
$1,499,000  for the year ended  April 30,  2004.  This  increase  of  $7,098,000
includes  a  non-cash  debt  discount  charge  of  $2,281,000,  an  increase  of
$2,122,000 from the year ended April 30, 2004. This increase is primarily due to
a charge of $1,080,000 for the fair value of additional  warrants  issued to the
HDS debt  holders  for the  extension  of their term debt and for the  intrinsic
value of the beneficial conversion feature as related to the exchange of the HDS
term debt for NEWCO  convertible  debt at the time of the merger and a charge of
$1,201,000  for the  intrinsic  value of the  beneficial  conversion  feature as
related to the issuance of  convertible  debentures  and warrants in  connection
with the  investment  banking  agreement.  The  increase  in the net  loss  also
includes charges of $713,000 and $398,000,  respectively,  in the current period
for the expensing of certain  deferred stock issuance costs and the amortization
of various  financing  costs as well as a charge of  approximately  $92,000  for
liquidated  damages  paid in stock  for not  filing  the  required  registration
statement as per the terms of an investment banking  agreement.  The rest of the
increase is primarily attributable to the increase in general and administrative
expenses as described above and an increase in interest expense of approximately
$156,000 from the prior year due to increased debt obligations.


Liquidity, Capital Resources and Going Concern

The following table sets forth our working capital (deficiency)  position at the
end of the fiscal years indicated:
<TABLE>
<CAPTION>

                                                     Year ended April 30,

                                                   2005                2004
                                                   ----                ----
<S>                                             <C>                <C>
Current assets                                  $   260,673        $   220,877
Current liabilities                               6,309,096          1,589,421
                                                -----------        -----------
Working capital (deficiency)                    $(6,048,423)       $(1,368,544)
                                                ===========        ===========
</TABLE>

The Company's  cash at April 30, 2005 increased to $22,000 as compared to $1,000
in the prior  fiscal  year.  This  increase  is  primarily  attributable  to the
additional  net cash provided by the issuance of new  convertible  debentures in
the current fiscal period.

Net cash used in  operating  activities  in the year  ended  April 30,  2005 was
$1,795,000  as compared  with  $243,000 in the prior fiscal year ended April 30,
2005. In the year ended April 30, 2005, the Company used approximately  $206,000
to pay down  accounts  payable  and amounts due to  affiliates  which  consisted
primarily of overdue rent and other  expenses  which were required to be paid in
order for the Company to continue to be able to operate. The balance of the cash
used to fund  operations was used to fund increased  general and  administrative
costs and to cover fixed  manufacturing  costs as previously  discussed above in
results of  operations.  In the period  ending April 30, 2004,  the Company used
approximately $243,000 to fund current operations as funds were not available to
pay down  accounts  payable and other  liabilities  which were due. In addition,
approximately  $316,000 in funding  was  provided  from  customer  deposits  and
included in net cash used in operations  which offset the actual use of cash for
operating  activities.  The  increase  in the  current  period  excluding  these
deposits  was  approximately  $1,236,000  which is the result of the  paydown of
liabilities and increased  expenses as described.  As the Company's revenues and
accounts receivable  collections did not significantly  increase during the year
ended April 30, 2005,  additional cash was not provided to cover these increased
expenses. However, management believes that the paydown of these liabilities and
increased expenses are required in order to continue to operate and to build its
future operations.

                                       19
<PAGE>

Net cash  provided by investing  activities in the year ended Arpil 30, 2005 was
$77,000 as compared  with $2,000 in the year ended April 30, 2004.  The net cash
provided by investing  activities was due to the cash received from OLDCO at the
closing  of the share  exchange,  net of  closing  costs.  OLDCO had  previously
advanced  HDS  $208,000  in the prior  fiscal  year.  The net cash  provided  by
financing activities in the year ended April 30, 2005 was $1,739,000 as compared
with  $197,000  in the year  ended  Arpil 30,  2004.  The net cash  provided  by
financing  activities  was  primarily  provided by the  issuance of  convertible
debentures.


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 $.15 per share. Each note was issued with a
five-year  warrant to purchase shares of the Company's  common stock at $.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
has  agreed  to  undertake  to  register  the  common  stock  issuable  upon the
conversion  of  the  notes  and  the  exercise  of the  warrants.  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.  These  amounts  were  recorded  as  equity  components.  The
remaining balance of $183,000 was recorded as long-term debt. For the year ended
April 30, 2005 the amortization of debt discount was  approximately  $1,160,000.
The  balance  due on the notes at April  30,  2005 is  approximately  $1,420,000
consisting of approximately  $2,295,000 in principal,  approximately  $77,000 of
accrued  interest,  and  unamortized  debt discount of  approximately  $952,000.
Interest expense for the year ended April 30, 2005 was  approximately  $136,000,
of which  approximately  $77,000 is included  in  interest  payable at April 30,
2005. 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. At April
30, 2005, none of the notes had been converted.


Financing fees in connection with this agreement approximated $286,000 which are
being amortized over the term of the convertible notes. For the year ended April
30, 2005, the amortization of financing costs approximated $160,000.


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 $.15 per
share.  The fair value of the warrants  ($405,000) will be charged to operations
over  the life of the  underlying  debt.  For the year  ended  April  30,  2005,
approximately  $238,000 was charged to operations  as financing  costs for these
warrants.

In connection  with this  agreement,  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 not been issued at April 30, 2005.

On August 23,  2004,  the Company  entered  into a Standby  Equity  Distribution
Agreement with Cornell Capital Partners,  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  can  be  drawn  down  upon  a
registration  statement covering the shares being declared effective by the SEC.
On January  27,  2005,  a  preliminary  registration  statement  was  filed.  As
consideration for entering into the Standby Equity Distribution  Agreement,  the

                                       20
<PAGE>

Company  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 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 Securities and Exchange  CommissionSEC  to allow the Company to increase the
number of common shares it is authorized to issue. This must be completed before
the Company can have a registration  statement declared effective by the SEC. On
January 27, 2005, a preliminary  registration  statement was filed with the SEC.
Between  December  2004 and November 2005 various  comments and  responses  were
exchanged  between the SEC and the  Company.  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. As discussed further in Note 2 to consolidated  financial
statements  in Part 2, Item 7, the Company has  expensed  the  $713,000 of stock
issuance costs as of April 30, 2005.

The  following  table  provides a summary of the  Company's  loans  payable  and
commitments for operating leases at April 30, 2005:
<TABLE>
<CAPTION>
                                                                 Less than                           3 or More
                                              Total ($)          1 Year ($)         1-3 Years ($)    Years ($)
                                              ---------          ----------         -------------    ---------
<S>                                           <C>                 <C>                   <C>           <C>
Notes and interest payable                      664,341             664,341               --             --
Convertible debentures and interest
 payable, related party                       1,547,747           1,547,747               --             --
Convertible debentures and interest
 payable, other                               3,153,232           3,153,232               --             --
Convertible debentures and interest
 payable, officers                              863,117             863,117               --             --

Operating leases                              1,774,808             342,710             923,098       $509,000
                                             ----------          ----------             -------       --------

         Total Contractual Obligations       $8,003,245          $6,571,147             923,098       $509,000
                                             ==========          ==========            ========       ========
</TABLE>


     Current Debt :

Substantially  all of the Company's debt  obligations are current and are due in
December 2005. The total current obligations as described above in the aggregate
of $6,228,000 and further in the Company's audited financial  statements consist
of approximately  $5,586,000 in principal and approximately $642,000 in interest
at April 30,  2005.  In December  2005,  $5,031,212  face amount of  convertible
debentures  became due and payable together with accrued  interest.  The Company
was  unable  to  make  such  repayment  and,  as  such,  is in  default  of such
agreements.  The Company is in  discussions  with the debt holders to reschedule
the repayment of the debt.

     Operating leases:

On October 1, 1998,  OLDCO entered into a ten-year  lease through  September 30,
2008 for rental of office  facilities.  On March 4, 2000,  OLDCO  entered into a
sublease  agreement  for the October  1998 lease with a company in which a prior
major  shareholder of OLDCO is a stockholder.  The sublease expires on September

                                       21
<PAGE>

30,  2008.  The sublease  annual rent of $178,000 is being paid  directly to the
landlord by the sublease  tenant.  The Company would have to pay the obligations
under the lease in the event of  default  by the  subtenant  under the  parties'
sublease agreement.

On January  25,  2002,  the  Company  entered  into a lease for a  manufacturing
facility  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.

     Off-Balance Sheet Arrangements

At  April  30,  2005,   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.

In May,  2004, in connection  with the closing of the share  exchange  agreement
with HDS, the Company became  conditionally liable to repurchase up to 2,400,000
of the  common  shares it had  issued in  connection  with the  transfer  of its
subsidiaries.  Transferee  may demand the  repurchase  of the shares only in the
event transferee elects to make such demand after transferee is unable to 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.  In the  event  of a  demand  by the
transferee,  the repurchase price will be at the lower of those two amounts.  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.

     Basis of Presentation - Going Concern

At April 30,  2005,  the Company  had an  accumulated  deficit of  approximately
$19,281,000,  a working capital deficit of approximately $6,048,000 and incurred
a  net  loss  of   approximately   $8,596,000  for  the  year  then  ended.  The
recoverability  of a major  portion of the recorded  asset  amounts shown in the
accompanying consolidated balance sheet is dependent on the Company's ability to
obtain  financing  on  an as  needed  basis.  The  Company's  current  financial
condition raises  substantial doubt about the Company's ability to continue as a
going concern.  The  additional  funds which were received in the current fiscal
year from the  financing  described  above have been  substantially  depleted to
repay indebtedness,  pay fees associated with the share exchange and for product
development  which has not yet  materialized  into current  revenue.  Management
intends to focus its efforts in the next twelve  months on building the business
of the Company but realizes that  additional  debt or equity  financing  will be
needed.  There can be no assurance  that the Company will be able to obtain this
financing or that current debt  obligations  will be extended.  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 in existence.

The  Company's   current  primary  sources  of  revenues  are  the  development,
manufacture  and sale of hydrogel  related  products to the  original  equipment
manufacturer  market and developers and  distributors of skin care  preparations

                                       22
<PAGE>

and other cosmetics as well as prescription and OTC medications. The Company has
expanded its  business to include the sales of finished  product  including  its
branded wound care  products,  Aquamatrix(R),  to wound care providers and other
potential  users and plans to expand this business by: (i) Increasing the number
of distributors  who carry  Aquamatrix(R);  (ii) Identifying  potential  private
label  opportunities;  (iii)  Incorporating  novel active  ingredients for wound
healing  into  the  gels  as  product   extensions;   and  (iv)   Expanding  the
Aquamatrix(R) product line to include complimentary products.

In addition,  on October 3, 2005,  the Company  entered into an agreement with a
subsidiary of HH Brown Shoe Company, HH Brown Shoe Technologies Inc. d/b/a Dicon
Technologies ("Dicon"), an entity affiliated with a Director of the Company. 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 the entity,  these products in
North America in  consideration of a 7-10% royalty based on sales. The agreement
also requires that we purchase certain equipment from the entity,  for which the
Company has obtained a tentative  commitment for financing from a related party,
and provides for a supply agreement between the Company and the entity. 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.  Management believes that this agreement will
result in an increase in revenues within the next 12 months.

     Critical Accounting Policies

Our critical and significant accounting policies,  including the assumptions and
judgments  underlying  them,  are  disclosed  in  the  Notes  to  the  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  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 financial  statements  and the reported  amounts of revenues and
expenses  during the reported  period.  Actual  results  could differ from those
estimates.

     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 Opinion No. 25 ("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,  based on the grant date
fair value of those awards, in the financial  statements.  The effective date of
SFAS No.  123R for the  Company  is the first  quarter  of 2006.  SFAS No.  123R
permits   companies  to  adopt  its   requirements   using  either  a  "modified
prospective" method, or a "modified  retrospective"  method. Under the "modified
prospective" method, compensation cost is recognized in the 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. Under the "modified  retrospective" method, the
requirements are the same as under the "modified  prospective"  method, but also
permits entities to restate financial statements of previous periods, either for
all prior periods  presented or to the beginning of the fiscal year in which the
statement is adopted, based on previous pro forma disclosures made in accordance
with SFAS No. 123.  The Company has not yet  determined  which of the methods it
will use upon adoption.

The Company currently utilizes the Black-Scholes option pricing model to measure
the fair value of stock  options  granted  to  employees.  While  SFAS No.  123R
permits  entities to continue to use such a model,  it also permits the use of a
"lattice" model. The Company expects to continue using the Black-Scholes  option
pricing  model upon adoption of SFAS No. 123R to measure the fair value of stock
options.

                                       23
<PAGE>

The adoption of this  statement  will have the effect of reducing net income and
income  per share as  compared  to what  would be  reported  under  the  current
requirements.  These future amounts cannot be precisely  estimated  because they
depend on, among other things,  the number of options issued in the future,  and
accordingly,  the  Company  has not  determined  the impact of  adoption of this
statement on its results of operations.

                                       24
<PAGE>


ITEM 7. FINANCIAL STATEMENTS


                                    CONTENTS






                                                                   Page

Report of Independent Registered Public Accounting Firm              26

Consolidated Balance Sheet                                      27 - 28

Consolidated Statements of Operations                                29

Consolidated Statements of Changes in Stockholders' Deficit          30

Consolidated Statements of Cash Flows                           31 - 33

Notes to Consolidated Financial Statements                      34 - 53



                                       25
<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  as of  April  30,  2005,  and the  related
consolidated  statements of operations,  changes in stockholders'  deficit,  and
cash flows for each of the years in the  two-year  period  ended April 30, 2005.
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 audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit 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 audit 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
audit provides 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, 2005, and the results of its
operations and its cash flows for each of the years in the two-year period ended
April 30, 2005, 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
4 to the consolidated financial statements, the Company's ability to continue in
the  normal  course  of  business  is  dependent  upon  the  success  of  future
operations.   The  Company  has  incurred  cumulative  losses  of  approximately
$19,281,000  since inception and utilized cash of  approximately  $2,039,000 for
operating  activities during the two years ended April 30, 2005. The Company has
a working  capital  deficit of  approximately  $6,048,000,  and a  stockholders'
deficit of approximately $5,431,000 as of April 30, 2005. 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 4.  These
consolidated  financial  statements  do not include any  adjustments  that might
result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated financial statements, the Company has
restated its April 30, 2005  consolidated  financial  statements  to reflect the
expensing of deferred stock issuance costs  associated  with shares that were to
be included in a registration  statement that was withdrawn  subsequent to April
30, 2005.

                                   /s/ Rothstein, Kass & Company, P.C.
                                   -----------------------------------
Roseland, New Jersey
September 8, 2005, except for
 Note 2 and 19 as to which the date is
March 15, 2006


                                       26

<PAGE>

Item 1. Financial Statements

NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                                                                                                              April 30,
                                                                                                                 2005
                                                                                                             as restated
----------------------------------------------------------------------------------------------------------------------------

ASSETS

<S>                                                                                                       <C>
Current assets                                                                                                       21,659
Accounts receivable                                                                                                 123,629
Inventories                                                                                                          65,126
Prepaid expenses and other current assets                                                                            50,259
                                                                                                          ------------------

Total current assets                                                                                                260,673
                                                                                                          ------------------

Property and equipment, net of accumulated depreciation of $1,667,768                                               417,886
                                                                                                          ------------------

Other assets
Deferred financing costs                                                                                            293,860
Investments                                                                                                           6,000
Other                                                                                                                16,455
                                                                                                          ------------------

Total other assets                                                                                                  316,315
                                                                                                          ------------------

                                                                                                          $         994,874
                                                                                                          ==================
LIABILITIES AND STOCKHOLDERS'  DEFICIT

Current liabilities
Note and interest payable                                                                                 $         664,341
Convertible debentures and interest payable, related party, net of debt discount of $500,823                      1,046,924
Convertible debentures and interest payable, other, net of debt discount of $1,191,209                            1,962,023
Convertible debentures and interest payable, officers, net of debt discount of $38,430                              824,637
Customer deposits                                                                                                   839,653
Accounts payable and accrued expenses                                                                               304,243
Stock to be issued                                                                                                  187,920
Common stock subject to redemption                                                                                  330,000
Due to affiliate                                                                                                    149,355
                                                                                                          ------------------

Total current liabilities                                                                                         6,309,096
                                                                                                          ------------------

Long-term liabilities, deferred sublease income                                                                     117,000
                                                                                                          ------------------
See accompanying notes to the consolidated financial statements.
</TABLE>

                                       27
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (CONTINUED)

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
                                                                                                              April 30,
                                                                                                                2005
                                                                                                             as restated
------------------------------------------------------------------------------------------------------------------------------

Commitments and contingencies
<S>                                                                                                                     <C>
Stockholders' deficit
Series A convertible preferred stock, $.001 par value, authorized
850,000 shares, 67,000  issued and outstanding                                                                           67
Series B convertible preferred stock, $.001 par value, authorized
150,000 shares, 116,687 issued and outstanding                                                                          117
Common stock, $.001 par value, authorized 25,000,000 shares,
17,117,410  issued and outstanding                                                                                   17,117
Additional paid-in-capital                                                                                       13,901,865
Accumulated other comprehensive loss                                                                                (69,000)
Accumulated deficit                                                                                             (19,281,388)
                                                                                                          ------------------

Total stockholders' deficit                                                                                      (5,431,222)
                                                                                                          ------------------

                                                                                                          $         994,874
                                                                                                          ==================
See accompanying notes to the consolidated financial statements.
</TABLE>

                                       28
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------

Years Ended April 30,                                                         2005                        2004
                                                                          as restated
------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                        <C>
Revenues                                                            $          738,498         $          623,349

Cost of revenues                                                               928,379                    912,082
                                                                    ----------------------------------------------
Gross margin                                                                  (189,881)                  (288,733)
                                                                    ----------------------------------------------

Operating expenses
General and administrative                                                   4,404,184                    661,737
Amortization and other expenses                                                136,470                    116,213
                                                                    ----------------------------------------------

                                                                             4,540,654                    777,950
                                                                    ----------------------------------------------

Loss from operations                                                        (4,730,535)                (1,066,683)
                                                                    ----------------------------------------------

Other income (expenses)
Sublease income                                                                 46,800                          -
Amortization of debt discount                                               (2,281,037)                  (158,526)
Stock issuance costs expensed                                                 (712,500)                         -
Interest expense                                                              (265,287)                  (152,398)
Interest expense, related parties                                             (164,496)                  (121,434)
Amortization of financing costs                                               (397,663)                         -
Liquidated damages - stock                                                     (91,800)                         -
                                                                    ----------------------------------------------

                                                                            (3,865,983)                  (432,358)
                                                                    ----------------------------------------------

Net loss                                                            $       (8,596,518)        $       (1,499,041)
                                                                    ==============================================

Weighted average common shares outstanding
Basic and diluted (see Note 11)                                             15,742,882
                                                                    ----------------------------------------------

Loss per common share
Basic and diluted (See Note 11)                                     $            (0.55)        $        N/A
                                                                    ----------------------------------------------

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


                                       29

<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Years Ended April 30, 2005 and 2004
------------------------------------------------------------------------------------------------------------------------------
                                                                NEWCO            HDS
                                              Series A         Series B       Series B
                                             Convertible     Convertible      Convertible
                                              Preferred       Preferred        Preferred                           Additional
                                               Stock             Stock          Stock            Common Stock        Paid-in
                                               Shares   Amount   Shares  Amount Shares Amount  Shares    Amount      Capital
<S>                                              <C>    <C>     <C>       <C> <C>      <C>     <C>        <C>       <C>
Balances, April 30, 2003                             - $    -        - $    -   522,487  $52   4,702,806    470     $6,186,798

Issuance of warrants in connection
with convertible debentures                                                                                            130,880

Net loss / comprehensive loss
                                              --------------------------------------------------------------------------------
Balances, April 30, 2004                             -      -        -      -   522,487   52   4,702,806    470      6,317,678

Reverse acquisition on May 25, 2004            512,500    513   94,625     95  (522,487) (52)  2,924,299  7,157      1,345,509

Revaluation of warrants as part of
reverse acquisition                                                                                                  1,793,555

Conversion of series A convertible preferred
stock to series B convertible preferred stock (445,500)  (446)  17,820     18                                              428

Conversion of note receivable from officer
to convertible debentures

Issuance of common stock for services                                                          8,500,000  8,500        986,010

Issuance of common stock in connection
with sale of subsidiaries                                                                        600,000    600           (600)

Issuance of common stock for interest expense                                                    390,305    390         58,153

Issuance of series B convertible preferred
stock for services                                               4,242      4                                          727,246

Debt discount on convertible debentures                                                                              2,203,825

Issuance of warrants in connection
with services                                                                                                          470,061

Net loss / comprehensive loss, as restated
                                              --------------------------------------------------------------------------------
Balances, April 30, 2005, as restated           67,000 $   67  116,687   $117         - $  - $17,117,410  $17,117 $ 13,901,865
                                              ================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       30
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Continued)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Years Ended April 30, 2005 and 2004
---------------------------------------------------------------------------------------------------------------------------------
                                                       Accumulated
                                                          Other           Note      Treasury
                                                      Comprehensive    Receivable,   Stock                 Accumulated
                                                          Loss           Officer     Shares      Amount      Deficit    Total
                                                      ---------------------------------------------------------------------------
<S>                                                   <C>              <C>          <C>       <C>          <C>         <C>
Balances, April 30, 2003                              $  (69,000)      $(80,000)    250,000   $ (42,500)   (9,185,829) (3,190,009)


Issuance of warrants in connection
with convertible debentures                                                                                               130,880

Net loss / comprehensive loss                                                                              (1,499,041) (1,499,041)
                                                      ---------------------------------------------------------------------------
Balances, April 30, 2004                                 (69,000)       (80,000)   250,000      (42,500)   (10,684,870)(4,558,170)


Reverse acquisition on May 25, 2004                                               (250,000)      42,500                 1,395,722


Revaluation of warrants as part of
reverse acquisition                                                                                                     1,793,555

Conversion of series A convertible preferred
stock to series B convertible preferred stock                                                                                   -

Conversion of note receivable from officer
to convertible debentures                                                80,000                                            80,000


Issuance of common stock for services                                                                                     994,510

Issuance of common stock in connection
with sale of subsidiaries                                                                                                       -

Issuance of common stock for interest expense                                                                              58,543

Issuance of series B convertible preferred
stock for services                                                                                                        727,250

Debt discount on convertible debentures                                                                                 2,203,825

Issuance of warrants in connection
with services                                                                                                             470,061

Net loss / comprehensive loss, as restated                                                                  (8,596,518)(8,596,518)

                                                      ----------------------------------------------------------------------------
Balances, April 30, 2005, as restated                  $  (69,000)      $      -          -    $       -   (19,281,388)(5,431,222)

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

                                       30
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------

Years Ended April 30,                                                                       2005                  2004
------------------------------------------------------------------------------------------------------------------------------
                                                                                        as restated
<S>                                                                                 <C>                   <C>
Cash flows from operating activities
Net loss                                                                            $      (8,596,518)    $      (1,499,041)
Adjustments to reconcile net loss to net cash
 used in operating activities:
   Stock and warrants issued for services                                                   1,217,373                   -
   Revaluation of warrants and options                                                      1,793,555                   -
   Stock issuance costs expensed                                                              712,500                   -
   Depreciation and amortization                                                              251,487               334,160
   Amortization of debt discount                                                            2,281,037               158,526
   Amortization of financing costs                                                            397,663                   -
   Liquidating damages - stock                                                                 91,800                   -
   Gain on sale of equipment                                                                       -                   (950)
   Changes in operating assets and liabilities:
     Accounts receivable                                                                      (49,937)              (13,820)
     Inventories                                                                               23,212                (2,678)
     Prepaid expenses and other current assets                                                  7,760               (45,959)
     Other assets                                                                              (6,549)               (6,400)
     Customer deposits                                                                         (8,000)              315,705
     Accounts payable and accrued expenses                                                    (55,003)               48,779
     Deferred sublease income                                                                 (46,800)                  -
     Due to affiliates                                                                       (151,809)              195,329
     Interest payable                                                                         343,058               273,000
                                                                                    ----------------------------------------

Net cash used in operating activities                                                      (1,795,171)             (243,349)
                                                                                    ----------------------------------------

Cash flows from investing activities
  Net cash acquired from merger                                                                86,183                   -
  Purchase of equipment                                                                        (8,925)                  -
  Proceeds from sale of equipment                                                                  -                  2,000
                                                                                    ----------------------------------------
Net cash provided by investing activities                                                      77,258                 2,000
                                                                                    ----------------------------------------

Cash flows from financing activities
  Proceeds from issuance of convertible debentures, other                                   2,295,000                   -
  Proceeds from issuance of convertible debentures, related party                                  -                198,000
  Proceeds from bridge loan, merger candidate                                                      -                208,500
  Payments on notes payable                                                                  (238,000)             (191,827)
  Payments for financing costs                                                               (286,380)                  -
  Payments of stock issuance costs                                                            (87,500)                  -
  Proceeds from loan from officer                                                                  -                 72,000
  Payments on loan from officer                                                                (7,000)                  -
  Proceeds from (payments to) affiliate                                                        62,624               (89,350)
                                                                                    ----------------------------------------

Net cash provided by financing activities                                                   1,738,744               197,323
                                                                                    ----------------------------------------

Net increase (decrease) in cash                                                                20,831               (44,026)
Cash
  Beginning of year                                                                               828                44,854
                                                                                    ----------------------------------------
End of year                                                                         $          21,659     $             828

See accompanying notes to consolidated financial statements

</TABLE>

                                       31
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------

Years Ended April 30,                                                                      2005                  2004
------------------------------------------------------------------------------------------------------------------------------
                                                                                       as restated
<S>                                                                                 <C>                   <C>
Supplemental disclosure of cash flow information,
 cash paid during the year for interest                                             $          88,764     $          24,827
                                                                                    ==========================================

Supplemental disclosure of non-cash investing and financing,
 activities:

Fair value stock issued in connection with Standby Equity Distribution
 Agreement (see Note 8)                                                             $         625,000     $               -
                                                                                    ==========================================

Fair value of warrants issued to brokers for financing services                     $         405,143     $               -
                                                                                    ==========================================

Debt discount related to convertible debentures                                     $       3,971,074     $               -
                                                                                    ==========================================

Stock issued for interest payment on convertible debentures                         $          58,543     $               -
                                                                                    ==========================================

Reclassification of accounts payable to due to affiliate                            $           5,014     $               -
                                                                                    ==========================================

Reclassification of treasury stock to additional paid in capital                    $          42,500     $               -
                                                                                    ==========================================

Reclassification of note receivable, officer and interest receivable
 against convertible debentures and interest payable, officer                       $         112,000     $               -
                                                                                    ==========================================

Reclassification of accrued expenses to convertible debentures
 and interest payable, officer                                                      $         552,335     $               -
                                                                                    ==========================================

Reclassification of due to officer to convertible debentures and
 interest payable, officer                                                          $         257,846     $               -
                                                                                    ==========================================

Reclassification of additional paid in capital to series A convertible
 preferred stock                                                                    $             513     $               -
                                                                                    ==========================================

Reclassification of additional paid in capital to series B convertible
 preferred stock                                                                    $              95     $               -
                                                                                    ==========================================

Conversion of series A convertible preferred stock to series B
 convertible preferred stock                                                        $             446     $               -
                                                                                    ==========================================

Reclassification of additional paid in capital to common stock                      $           7,757     $               -
                                                                                    ==========================================

See accompanying notes to consolidated financial statements




                                       32
<PAGE>

NESCO INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

------------------------------------------------------------------------------------------------------------------------------

Years Ended April 30,                                                                     2005                  2004
------------------------------------------------------------------------------------------------------------------------------
                                                                                       as restated

Supplemental disclosure of non-cash investing and financing,
 activities (continued):

Balance sheet of Nesco Industries, Inc. at the date of the
 Share Exchange (See Note 2):

Property and equipment                                                              $           4,939     $        -
                                                                                    ----------------------------------------


Accounts payable and accrued expenses                                                         177,351

Deferred sublease income                                                                      163,800

Stockholders' equity                                                                            6,581
                                                                                    ----------------------------------------

      Total liabilities and stockholders' equity                                              347,732
                                                                                    ----------------------------------------

Elimination of intercompany bridge loan                                                      (208,500)
                                                                                    ----------------------------------------

Cash acquired from merger                                                                     134,293

Expenditure of legal fees in connection with merger                                           (48,110)
                                                                                    ----------------------------------------

Net cash acquired from merger                                                       $          86,183     $        -
                                                                                    ========================================

See accompanying notes to consolidated financial statements

</TABLE>


                                       33
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Organization and Nature of Operations

NESCO Industries,  Inc.  (hereinafter referred to as "OLDCO"), a Nevada publicly
traded  corporation,  prior to ceasing business operations and becoming inactive
in May 2003,  was a provider  of  asbestos  abatement  and  indoor  air  quality
testing, monitoring and remediation services. In the fiscal year ended April 30,
2003,  OLDCO  consolidated the operations of its various  subsidiaries,  through
which it provided services,  into a single environmental services operating unit
organized under the banner of its  wholly-owned  subsidiary  National  Abatement
Corporation.  Prior to  consolidation,  OLDCO operated  through its wholly-owned
subsidiaries,   National   Abatement   Corporation   ("NAC"),   NAC/Indoor   Air
Professionals, Inc. ("IAP") and NAC Environmental Services, Inc. ("NACE").

On April 29, 2004,  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
approximates  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 (hereinafter referred to as "NEWCO" or the "Company").  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.

NEWCO's fiscal year ends on April 30 and,  therefore,  references to fiscal 2005
and fiscal 2004 refer to the fiscal  years  ending  April 30, 2005 and April 30,
2004, respectively.

The  accompanying  condensed  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 NEWCO  subsequent  to the
acquisition date of May 25, 2004.

The  common  stock  and per  share  information  in the  consolidated  financial
information and related notes have been retroactively adjusted to give effect to
the reverse acquisition on May 25, 2004.

2.  Restatement

In December 2005,  subsequent to the issuance of the April 30, 2005 consolidated
financial  statements,  the Company  concluded  that $712,500 of stock  issuance
costs that had been  deferred  should have been  expensed as of April 30,  2005.
Such costs were  incurred in  connection  with a proposed  issuance of shares to
Cornell  Capital  Partners  LP,  the  issuance  of which  was  dependant  on the
effectiveness of a registration  statement.  The related registration  statement
was filed in January 2005 but  withdrawn  in November  2005,  shortly  after the
release of the April 30, 2005 consolidated  financial statements.  The effect of
this change increases net loss and net loss per share as follows:

<TABLE>
<CAPTION>
                                                           2005             2004
                                                           ----             ----
      <S>                                              <C>               <C>
      Net loss, as reported                            $(7,884,018)      $(1,499,041)
      Write off deferred stock issuance costs             (712,500)            -
                                                       -----------       -----------
      Net loss, as restated                            $(8,596,518)      $(1,499,041)
                                                       -----------       -----------
      Net loss per common share, basic and diluted,
         as reported                                        $(0.50)          N/A
      Write off deferred stock issuance costs                (0.05)           -
                                                       -----------       -----------
      Net loss per common share, basic and diluted,
         as restated                                        $(0.55)          N/A
                                                       -----------       -----------
</TABLE>
                                       34

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


The  effect  of this  change  is also to  decrease  total  assets  and  increase
stockholders' deficit at April 30, 2005 as follows:
<TABLE>
<CAPTION>
                                                          April 30, 2005
                                                          --------------
                                                     Stockholders'      Total
                                                        Deficit         Assets
                                                        -------         ------
      <S>                                            <C>              <C>
      As reported                                    $(4,718,722)     $1,707,374
      Write-off deferred stock issuance costs           (712,500)       (712,500)
                                                     -----------      ----------
      As restated                                    $(5,431,222)     $  994,874
                                                     -----------      ----------
</TABLE>


3.   Exchange of securities


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

NEWCO 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, because NEWCO did not have the required number of authorized
shares of common  stock to complete  the  exchange  on this basis,  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 NEWCO is
authorized  to  issue,  each  share of the  Series  B  Preferred  Stock  will be
automatically  converted into shares of NEWCO common stock. On November 16, 2004
NEWCO filed a preliminary information statement with the Securities and Exchange
Commission  ("SEC").  On December  16, 2004,  the SEC  responded  with  comments
pertaining to the preliminary  information statement.  On February 25, 2005, the
Company  responded to these comments and received  further  additional  comments
from the SEC on March 15, 2005,  May 19, 2005 and July 5, 2005.  The Company has
responded  to the last  comments  received  (July 5, 2005) on August 5, 2005 and
received  final  comments  from the SEC on  August  23,  2005.  The  information
statement  can be completed  once the 10-KSB for the fiscal year ended April 30,
2005 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 NEWCO  Preferred  B Stock,  which will be
converted into 29,165,250 shares of NEWCO common stock (a ratio of approximately
9 NEWCO  shares  for 1 share  of HDS  stock).  The  HDS  preferred  shareholders
exchanged  295,853 shares of stock for 14,201 shares of NEWCO Preferred B Stock,
which will be converted into 10,650,750 shares of NEWCO common stock (a ratio of
approximately  36 NEWCO 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, 2005 which has resulted in  approximately  54.1% of NEWCO's  voting
securities  outstanding at the time of the exchange  owned by HDS  stockholders.
The Company  anticipates  that the remaining  shareholders  will exchange  their
shares  in the near  future,  which  will  result  in 55.3%  of  NEWCO'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 NEWCO
Preferred  B Stock,  which will be  converted  into  40,075,167  shares of NEWCO
common stock (a ratio of approximately 9 NEWCO 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 NEWCO  Preferred  B Stock  which will be  converted  into

                                       35
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18,809,574  shares  of NEWCO  common  stock (a ratio of  approximately  36 NEWCO
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,  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 NEWCO'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 NEWCO  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 exchange  agreement,  they would convert their shares to
NEWCO's  common  stock and that NEWCO  would have no  further  obligations  with
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.  This bridge loan was applied to the net cash  obligation  of
OLDCO, which was satisfied at the closing.

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 NEWCO
Preferred  B Stock,  which will be  converted  into  15,375,000  shares of NEWCO
common stock (a ratio of  approximately  30 NEWCO  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.  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,  OLDCO  conditionally  transferred its three wholly
owned  subsidiaries,  NAC, IAP and NACE, to a consultant and interim  officer of
OLDCO 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  NEWCO 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,  NEWCO  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.

In connection with the share exchange agreement,  NEWCO also issued an aggregate
of 6,500,000  common  shares (with a fair value of $975,000  based on the market
price of $.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 exchange agreement. 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 OLDCO.
NEWCO 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 OLDCO acquisition,  were charged to equity, and the balance of $695,000
was recorded as a charge to operations in the quarter ended July 31, 2004.

                                       36
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Prior to the transaction,  OLDCO had 7,627,105 common shares outstanding.  After
giving effect to the transactions above and after such time that NEWCO increases
the  number  of  common  shares  it is  authorized  to  issue,  NEWCO  will 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 NEWCO  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 NEWCO (a ratio of 9 NEWCO 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 NEWCO (a
ratio of 36  NEWCO  common  shares  for 1 share of HDS  preferred  stock).  This
resulted in the issuance of  approximately  24,357,000  options/warrants.  These
options/warrants  are  currently  exercisable  at prices that range between $.08
-$.39 and expire between one and eight 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 NEWCO Common Stock at an exercise  price
of $.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 $2,736,212 was also
exchanged  for NEWCO  convertible  debt and the holders may convert this debt to
approximately 28,551,000 shares of NEWCO common stock. Approximately $156,000 of
the total debt  exchanged  was  attributed to the fair value of the warrants and
$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 $877,000 was recorded as  long-term  debt.  For the year ended April 30, 2005
the amortization of debt discount approximated $1,080,000.

Prior to the transaction, OLDCO had approximately 4,212,500 options and warrants
outstanding.   After  giving  effect  to  the  transactions   above,  NEWCO  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.

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 years ended April 30, 2005 and 2004 as if
the acquisition had occurred at the beginning of the respective period:

<TABLE>
<CAPTION>
                                Year Ended April 30,
                                --------------------
                               2005             2004
                               ----             ----
<S>                     <C>              <C>
Revenues                $      738,498   $      623,349
Net loss                $   (8,641,065)  $   (3,267,982)
Net loss                $        (0.52)  $        (0.00)
per share
</TABLE>
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 OLDCO  been a combined  company
during the specified periods.

                                       37
<PAGE>
NESCO INDUSTRIES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   Going concern and liquidity

The  accompanying  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  $19,281,000  since inception and
utilized cash of approximately  $2,039,000 for operating  activities  during the
two years ended April 30,  2005.  The Company has a working  capital  deficit of
approximately $6,048,000 and a stockholders' deficit of approximately $5,431,000
as of April 30,  2005.  The  recoverability  of a major  portion of the recorded
asset amounts shown in the accompanying  consolidated balance sheet is dependent
on the Company's  ability to obtain financing on an as needed basis. The Company
has obtained  additional  financing as described in Note 8 and has  completed an
acquisition  as  described in Note 2. In  addition,  the Company has  additional
financing  available as described in Note 9. However,  the  Company's  financial
condition raises  substantial doubt about the Company's ability 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 in existence.


Management  recognizes  that the Company  must  generate  additional  revenue to
achieve profitable  operations.  Management's plans to increase revenues include
the  continued  building of its  customer  base,  especially  in the medical and
cosmetic industries,  through its ability to manufacture goods on a custom basis
or to the  exacting  standards  required  by  medical  customers  (See Note 18).
Management  also will seek to  increase  revenues  through  the  development  of
alternative  uses  of its  equipment,  such  as  irradiation  and  sterilization
services.

There can be no  assurance  that the Company  will be able to obtain  sufficient
debt or equity financing and extensions of current debt obligations on favorable
terms if at all, or that it will be  successful in building its customer base or
developing alternative uses for its equipment. If the Company is unsuccessful in
building its customer base and developing  alternative uses for its equipment or
is unable to obtain additional financing on terms favorable to the Company there
could be a  material  adverse  effect  on the  financial  position,  results  of
operations and cash flows of the Company. The accompanying  financial statements
do not include any adjustments  that might be necessary if the Company is unable
to continue as a going concern.

5.   Summary of significant accounting policies


Principles of Consolidation

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

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

The Company  carries  its  accounts  receivable  at cost less an  allowance  for
doubtful  accounts.  On a periodic  basis,  the Company  evaluates  its accounts
receivable  and  establishes  an  allowance  for doubtful  accounts,  based on a
history of past write-offs and collections and current credit 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.

                                       38
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation and Amortization

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

Loss Per Share

Basic loss per common  share is 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 year  ended  April 30,
2005.


Income Taxes

The Company complies with Statement of Financial  Accounting  Standards ("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.

Investments

Available-for-sale  securities  are  recorded at fair value,  with the change in
fair value during the year  excluded  from earnings and recorded net of tax as a
component of other comprehensive income.

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.

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.

Concentrations of Credit Risk

Financial instruments which 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. As of April 30,
2005, the Company was not subject to credit risk with any financial  institution
beyond the insured amount.

                                       39
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived Assets

Certain  long-lived assets (including  purchased  technology) 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 impairment is deemed to exist, the assets will be written
down to fair value.  Management also  reevaluates the periods of amortization to
determine whether subsequent events and circumstances  warrant revised estimates
of useful  lives.  As of April 30, 2005,  management  expects these assets to be
fully recoverable.

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.

The Company applies APB 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:
<TABLE>
<CAPTION>
                                                                           2005              2004
                                                                           ----              ----
<S>                                                                    <C>                <C>
Net loss, as reported                                                  $ (8,596,518)      $ (1,499,041)

Stock-based compensation determined under the
fair value-based method, net of related tax effects                      $ (241,749)                 -
                                                                  -------------------------------------

Net loss, pro forma                                                    $ (8,838,267)      $ (1,499,041)
                                                                  =====================================

Loss per common share, basic and diluted
As reported                                                                 $ (0.55)               $ -

Pro forma                                                                   $ (0.56)               $ -
</TABLE>
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 years 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.

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 Opinion No. 25 ("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

                                       40
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

received in exchange for awards of equity  instruments,  based on the grant date
fair value of those awards, in the financial  statements.  The effective date of
SFAS No.  123R for the  Company is  February  1,  2006.  SFAS No.  123R  permits
companies to adopt its requirements using either a modified prospective" method,
or a "modified  retrospective" method. Under the "modified prospective" method,"
compensation cost is recognized in the 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.
Under the "modified  retrospective"  method,  the  requirements  are the same as
under the "modified  prospective"  method,  but also permits entities to restate
financial statements of previous periods, either for all prior periods presented
or to the beginning of the fiscal year in which the statement is adopted,  based
on previous  pro forma  disclosures  made in  accordance  with SFAS No. 123. The
Company has not yet determined which of the methods it will use upon adoption.

The Company currently utilizes the Black-Scholes option pricing model to measure
the fair value of stock  options  granted  to  employees.  While  SFAS No.  123R
permits  entities to continue to use such a model,  it also permits the use of a
"lattice" model. The Company expects to continue using the Black-Scholes  option
pricing  model upon adoption of SFAS No. 123R to measure the fair value of stock
options.

The adoption of this  statement  will have the effect of reducing net income and
income  per share as  compared  to what  would be  reported  under  the  current
requirements.  These future amounts cannot be precisely  estimated  because they
depend on, among other things,  the number of options issued in the future,  and
accordingly,  the  Company  has not  determined  the impact of  adoption of this
statement on its results of operations.

6.   Property and equipment

Property and equipment, at cost, consist of the following at April 30, 2005:
<TABLE>


<S>                                                <C>
Machinery and equipment                            $ 1,614,114
Office equipment and fixtures                           97,684
Leasehold improvements                                 373,856
                                             ------------------

                                                     2,085,654
Less accumulated depreciation
  and amortization                                   1,667,768
                                             ------------------

                                                     $ 417,886
                                             ==================
</TABLE>

Depreciation  expense for the years  ended  April 30, 2005 and 2004  amounted to
approximately $166,000 and $218,000, respectively.

7.       Purchased technology

In 1997 the Company  purchased  technology  for net  consideration,  as amended,
approximating  $797,000.  At April 30, 2005, the purchased  technology was fully
amortized.  For the years ended April 30,  2005 and 2004,  amortization  expense
related to the  purchased  technology  amounted  to  approximately  $85,000  and
114,000, respectively.

                                       41
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   Current Debt

Note Payable, Manufacturing Equipment

On January 24,  1997,  the Company  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 funds were  transferred
directly  from  the  lender  to  the  seller  of the  equipment.  The  note  was
collateralized by the related equipment.

On January 23, 2001, the note was amended and restated in the amount of $793,053
which was the aggregate  amount of the original  note plus interest  through the
date of the  restated  note.  The amended  note,  with  interest at 8%,  payable
quarterly,  was due on January 23, 2002. On December 9, 2001, the note was again
amended  and  restated  in the amount of $793,053  which was  originally  due on
January 23, 2002.  The amended  note,  with interest at 8%,  payable  quarterly,
called for a principal  payment of $250,000 on January 23, 2002, and the balance
on January 23, 2003. The note was not paid when due.

On April 21, 2004, the lender agreed to amend and restate the note in the amount
of $793,053 upon the Company's  entering into a Share  Exchange  Agreement  with
OLDCO which occurred on April 29, 2004. The amended note matures on December 31,
2005 and  bears  interest  at 11% (the  default  rate)  until  such time that an
aggregate interest payment of $84,000 was made,  interest from such date forward
until the maturity date  provides for interest rate of 8%,  payable at maturity.
The Company made the interest  payment of $84,000 on July 27, 2004. In addition,
the lender  agreed to release its security  position on the  collateral  90 days
after  receipt of a payment of  $200,000  against  the  principal  balance.  The
Company  made this  payment on August 13,  2004.  The balance due on the note at
April 30, 2005 is approximately $664,000 consisting of approximately $555,000 in
principal and $109,000 of accrued interest. Interest expenses for the year ended
April 30, 2005 and April 30, 2004 approximated $76,000 and $95,000 respectively.

Convertible Debentures

Convertible Debentures - 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 agreement,  to
extend the due dates of these debentures until December 31, 2005 and to exchange
these  debentures for 8%  convertible  debt of NEWCO based on the same ratios in
the share exchange agreement (a ratio of approximately 9 NEWCO common shares for
1 common share of HDS stock and 36 NEWCO common shares for 1 preferred  share of
HDS stock). On May 25, 2004 the exchange was completed. This debt is convertible
at approximately  $.08 per share into an aggregate of  approximately  15,696,000
shares of NEWCO.  The debt holder,  was also granted,  in  consideration  for an
extension  and  exchange  of the debt,  a warrant to acquire  one share of NEWCO
common  stock at an  exercise  price of $.15 for a term of five  years  for each
dollar  of  HDS  debt  for  an  aggregate   issuance  of   1,308,000   warrants.
Approximately  $75,000 of the total debt  exchanged  was  attributed to the fair
value of the warrants and $1,121,000  was  attributed to the intrinsic  value of
the  beneficial  conversion  feature.  These  amounts  were  recorded  as equity
components.  The remaining  balance of $112,000 was recorded as long-term  debt.
For  the  year  ended  April  30,  2005,  the   amortization  of  debt  discount
approximated  $695,000.  The  balance  due on the  note  at  April  30,  2005 is
approximately  $1,046,000  consisting of approximately  $1,308,000 in principal,
approximately  $239,000 of accrued  interest,  and unamortized  debt discount of
approximately  $501,000.  Interest expense for the year ended April 30, 2005 and
April 30, 2004 approximated $105,000 and $100,000 respectively.

                                       42
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition,  this party  exchanged an aggregate of 331,500 options and warrants
of HDS for an aggregate of 10,566,000 warrants of NEWCO based on the same ratios
in the exchange agreement.  These  options/warrants are currently exercisable at
prices that range  between  $.08 -$.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.

Convertible  Debentures - Other - Including Bridge Loans and Investment  Banking
Agreement

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
lenders agreed, upon consummation of the share exchange agreement, to extend the
due  dates of this  debenture  until  December  31,  2005 and to  exchange  this
debentures  for 8%  convertible  debt of NEWCO  based on the same  ratios in the
share exchange  agreement (a ratio of  approximately 9 NEWCO common shares for 1
common  share of HDS stock and 36 NEWCO common  shares for 1 preferred  share of
HDS stock). On May 25, 2004 the exchange was completed. This debt is convertible
at  approximately  $.08 per share into an aggregate of  approximately  7,500,000
shares of NEWCO. The debt holders,  were also granted,  in consideration  for an
extension  and  exchange  of the debt,  a warrant to acquire  one share of NEWCO
common  stock at an  exercise  price of $.15 for a term of five  years  for each
dollar  of HDS  debt for an  aggregate  of the  issuance  of  625,000  warrants.
Approximately  $36,000 of the total debt  exchanged  was  attributed to the fair
value of the warrants and $536,000 was attributed to the intrinsic  value of the
beneficial conversion feature. These amounts were recorded as equity components.
The remaining  balance of $53,000 was recorded as long-term  debt.  For the year
ended April 30, 2005, the amortization of debt discount  approximated  $332,000.
The  balance  due on the  notes  at April  30,  2005 is  approximately  $542,000
consisting of  approximately  $625,000 in principal,  approximately  $156,000 of
accrued  interest,  and  unamortized  debt discount of  approximately  $239,000.
Interest  expense  for the  year  ended  April  30,  2005  and  April  30,  2004
approximated $50,000.

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  NEWCO  based  on  the  same  ratios  in  the   exchange   agreement.   These
options/warrants  are  currently  exercisable  at prices that range between $.08
-$.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.

Convertible Debentures - Bridge Loans and Investment Banking Agreement

In June 2004 the Company  borrowed  $100,000 under bridge loans bearing interest
at 8%. The lenders were also granted  warrants to acquire  666,667 common shares
at $.15 per share.  These loans were  converted into  convertible  debentures in
connection with an investment  banking  agreement entered into in July 2004. The
fair  value of these  warrants  of  approximately  $40,000  was  charged to debt
discount in the quarter ended July 31, 2004.

                                       43
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $.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 $.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.
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.  These  amounts  were  recorded  as  equity
components.  The remaining  balance of $183,000 was recorded as long-term  debt.
For the  year  ended  April  30,  2005 the  amortization  of debt  discount  was
approximately  $1,160,000.  The  balance  due on the notes at April 30,  2005 is
approximately  $1,420,000  consisting of approximately  $2,295,000 in principal,
approximately  $77,000 of accrued  interest,  and  unamortized  debt discount of
approximately  $952,000.  Interest expense for the year ended April 30, 2005 was
approximately  $136,000,  of which approximately $77,000 is included in interest
payable at April 30,  2005.  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 which are
being amortized over the term of the convertible notes. For the year ended April
30, 2005, the amortization of financing costs approximated $160,000.

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 $.15 per
share.  The fair value of the warrants  ($405,000) will be charged to operations
over  the life of the  underlying  debt.  For the year  ended  April  30,  2005,
approximately  $238,000 was charged to operations  as financing  costs for these
warrants.

In connection  with this  agreement,  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 not been issued at April 30, 2005.

Convertible Debentures - Officers

As of April  30,  2004,  HDS had  outstanding  debt due to two  officers  in the
aggregate of $803,212,  which was comprised or approximately $552,000 in payroll
and $251,000 in net notes receivable  including accrued  interest.  On April 19,
2004, the officers agreed, upon consummation of the share exchange agreement, to
exchange  this  debt for 8%  convertible  debentures  of NEWCO  which are due on
December 31, 2005.  On May 25, 2004 the  exchange  was  completed.  This debt is
convertible at approximately $.15 (the market price on the date of exchange) per

                                       44
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

share into an aggregate of 5,354,747  shares of NEWCO.  The debt  holders,  were
also  granted,  in  consideration  for an extension  and exchange of the debt, a
warrant to acquire one share of NEWCO common stock at an exercise  price of $.15
for a term of five years for each dollar of HDS debt for an  aggregate  issuance
of 803,212  warrants.  Approximately  $46,000 of the total  debt  exchanged  was
attributed  to the fair value of the warrants and $46,000 was  attributed to the
intrinsic  value  of the  beneficial  conversion  feature.  These  amounts  were
recorded as equity components.  The remaining balance of approximately  $711,000
was  recorded  as  long-term  debt.  For the year  ended  April  30,  2005,  the
amortization of debt discount approximated $53,000. The balance due on the notes
at April 30, 2005 is approximately $825,000 consisting of approximately $803,000
in principal,  approximately  $60,000 of accrued interest,  and unamortized debt
discount of approximately  $38,000.  Interest  expenses for the year ended April
30, 2005 and April 30, 2004 approximated $60,000 and 27,000, respectively.

In addition,  one of the officers  exchanged an aggregate of 133,334  options of
HDS for an aggregate of 1,200,000  warrants of NEWCO based on the same ratios in
the exchange  agreement.  These  options are currently  exercisable  at $.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.

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.

10.  Standby Equity Distribution Agreement

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 was to be drawn down upon a
registration  statement covering the shares being declared effective by the 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
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 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
have a  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. As discussed in Note 2, the
Company has expensed the $712,500 of stock issuance costs as of April 30, 2005.

11.   Customer deposits

At April 30, 2005,  approximately  $831,000 of the $839,653 of customer deposits
represents  deposits  from a customer  to be  applied  against  future  purchase
orders.  The deposits are non-refundable but applicable 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 will be forfeited.

                                       45
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.   Due to affiliates

Due to affiliates at April 30, 2005 of approximately  $149,000  consists primary
of temporary advances,  unpaid rent and real estate taxes due to an entity owned
by a related party of the Company.

13.    Stockholders' deficit

Capitalization

Our authorized  capital consists of 25,000,000 shares of common stock $0.001 par
value.  Shares  outstanding  at April 30, 2005 includes the current  outstanding
common shares in the aggregate of  19,517,410  shares less the 2,400,000  shares
which are subject to redemption (see Note 2). In addition,  we are authorized to
issue 850,000  shares of our Series A  Convertible  Preferred  Stock  ("Series A
Stock") and 150,000 shares of our Series B Convertible  Preferred Stock ("Series
B Preferred Stock") respectively. As of April 30, 2005, there were 67,000 shares
of our  Series  A Stock  outstanding  and  116,686.84  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 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
Stock.

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.

                                       46
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The loss per common  share at April 30, 2005  includes  the current  outstanding
common shares in the aggregate of  19,517,410  shares less the 2,400,000  shares
which are subject to redemption (see Note 2). It does not include 116,687 shares
of Series B preferred  shares which will be  converted  into  87,515,132  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.  There is no loss
per common share at April 30, 2004 as the historical financial statements of HDS
are carried  forward as those of the  combined  entity and at April 30, 2004 all
HDS common  stock is  considered  to be  exchanged  for Series B stock of NEWCO.
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 of the  conversion  of Series A and Series B  preferred  stock to common
stock for the years ended April 30, 2005 and 2004:
<TABLE>
<CAPTION>

                                                April 30, 2005       April 30, 2004
                                                --------------       --------------
<S>                                             <C>                    <C>
Net Loss                                        $(8,559,458)           $(1,499,041)

Weighed average common shares outstanding
  Basic and diluted                             104,849,245             58,884,741

Loss per common share, basic and diluted        $      (.08)           $      (.03)
</TABLE>

The loss per common shares does not include an aggregate of 56,436,304  warrants
and  options  outstanding  and  43,850,747  shares  issuable  under the terms of
convertible debt. The effect of these securities would be antidilutive.


14.    Income taxes


Income  taxes have been  recorded  under SFAS No.  109,  "Accounting  for Income
Taxes."  Deferred  income  taxes  reflect the net tax  effects of (a)  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the  amounts  used for  income  tax  purposes,  and (b)
operating loss carryforwards.

The tax effects of significant  items  comprising the Company's net deferred tax
asset as of April 30, 2005 are as follows:
<TABLE>
<CAPTION>
                                                                        2005                  2004
<S>                                                                   <C>                   <C>
Deferred tax asset
Net operating loss carryforward                                       $ 6,903,000           $ 3,435,000
Tax basis of intangible assets in
  excess of book basis                                                    162,000               150,000
                                                               -----------------------------------------
Deferred tax asset                                                      7,065,000             3,585,000

Valuation allowance                                                    (7,065,000)           (3,585,000)
                                                               -----------------------------------------
Net deferred tax asset                                                 $     -              $      -
                                                               =========================================
</TABLE>

                                       47
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The increase in valuation  allowance  of  $3,480,000  and $475,000 for the years
ended April 30, 2005 and 2004  respectively  is  primarily  attributable  to the
Company's  additional net operating  losses.  At April 30, 2005, the Company has
federal and state net operating loss carryforwards of approximately $17,258,000,
which expire beginning in 2012.


Ownership  changes  resulting from the Company's  issuance of capital stock (see
Note 2) may limit the amount of net  operating  loss  carryforwards  that can be
utilized  annually to offset  future  taxable  income.  The amount of the annual
limitation is determined based upon the Company's value immediately prior to the
ownership  change.  Subsequent  significant  changes in ownership  could further
affect the limitation in future years.  The amount of such  limitation,  if any,
has not been determined.

The following table presents the principal  reasons for the differences  between
the  effective  tax  rate  and  the  U.S.  Federal  statutory  income  tax  rate
attributable  to  continuing  operations  for the years ended April 30, 2005 and
2004:
<TABLE>
<CAPTION>
                                                                            2005                2004
<S>                                                                        <C>                 <C>
U.S. federal statutory income tax rate                                     (34.0)%             (34.0)%
State and local statutory income tax rate (net of Federal benefit)          (7.3)%              (7.3)%
Change in the valuation allowance                                           40.0 %              31.7 %
Other                                                                        1.3 %               9.6 %
                                                                          ------------------------------

                                                                             0.0 %               0.0 %
                                                                          ==============================
</TABLE>
15.    Commitments and contingencies

Employment Agreements

On May 19, 2004, the Company entered into a three-year employment agreement with
an officer.  The agreement  provides for annual  compensation of $120,000 with a
10%  increase  each year on  December  31 during the term of the  agreement  and
bonuses  based on the  Company's  annual  operating  profit  as  defined  in the
agreement. 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 is the lesser of (i) the  average  closing  bid price per
share of the Company's common stock for 30 consecutive trading days prior to the
closing  date or (ii) the average  closing bid price per share of the  Company's
common  stock  for 30  consecutive  trading  days  commencing  on the  31st  day
following  the  effective  date of the  reverse  split as  defined  in the share
exchange  agreement;  provided  however,  the exercise  price shall be the price
determined  under (i) at any time prior to the  reverse  split.  The average bid
closing price for the 30 consecutive trading days prior to the closing was $.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.  Bonuses are to be paid as determined by the Board of
Directors. The agreement was also extended to December 31, 2009. All other terms
remained the same as defined in the original agreement.

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 OLDCO which  provided for

                                       48
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $.15 on the date of the  agreement)  was charged to
operations in the quarter ended July 31, 2004. As of April 30, 2005, the Company
has  prepaid  approximately  $23,000 in  consulting  fees  associated  with this
agreement.

     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 ($102,250 based
on the  market  price  of $.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
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,  2005 the Company has accrued the monthly
minimum  compensation  of  $1,800.  The fair  value of the  shares due under the
agreement  ($49,200) has been charged to operations and this expense is included
in current liabilities as these shares have not been issued at April 30, 2005.

     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 ($46,920 based
on the market  price of $.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.

     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 $7,800 and the
issuance of a five-year warrant to purchase 40,000 shares of the common stock of
the  Company  exercisable  at the  closing  price on the  date of the  agreement
($.15). The warrants vest at the rate of 10,000 shares per month. The fair value
of the warrants  (warrants  ($12,000)  were charged to operations in the current
fiscal year.

     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 $.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  vested as of April 30, 2005  ($10,200)  were  charged to
operations in the current fiscal year.

Lease

     On October 1, 1998,  OLDCO entered into a ten-year lease through  September
30, 2008 for 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, OLDCO entered into

                                       49
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

a sublease  agreement for the October 1998 lease with a company in which a prior
major  shareholder of OLDCO 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, 2005 are as follows:
<TABLE>
<CAPTION>
                                   Rent            Sublease
                                  payment           income            Net
                                -----------       -----------      --------
<S>                             <C>               <C>             <C>
Year ending April 30,
    2006                            178,710           178,710             -
    2007                            178,710           178,710             -
    2008                            178,710           178,710             -
    2009                             44,678            44,678             -
                                -----------       -----------      --------

                                $   580,808       $   580,808      $      -
                                ===========       ===========      ========
</TABLE>
In June 2000,  OLDCO  received a payment for future  rent of  $397,800  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,  2005,
deferred  sublease  income is  approximately  $164,000,  of which  approximately
$47,000 is included in current liabilities.

Litigation

Except for the claims against former  subsidiaries of OLDCO, as described in the
OLDCO'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,
2005.

The NAC entities,  formerly  subsidiaries  of OLDCO,  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  agreement  with  HDS on May 25,  2004,  between  OLDCO  and NAC
Calabria  Acquisition  Corporation  (the  "Purchaser"),   the  Purchaser  became
responsible  for all liabilities of our previous  business  conducted by the NAC
Entities.

16.  Related party transactions

On January 25, 2002, HDS entered into a lease for a manufacturing  facility 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 (see Note 7) 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,   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 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.

                                       50
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Minimum annual rentals under the manufacturing  facility lease are approximately
as follows:
<TABLE>
<CAPTION>
         Year ending April 30,
                 <S>                        <C>
                 2006                       $ 164,000
                 2007                         170,000
                 2008                         172,000
                 2009                         179,000
                 2010                         181,000
              Thereafter                      328,000
                                       ------------------
                                          $ 1,194,000
                                          ===========
</TABLE>
Rent  expense  for the years  ended  April 30,  2005 and 2004 was  approximately
$196,000 and $186,000, respectively.

17.   Major customers

Customers  accounting  for 10% or more of revenue  for the years ended April 30,
2005 and 2004 are as follows:
<TABLE>
<CAPTION>
                                               April 30,
                                        2005               2004
                                        ----               ----
<S>                                   <C>                <C>
Customer A                            $353,000           $73,000
Customer B                             108,000            80,000
Customer C                               -               195,000
Customer D                               -                72,000
                                      --------          --------
                                      $461,000          $420,000
                                      ========          ========
</TABLE>
Accounts  receivable from these customers  aggregated  approximately  $82,000 at
April 30, 2005.

18.   Stock options and warrants

The Company's  1999 Stock Option Plan ("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,  2005,  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.

                                       51
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following  table  summarizes  the options and warrants  granted to officers,
employees consultants and convertible debt holders for the period from April 30,
2003 through April 30, 2005:
<TABLE>
<CAPTION>
                                                                Number of shares
                                                     ---------------------------------------
                                                                                                              Weighted
                                                                                                  HDS         Average
                                       Total                                                    Warrants      Exercise
                                       number            NEWCO                HDS    -----------------------  price per
                                      of shares     Options    Warrants    Options   Common Stock  Preferred  share
                                     ----------     -------    --------   --------   ------------  ---------  ---------
<S>                                   <C>         <C>        <C>           <C>          <C>         <C>          <C>
Options and Warrants outstanding
    at May 1, 2003                    1,027,870                            425,000      167,500     435,370      $3.13

Expired - Options                       (66,666)                           (66,666)                               3.50

Granted - Warrants                      109,750                                                     109,750       3.00
                                     ----------     -------  ----------   --------    -----------  ---------  ---------
Options and Warrants outstanding
    at April 30, 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

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

Granted - Warrants                   24,039,484              24,039,484                                           $0.21

Granted - Options                     5,180,000   5,180,000                                                       $0.16
                                    -----------   ---------  ----------   --------     ----------    -------    -------
Options and Warrants outstanding
    At April 30, 2005                56,436,304   7,805,000  48,631,304          -            -           -       $0.16
                                    ===========   =========  ==========   ========     ==========    =======    =======
</TABLE>
     The  following  table  summarizes  information  about the stock options and
     warrants granted to officers, employees and consultants at April 30, 2005:
<TABLE>
<CAPTION>
                                                                                          Options and
                                 Options and Warrants Outstanding                     Warrants Exercisable
                                 --------------------------------                     --------------------

                             Number             Weighted-                          Number
                           Outstanding           Average        Weighted-        Exercisable         Weighted-
                               at               Remaining        Average             at               Average
   Range of                 April 30,          Contractual      Exercise          April 30,          Exercise
Exercise Prices               2005                Life            Price             2005               Price
---------------            -----------         -----------      ---------        -----------         ---------
   <S>                      <C>                   <C>               <C>           <C>                   <C>

   $0.05- $0.15             37,948,798            5.3  years        $0.11         34,812,798            $0.10
   $0.25- $0.39             18,487,506            4.2  years        $0.27         18,487,506            $0.27
                           -----------                              -----           ---------            -----
                            56,436,304                              $0.16         53,300,304            $0.16
                           ===========                              =====         ==========            =====
</TABLE>

19.  Employee benefit plan

     The Company maintains a 401(k) plan that allows all full-time  employees to
     participate  immediately  in the plan.  The plan is funded 100% by employee
     contributions as the Company does not make any matching contributions.

                                       52
<PAGE>
NESCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.  Subsequent  events

Payroll Taxes

Subsequent to April 30, 2005, the Company became  delinquent  with regard to the
submission  of  certain  federal  payroll  tax  obligations  due  to  cash  flow
deficiencies.  These liabilities  approximated $104,000,  exclusive of penalties
and interest assessed as of October 12, 2005. The total amount of the delinquent
payroll  taxes due were paid on  October  13,  2005 with funds  advanced  from a
related  party.  The  penalties  and  interest   assessed  are  currently  being
contested.

Agreement

On  October  3, 2005,  the  Company  entered  into an  agreement  with an entity
affiliated with a Director of the Company.  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 the entity,  these  products in North America in  consideration  of a
7-10%  royalty  based on sales.  The  agreement  also  requires  the  Company to
purchase  certain  equipment from the entity and provides for a supply agreement
between  the Company and the  entity.  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.

On January 18, 2006, the Agreement was amended to permit the Company  additional
time to complete the initial  payment of $135,000  due to the Partner  under the
Agreement.  Additionally,  the amendment granted the Partner a security interest
in certain "first line"  equipment  until all $270,000 of purchase price is paid
by the Company.  In December 2005, the Company formed Foam  Manufacturing,  Inc.
("Foam") as a wholly owned subsidiary of the Company.  Between December 20, 2005
and March 15, 2006, the Company raised approximately $285,000 by issuing 11% per
annum senior  secured  notes of Foam  pursuant to a note  purchase  agreement as
amended and restated on February 1, 2006.  Such senior secured notes are secured
by all the  assets  of Foam and are due the  earlier  of April  30,  2006 or the
completion  of a  financing  of at least  $500,000.  The  notes  were  issued to
directors and other related parties.

In February 2006, Foam executed a six year lease for approximately 28,000 square
feet of space  calling for annual  rentals  ranging from $159,600 in the initial
year to $194,600 in the sixth year.  Also in February  2006,  Foam completed the
initial  payment of $135,000 and the "first line" equipment was delivered to the
new facility.  The remaining balance due to the seller, of $135,000, is due upon
completion of setup and first production.

The  Company  also may  purchase  under  the  Agreement  certain  "second  line"
equipment on March 31, 2006 for $350,000. Such amount is payable $50,000 in cash
and $300,000 under a 3 year note with interest at prime plus 2% per annum.

Convertible debt

In December 2005,  $5,031,212 face amount of convertible  debentures  became due
and payable together with accrued interest.  The Company was unable to make such
repayment and, as such, is in default of such agreements.  In addition,  under a
registration rights agreement with holders of $2,295,000 of such debt, penalties
of 2% per month, plus interest on the unpaid penalties at 18% per annum,  accrue
subsequent to July 27, 2005. The Company is in discussions with the debt holders
to reschedule the repayment of the debt and renegotiate such penalties.

Equity

In December 2005, the Company issued 122.67 shares of Series B Preferred  shares
in  settlement  of $46,920 of Common Stock to be Issued at April 30, 2005.  Such
shares are convertible into 276,000 shares of common stock of the Company.

                                       53
<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 Registrant  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  statement (OLDCO) for
fiscal year ending April 30, 2004. Grant Thornton LLP was the Company's  (OLDCO)
independent  auditor for fiscal year ending April 30, 2003.  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 NEWCO 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 Registrant'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 Registrant's two most recent fiscal years, and the subsequent interim
period  preceding BP Audit Group's  dismissal,  the Registrant 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 this Form 10-KSB/A.  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.


                                       54
<PAGE>
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
and raising capital which permits the company to apply  additional  resources to
its financial reporting and disclosure obligations.

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.

There was no change in the Company's  internal control over financial  reporting
during the fiscal  year April 30,  2005,  that has  materially  affected,  or is
reasonably  likely to materially  affect,  the Company's  control over financial
reporting.  Subsequent  to April 30, 2005,  there were changes to the  Company's
internal  control over financial  reporting as noted above. In January 2006, the
Company's Chief Financial Officer resigned.

                                       55
<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

As of October 12, 2005, our directors and executive officers were as follows:
<TABLE>
<CAPTION>

         Name                    Age           Position with the Company
         <S>                     <C>      <C>
         Matthew Harriton        41       President, Principal Executive
                                          Officer and Director
         Geoffrey Donaldson      62       Chief Operating Officer and Director
         Karen Nazzareno         48       Chief Financial Officer
         Richard Selinfreund     47       Director
         Gene E. Burelson        64       Director
         Wayne M. Celia          50       Director
         Joel S. Kanter          48       Director
         Arlen Reynolds          63       Director
</TABLE>
Matthew  L.  Harriton  became  our  Chairman  of the Board of  Directors,  Chief
Executive  Officer and President in May 2004.  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.

Geoffrey  Donaldson  became a Director in December 2004. He is currently and has
been  since  January  2000  Chief  Operating  Officer  of HDS.  He is also Chief
Executive  Officer of Sea Change Group,  LLC, a consulting  firm which  provides
capitalization and management skills to start-up  companies.  Prior to that, Mr.
Donaldson was President of the Revlon Department Store Group and Chief Executive
Officer of Asian American Partners.  He is a graduate of L.I. University and has
performed  graduate work at both Harvard  Business  School and Wharton School Of
Business, University of Pennsylvania.

Karen Nazzareno became our Chief Financial  Officer in May, 2004. She has served
as Chief  Financial  Officer  of HDS since  January  1999 and  Controller  since
October  1996.  Prior to joining  HDS Ms.  Nazzareno's  professional  experience
included positions as Assistant Controller at Fischbach  Corporation,  and audit
supervisor at Holtz  Rubenstein,  a public accounting firm. She is a graduate of
Dowling College and a licensed CPA in the State of New York.

Richard  Selinfreund  became a Director  in October  2004.  From May 1997 to the
present,  he has been  president and Chief  Technology  Officer of  Verification
Technology,  Inc., a biotech  company  specializing  in developing  brand equity
protection      technology;      specifically,      technology     to     detect
counterfeiting/adulteration  of pharmaceuticals,  beverages and CDs. From August
1994  to May  1997,  he was  president  of Lion  Laboratories  Inc.,  a  testing
laboratory  for consumer  products.  From  September 1993 to June 1994, he was a
research scientist with the department of pharmacology of Yale University school
of medicine.

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.

                                       56
<PAGE>

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 has also been President of Chicago  Advisory Group Inc., a privately held
equity financing and consulting  company.  Since its inception in November 1999,
Mr. Kanter serves on the boards of directors of several public companies as well
as a number of private concerns.

Arlen Reynolds  became a director in December 2004. 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.

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.

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  executives officer of the Company other than the CEO or
interim CEO whose salary and bonus payments exceeded $100,000 in fiscal 2005.

                                       57
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                Summary Compensation Table
-------------------------------------------------------------------------------------------------------------------------------
                                                                                        Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------------
                                        Annual Compensation                       Awards                     Payouts
-------------------------------------------------------------------------------------------------------------------------------
   Name and         Year       Salary ($)    Bonus ($)       Other       Restricted    Securities       LTIP       All Other
  Principal                                                  Annual        Stock       Underlying   Payouts ($)  Compensation($)
   Position                                               Compensation     Award(s)     Options/
                                                              ($)            ($)         SARS(#)
-------------------------------------------------------------------------------------------------------------------------------
<S>               <C>           <C>           <C>            <C>          <C>          <C>            <C>           <C>
Matthew           2005          143,700       -0-            *            -0-          5,000,000      -0-           -0-
Harriton,     -----------------------------------------------------------------------------------------------------------------
Chairman          2004           75,000       -0-            *            -0-           -0-           -0-           -0-
of the Board, -----------------------------------------------------------------------------------------------------------------
President, and    2003           30,400       -0-            *            -0-           -0-           -0-           -0-
CEO (1)
-------------------------------------------------------------------------------------------------------------------------------
Karen             2005           95,300       -0-            *            -0-           -0-           -0-           -0-
Nazzareno    ------------------------------------------------------------------------------------------------------------------
CFO               2004           78,500       -0-            *            -0-           -0-           -0-           -0-
             ------------------------------------------------------------------------------------------------------------------
                  2003           60,400       -0-            *            -0-           -0-           -0-           -0-
-------------------------------------------------------------------------------------------------------------------------------
<FN>
</FN>
(1)  Approximately  $80,000 of salary  for the years 2003 and 2004 were  accrued
     but not paid and were  converted  to debt as part of the terms of the share
     exchange agreement.

* Less than $50,000
</TABLE>

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  2005 the  following  option  grants  were made to the named
executive officers:
<TABLE>
<CAPTION>
                                          % of Total
                                          Options
                             Number of    Granted                                         Hypothetical
                              Options     Officers/Employees   Exercise    Expiration        Value at
        Name                  Granted     in Fiscal Year        Price(1)      Date         Grant Date
        ----                 --------     ------------------   ---------   ----------     ------------
<S>                         <C>               <C>               <C>         <C>              <C>
Matthew Harriton            5,000,000         100.0%            $ .15       5/19/09          $327,191
</TABLE>
The  hypothetical  value  of the  options  as of their  date of  grant  has been
calculated  using the  Black-Scholes  option-pricing  model, as permitted by SEC
rules,  based upon  various  assumptions,  which  include:  no  dividend  yield,
expected  volatility of 59%, risk free interest rate of 1.38% and expected lives
of 3 years.  The approach  used in  developing  the  assumptions  upon which the
Black-Scholes  valuations were calculated is consistent with the requirements of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.  It should be noted that this model is only one method of valuing
options,  and our  company's  use of the model should not be  interpreted  as an
endorsement   of  its  accuracy.   The  actual  value  of  the  options  may  be
significantly  different,  and the value actually realized,  if any, will depend
upon the excess of the market value of the common stock over the option exercise
price at the time of exercise.

Aggregated Option/SAR Exercises and Fiscal 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 officers is set forth in the following table:

                                       58
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Fiscal 2005 and Fiscal 2005 Year-End Option/SAR Value

--------------------------------------------------------------------------------------------------------------------------------
         (a)                      (b)                  (c)                          (d)                           (e)

        Name                 Shares Acquired       Value Realized           Number of Securities         Value of Unexercised
                              on Exercise              ($)                 Underlying Unexercised         In-the-Money Options/
                                                                          Options/SAR at 4/30/05            SARs at 4/30/05
                                                                          Exercisable/ Unexercisable    Exercisable/Unexercisable
                                                                                    (#) (1)                      ($) (2)
--------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                   <C>                     <C>                                <C>
Matthew Harriton                -0-                   -0-                     2,000,000/3,000,000                -0-/-0-
--------------------------------------------------------------------------------------------------------------------------------
<FN>

     (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 ($.12) of shares quoted on April 28, 2005.
</FN>
</TABLE>
             .
Long-Term Incentive Plans

Not Applicable.

Compensation of Directors

During  the  fiscal  year  ended  April  30,  2005,  no  director  received  any
compensation  for services  provided in such capacity.  Directors are reimbursed
for any 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 nonqualified  options,  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" in the Share Exchange
Agreement  which is the lesser of (i) the average closing bid price per share of
our common stock for 30  consecutive  trading days prior to the closing date and
(ii) the  average  closing  bid  price  per  share of our  common  stock  for 30
consecutive trading days commencing on the 31st day following the effective date
of the  Reverse  Split as  defined  in the share  exchange  agreement;  provided
however,  the exercise  priceshall be the price determined under (i) at any time
prior to the Reverse  Split.  The average bid closing  price for 30  consecutive
trading days prior to the closing was $.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.

Report on Repricing of Options/SARS

None.

                                       59
<PAGE>
lTEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

Beneficial Ownership

On October 12, 2005 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
October 12, 2005 there were 20,136,225 shares of common stock,  67,000 shares of
Series A Stock and 116,686.84  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 October 12, 2005
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.
<TABLE>
<CAPTION>
Name and Address of                                  Amount and Nature of                 Percent
Beneficial Owner                                     Beneficial Ownership (1)             of Class
--------------------------------------------------------------------------------------------------
<S>                                                   <C>                                  <C>
Santo Petrocelli, Sr.
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY  10165 (2)                               19,741,667                           17.80%

Matthew Harriton
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY  10165 (3)                                7,910,244                            6.85%

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

Karen Nazzareno
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY  10165 (8)                                  180,000                             *

Richard Selinfreund
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 (8)                               -0-                               *

Geoffrey Donaldson
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York 10165 (5)(8)                        3,962,715                            3.49%

                                       60
<PAGE>

Gene E. Burelson
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York  10165                                  -0-                               *

Wayne M. Celia
c/o Nesco Industries, Inc.
305 Madison Avenue                                         -0-                               *
New York, New York  10165

Joel S. Kanter
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York  10165                                  -0-                               *


Arlen Reynolds
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, New York  10165                                  -0-                               *

Richard Harriton
305 Madison Avenue, Suite 4510

New York, NY  10165 (6)                               27,840,007                           20.29%
KSH Strategic Investments
575 Jericho Turnpike
Jericho, NY  11753 (7)                                10,316,500                            8.90%

Directors and Officers
as a Group (8 persons)                                12,052,959                           10.09%
<FN>
     * 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.

(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 and a
     director. Prior to the share exchange agreement with HDS and currently, Mr.
     Harriton remains as CEO and a director of the Company. Mr. Harriton is also

                                       61
<PAGE>


     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 3,000,000 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)  Mr.  Donaldson,  a  director,  is also a director  and the Chief  Operating
     Officer of HDS.  The above  number of shares  beneficially  owned  includes
     2,924,100  shares  issuable  upon the  conversion of debt,  438,615  shares
     issuable upon exercise of a warrant  granted for the extension of debt, and
     600,000 shares  issuable upon exercise of a warrant  granted as part of Mr.
     Donaldson's previous employment agreement with HDS in January 2000.

(6)  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).

(7)  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.

(8)  These  individuals  resigned  their  positions  with the Company in January
     2006.
</FN>
</TABLE>

                                       62
<PAGE>

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth  information as of April 30, 2005 with respect to
compensation  plans and  individual  compensation  arrangements  under which the
Company's common stock is authorized for issuance.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                              Number of securities
                                                                                              remaining available
                                                                                              for future issuance
                                       Number of securities to   Weighted-average exercise     under equity plans
                                       be issued upon exercise      price of outstanding     (excluding securities
                                       of outstanding options,     options, warrants, and     reflected in column
                                         warrants, and rights    rights compensation plans            (a))
            Plan Category                        (a)                        (b)                       (c)
-------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                            <C>                     <C>
1999 Incentive Stock Option Plan(1)
(previously approved by security                -0-                        ----                    1,000,000
holders)

-------------------------------------------------------------------------------------------------------------------
Securities to be issued upon the
exercise of outstanding options,            5,000,000(2)                   $0.15                        --
warrants and rights granted to
officers, directors and employees
not pursuant to a plan

-------------------------------------------------------------------------------------------------------------------
                Total:                      5,000,000                      $0.15                   1,000,000
-------------------------------------------------------------------------------------------------------------------
<FN>
(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.

     On March 13, 2002, the Board of Directors approved the Company's 2001 Stock
     Option  Plan  ("2001  Plan").  The 2001 Plan  authorized  the  issuance  of
     incentive stock options and nonqualified  stock options to purchase up to a
     total of 7,000,000 shares of Common Stock to selected employees,  officers,
     directors,  agents, consultants and independent contractors of the Company.
     The 2001 Plan failed to become  effective in March 2003 when the  necessary
     shareholder  approval was not  obtained.  No options were ever issued under
     the 2001 Plan.

(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 $.15. These options expire in May 2009.
</FN>
</TABLE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

     In the prior two fiscal years, 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  $69,000 at April 30, 2003,  and $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  exchange  agreement  and  currently  holds
approximately  4.44% of the  common  stock  of the  Company  as a result  of the
exchange.  HDS was a majority  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 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.

                                       63
<PAGE>

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  (subsequent  to the exchange  agreement).  In  addition,  Mr. R.
Harriton has a beneficial  ownership of approximately  20.29% upon conversion of
all outstanding warrants and debt issued to him in the Company and holds debt in
the amount of $1,308,000  convertible to 15,696,000  shares of common stock as a
result of the exchange agreement.  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  $77,000 and $229,000 were due to
Mr.  R.  Harriton  on these  leases as of April  30,  2005 and  April 30,  2004,
respectively.  In addition,  Mr. Harriton made temporary advances to the Company
during 2005, of which approximately  $78,000 is due to Mr. Harriton at April 30,
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
agreement,  to extend the due dates of these  debentures until December 31, 2005
and to exchange these  debentures for 8% convertible  debt of NEWCO based on the
same ratios in the share exchange  agreement (a ratio of  approximately  9 NEWCO
common  shares for 1 common  share of HDS stock and 36 NEWCO  common  shares for
1preferred share of HDS stock). On May 25, 2004 the exchange was completed. This
debt is  convertible  at  approximately  $.08 per  share  into an  aggregate  of
approximately  15,696,000  shares of NEWCO. Mr. Harriton,  was also granted,  in
consideration  for an  extension  and exchange of the debt, a warrant to acquire
one share of NEWCO common stock at an exercise  price of $.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,  2005 is  approximately
$1,046,000  consisting of approximately  $1,308,000 in principal,  approximately
$239,000 of accrued  interest,  and unamortized  debt discount of  approximately
$501,000.  Interest expense for the year ended April 30, 2005 and April 30, 2004
approximated  $105,000 and $100,000  respectively.  In  addition,  Mr.  Harriton
exchanged an  aggregate of 331,500  options and warrants of HDS for an aggregate
of  10,566,000  warrants  of  NEWCO  based on the same  ratios  in the  exchange
agreement. These options/warrants are currently exercisable at prices that range
between $.08 -$.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 $.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 NEWCO which
mature in December  2005.  This debt is convertible  at  approximately  $.15 per
share  into an  aggregate  of  approximately  2,431,000  shares  of  NEWCO.  Mr.
Harriton,  was also granted,  in consideration  for an extension and exchange of
the debt,  a warrant to acquire one share of NEWCO  common  stock at an exercise
price  of $.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, 2005 is approximately $374,000 consisting of approximately
$365,000  in  principal,   approximately   $27,000  of  accrued  interest,   and
unamortized  debt discount of  approximately  $18,000.  Interest expense for the
year ended April 30, 2005 and April 30, 2004 approximated $27,000 in each of the
two years.

                                       64
<PAGE>

     At  April  30,  2004,  HDS  owed  Mr.  Geoffrey  Donaldson,  the COO of HDS
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 NEWCO which
matures in December 2005.  This debt is convertible  at  approximately  $.15 per
share  into an  aggregate  of  approximately  2,924,000  shares  of  NEWCO.  Mr.
Dpnaldson,  was also granted,  in consideration for an extension and exchange of
the debt,  a warrant to acquire one share of NEWCO  common  stock at an exercise
price  of $.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, 2005 is approximately $450,000 consisting of approximately
$439,000  in  principal,   approximately   $33,000  of  accrued  interest,   and
unamortized  debt discount of  approximately  $20,000.  Interest expense for the
year ended  April 30,  2005 and April 30,  2004  approximated  $33,000  and -0-,
respectively.  In  addition,  Mr.  Donaldson  exchanged  an aggregate of 133,334
options of HDS for an aggregate of 1,200,000 warrants of NEWCO based on the same
ratios in the exchange  agreement.  These options are currently  exercisable  at
$.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
$.15 on the date of the  agreement)  was  charged to  operations  in the quarter
ended July 31, 2004. As of April 30, 2005, the Company has prepaid approximately
$23,000 in consulting fees associated with this agreement.

     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 $.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 $.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 $.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 has

                                       65
<PAGE>


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,  2005  is  approximately   $1,420,000   consisting  of  approximately
$2,295,000  in  principal,   approximately  $77,000  of  accrued  interest,  and
unamortized  debt discount of approximately  $952,000.  Interest expense for the
year ended April 30, 2005 was  approximately  $136,000,  of which  approximately
$77,000 is included in interest  payable at April 30, 2005. 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 which are being amortized over the term of
the convertible  notes.  For the year ended April 30, 2005, the  amortization of
financing costs approximated  $160,000. At April 30, 2005, 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 NEWCO common stock at an exercise price of $.15
per  share.  The fair  value  of the  warrants  ($405,000)  will be  charged  to
operations  over the life of the  underlying  debt. For the year ended April 30,
2005,  approximately  $238,000 was charged to operations as financing  costs for
these warrants.

     In  connection  with  this   agreement,   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, 2005.

     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  can be drawn  down  upon a
registration  statement covering the shares being declared effective by the SEC.
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.  This must be completed
before the Company can have a registration  statement  declared effective by the
SEC. On December 16, 2004,  the SEC responded  with  comments  pertaining to the
preliminary  information statement.  On February 25, 2005, the Company responded
to these comments and received further additional comments from the SEC on March
15, 2005,  May 19, 2005 and July 5, 2005.  The Company has responded to the last
comments  received  (July 5, 2005) on August 5, 2005 and received final comments
from the SEC on August 23, 2005. The information statement can be completed once
the 10-KSB for the fiscal year ended April 30, 2005 is filed.   Upon  completion
of this process,  the Company will file the  Certificate  of Amendment and issue
the common stock.

     On January 27, 2005, a preliminary  registration  statement  was filed.  On
March 1, 2005,  the SEC responded  with comments  pertaining to the  preliminary
registration statement. These comments will be responded to once the information
statement noted above is completed. The registration statement will be effective
at such time that the SEC  completes its review of our responses to the comments
in regard to both the  preliminary  information  statement  and the  preliminary
registration  statement and we are able to complete the  information  statement.
Upon  completion of this process,  we will file the  Certificate of Amendment to
increase  the  number  of  common  shares  we  are   authorized  to  issue.   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.

                                       66
<PAGE>

     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, 2005 the Company has  accrued  the  monthly  minimum  compensation  of
$1,800. The fair value of the shares due under the agreement  ($49,200) has been
charged to  operations  and this expense is included in current  liabilities  as
these shares have not been issued at April 30, 2005.

     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 $.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.

     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 $7,800 and the  issuance  of a five-year  warrant to
purchase  40,000  shares of the common stock of the Company  exercisable  at the
closing price on the date of the agreement ($.15). The warrants vest at the rate
of 10,000 shares per month. The fair value of the warrants  (warrants  ($12,000)
were charged to operations in the current fiscal year.

     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 $.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  vested as of April 30, 1005 ($10,200) were
charged to operations in the current fiscal year.


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

                                       67
<PAGE>
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 Registrant 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 Registrant and Matthew Harriton dated as of
        May 19, 2004.


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

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


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

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

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

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

10.11*  Placement Agent  Agreement  between  Registrant and Newbridge Securities
        Corporation, Cornell Capital Partners, LP dated as of August 23, 2004.

16.1 (g)Letter from  BP Audit Audit Group re: Change in Registrant'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

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.

                                       68
<PAGE>

(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.

* 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, 2005 and 2004:
<TABLE>
<CAPTION>
        Fee category                   2005                2004
        ------------                   ----                ----
        <S>                         <C>                  <C>
        Audit fees                  $  75,000            $  55,203

        Audit-related fees                  -                  -

        Tax fees                            -                  -

        All other fees                      -                  -
                                    ----------          ----------

        Total fees                  $  75,000            $  55,203
                                    =========           ==========
</TABLE>
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."

                                       69
<PAGE>


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.


                                       70
<PAGE>




                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the  Securities  Exchange  Act, the
registrant  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  registrant and in the capacities and on the
dates indicated.


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

/s/ Matthew Harriton         President and                     March 31, 2006
Matthew Harriton             Director
                             Principal Executive
                             And Principal Financial Officer

/s/ Gene E. Burelson
Gene E. Burelson             Director                          March 31, 2006

/s/ Wayne Celia
Wayne Celia                  Director                          March 31, 2006

/s/ Joel S. Kanter
Joel S. Kanter               Director                          March 31, 2006

/s/ Arlen Reynolds
Arlen Reynolds               Director                          March 31, 2006