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

                                  FORM 10-KSB
                                   (Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE ACT OF
     1934 FOR THE FISCAL YEAR ENDED April 30, 2004

[ ]  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:  (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]

The issuer's revenues for its most recent fiscal year were $25,364

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 September 1,
2004, was $1,668,900.

At September  1, 2004,  the  registrant  had  19,127,105  shares of Common Stock
outstanding.  Transitional  Small  Business  Disclosure  Format:  Yes [ ] No [X]
Documents incorporated by reference: None

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                               TABLE OF CONTENTS
                               -----------------
                                                                          Page
                                                                          ----
PART I

Item 1.        Description of Business.........................................4

Item 2.        Description of Property........................................10

Item 3.        Legal Proceedings..............................................11

Item 4.        Submission of Matters to a Vote of Security Holders............11

PART II

Item 5.        Market for Common Equity, Related Stockholder Matters
               And Small Business Issuers Purchases of Equity Securities......12

Item 6.        Management's Discussion and Analysis or Plan of Operation......14

Item 7.        Financial Statements (F-1 to F-24) ............................21

Item 8.        Changes In and Disagreements With Accountants on
               Accounting and Financial Disclosure............................22

Item 8A.       Controls and Procedures .......................................22

PART III

Item 9.        Directors and Executive Officers of the Registrant.............23

Item 10.       Executive Compensation.........................................25

Item 11.       Security Ownership of Certain Beneficial Owners and
               Management and Related Stockholder Matters.....................29

Item 12.       Certain Relationships and Related Transactions.................33

Item 13.       Exhibits and Reports on Form 8-K...............................35

Item 14.       Principal Accountant Fees and Services.........................37

Signatures     ...............................................................38

Exhibit 31

Exhibit 32

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     FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB of Nesco Industries,  Inc. for the fiscal year
ended April 30,  2004,  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,

     --   success of management;
     --   transition in business focus;
     --   achievement of operational goals;
     --   current and new products and services;
     --   dependence on a small number of customers;
     --   ability to secure financing;
     --   merger and acquisition prospects;
     --   formation of strategic relationships;
     --   current and potential claims, actions and proceedings;
     --   research and development activities;
     --   regulatory submissions and approvals;
     --   financial condition, results of operations and cash flows; and
     --   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. As used in this annual report, the terms "we",
"us", "Nesco", and "the Company" mean Nesco Industries, Inc.

                                       3
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Business

     Corporate History

Nesco  Industries,  Inc.  (hereinafter  sometimes  referred  to as  "we"  or the
"Company")was  incorporated  in Nevada in March  1993,  and was  inactive  for a
number of years. In March 1998, Nesco acquired  National  Abatement  Corporation
("NAC")  and  NAC  Environmental  Services,  Inc.("NACE")..  By  virtue  of this
acquisition, which was the result of arms length negotiations between previously
non-  affiliated  parties,  the  former  shareholders  of NAC and NACE  acquired
5,000,000 shares of the Company's common stock, or 80% of the total outstanding,
immediately  following the acquisition.  The former shareholders of NAC were the
same as the  former  shareholders  of NACE.  For  accounting  purposes,  NAC was
treated as the acquiring corporation.  Thus, the historical financial statements
of NAC prior to that acquisition date were deemed to be the historical financial
statements of the Company.

The Company was a provider of asbestos abatement and indoor air quality testing,
monitoring and  remediation  services.  In the fiscal year ended April 30, 2003,
the Company  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  NAC. Prior to this
consolidation,   the  Company  also  operated  through  two  other  wholly-owned
subsidiaries, NAC/Indoor Air Professionals, Inc. ("IAP") and NACE.

In the fourth  quarter of fiscal 2003,  the Company  elected to  deactivate  the
environmental  services  operating  unit,  and  authorized NAC to cease business
operations,  in order to  conserve  financial  and other  resources  until a new
business focus was  identified.  The Company ceased  business  operations in May
2003.  As a  result  of  ceasing  business  operations,  the  Company  wrote-off
goodwill, fixed assets and inventory in fiscal 2003.

On April 29, 2004,  the Company  entered into a share  exchange  agreement  with
Hydrogel Design Systems,  Inc. ("HDSI"),  a Delaware privately held corporation,
whereby HDSI would become a majority-  owned  subsidiary of the Company and upon
completion of the exchange, the holders of HDSI common stock and debt would hold
a majority interest of the Company. This exchange was completed on May 25, 2004.
The accounting  for the  transaction is a  recapitalization  of HDSI,  with HDSI
treated as the acquirer. The acquired assets and assumed liabilities, if any, of
the Company are carried forward at their historical  values.  HDSI's  historical
financial  statements are carried forward as those of the combined entity.  HDSI
is engaged in the manufacture, marketing, selling and distribution of an aqueous
polymer-based radiation ionized gel, commonly referred to as a "hydrogel", which
is used in various medical and cosmetic consumer products.

Nesco had  intended  to issue  shares of its common  stock in  exchange  for the
equity  securities  of HDSI in certain  ratios as provided  for in the  exchange
agreement. However, because Nesco 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 for, among others,
equity  and  debt of HDSI and the  Company.  Upon  filing  of a  Certificate  of
Amendment to the Certificate of  Incorporation  to increase the number of shares
of common stock which Nesco is authorized  to issue,  each share of the Series B
Preferred  Stock will be  automatically  converted  into shares of Nesco  common
stock.

                                       4
<PAGE>

As  part  of  this  transaction,   the  Company  transferred  its  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  the  Company.   The  transferee   assumed  all  liabilities  and
obligations  with respect to these  subsidiaries  and agreed to indemnify  Nesco
against any claims. In consideration for the indemnity,  the transferee received
3,000,000 shares of common stock of the Company and certain related registration
rights.  In support  of the value of the common  stock  delivered,  the  Company
agreed that the transferee,  at its election,  may demand the Company repurchase
from the  transferee  up to 2,400,000 of the common  shares upon written  notice
from the transferee 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.

In addition to the  transfer of its  subsidiaries,  the Company 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 Nesco Series B Preferred Stock which will be converted into 15,000,000 shares
of common  stock.  The Company was also required to obtain the consent to cancel
an aggregate of 602,500  special  warrants prior to the closing.  The holders of
these special warrants were granted shares in the exchange as part of the common
advisor shares issued. The Company Series A Preferred  shareholders also agreed,
that upon completion of the exchange agreement,  they would convert their shares
to common  stock and that the  Company  would  have no  further  obligations  in
respect to these  preferred  shares.  In  addition,  the Company was required to
retain net cash of approximately $350,000 as part of the terms of the agreement,
of which  approximately  $208,500  was paid as a bridge  loan prior to April 30,
2004 and is included in assets at April 30,  2004.  This bridge loan became part
of the closing requirements in May 2004.

On May 25, 2004, HDSI common  shareholders  exchanged  3,240,593 shares of stock
for  38,887  shares of Nesco  Preferred  B Stock  which will be  converted  into
29,165,250 shares of common stock (a ratio of approximately 9 Nesco shares for 1
share of HDSI stock). The HDSI preferred  shareholders  exchanged 295,853 shares
of stock for 14,201  shares of Nesco  Preferred B Stock which will be  converted
into 10,650,750 shares of common stock (a ratio of approximately 36 Nesco shares
for 1 share  of HDSI  stock).  Approximately  72% of the  common  and 57% of the
preferred  shareholders  exchanged  their shares at this time.  This resulted in
approximately  44.6% of Nesco's  voting  securities  exchanged and owned by HDSI
stockholders.  The  Company  anticipates  that  the  majority  of the  remaining
shareholders will exchange their shares in the near future, which will result in
54.3% of Nesco's voting  securities owned by HDSI  stockholders upon exchange of
all outstanding HDSI securities.  Upon completion of this exchange,  HDSI common
shareholders  will  exchange  a total of  4,452,806  shares of stock for  53,434
shares of Nesco Preferred B Stock which will be converted into 40,075,167 shares
of common  stock (a ratio of  approximately  9 Nesco  shares for 1 share of HDSI
stock). The HDSI preferred  shareholders will exchange a total of 522,487 shares
of stock for 25,079  shares of Nesco  Preferred B Stock which will be  converted
into 18,809,574 shares of common stock (a ratio of approximately 36 Nesco shares
for 1 share of HDSI stock).

The Company  Series A Preferred  shareholders  will exchange  512,500  shares of
stock for an aggregate of 20,500 shares of Nesco Preferred B Stock which will be
converted into 15,375,000  shares of common stock (a ratio of  approximately  30
Nesco common shares for 1 share of Series A preferred stock).

In  connection  with the share  exchange  agreement,  the Company also issued an


                                       5
<PAGE>

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.

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

In addition to the exchange of shares,  all outstanding  warrants and options of
HDSI were  exchanged for Nesco  warrants and options based on the same ratios as
the stock  exchange.  This resulted in the issuance of  approximately  5,512,500
options and  19,624,320  warrants.  The HDSI debt holders were also granted,  in
consideration  of an  extension of term debt , a warrant to acquire one share of
Nesco  common stock for each dollar of HDSI debt,  for an aggregate  issuance of
2,736,000  warrants.  The total HDSI term debt of $2,736,000  was also exchanged
for  Nesco   convertible   debt  and  the  holders  may  convert  this  debt  to
approximately 28,551,000 shares of the Company's common stock.

Prior to the transaction,  the Company had  approximately  4,212,500 options and
warrants  outstanding  . After  giving  effect to the  transactions  above,  the
Company will have approximately  31,483,000 options and warrants outstanding and
debt convertible into approximately 28,551,000 common shares.

As of July 1, 2004,  Nesco  entered into a securities  purchase  agreement  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.  Through August 26, 2004,
we have received  approximately  $1,868,000  of net proceeds in connection  with
this  agreement and issued  warrants to purchase  14,533,333  shares.  The notes
mature on December 1, 2005. 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.

     Business of the Issuer

As  previously  stated,  in fiscal 2004,  we did not conduct any  business,  but
actively sought new business opportunities, resulting in the consummation of the
share exchange agreement with HDSI.

HDSI  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.  HDSI gels are produced
using  unique  proprietary  manufacturing  technologies  which  enable  HDSI  to
develop, manufacture and market electron beam cross-linked aqueous polymer sheet
hydrogels,  hereafter referred to as "gels".  One of two known  manufacturers in
the world,  HDSI specializes in custom gels  capitalizing on unique  proprietary
manufacturing  technologies.  These  capabilities allow HDSI 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.


HDSI gels exhibit significant potential in the following high growth fields:
     --   topical therapeutics in moist wound/burn healing applications;

                                       6
<PAGE>

     --   in  trans  (systemic)  and  intradermal   (non-systemic)  delivery  of
          prescription and non- prescription medications;
     --   cosmetic skin care; and
     --   components in medical diagnostics.

HDSI  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  produced  by  HDSI  are  electron  beam
cross-linked,  water and polymer gels, a category in which HDSI 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 HDSI'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 the HDSI gels.

The gels are manufactured  using proprietary  mixing,  coating and cross-linking
technologies.  Together,  these proprietary  technologies enable HDSI 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  proprietary   manufacturing   technologies   allow  HDSI  to
participate  in the  development  of FDA  regulated  medical  devices.  HDSI  is
currently  participating  in  other  highly  regulated,  confidential  projects.
Management  believes  that HDSI has  sufficient  capacity  in its core assets to
address  the  anticipated  manufacturing  demand  for all  current  and  planned
projects.

In  addition  to HDSI's  ability to  specifically  regulate  the  aforementioned
physical  characteristics  of the gel, HDSI has 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

HDSI 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.  HDSI  markets  its own  brand of  moist  wound/burn
dressings  under  the  AQUAMATRIXTM  brand  name,  and is  currently  developing
additional  line  extensions  of this  product.  In addition,  the HDSI gels are
prepared as components for products  distributed  by HDSI customers  under their
brand names. HDSI, in addition to manufacturing  hydrogel,  offers its customers
converting  services,  allowing HDSI to create competitive  advantage in pricing

                                       7
<PAGE>

while expediting the production process.  HDSI 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 have 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:

          --   Hormone replacement therapy and contraception
          --   Treatment of acne, shingles, diabetes and motion sickness
          --   Treatment of angina with nitroglycerin
          --   Treatment of smoking addiction using nicotine
          --   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 for HDSI

     Moist Wound  Healing.  HDSI 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.  HDSI  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.  HDSI 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.  HDSI
     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.

     HDSI is  actively  involved  in  various  development  projects  for use of
     hydrogels in transdermal delivery of specific ingredients.  HDSI also sells
     hydrogels  products to manufacturers  and distributors of  non-prescription
     medications.

     Cosmetics  and  Other  Consumer  Products.   HDSI  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.   HDSI  is  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.


     Competition

The opportunity for aqueous polymer hydrogels is significant. HDSI's 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 HDSI 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.

                                       9
<PAGE>

     Government Regulation

There is no required government  regulation on hydrogel related products at this
time.  While  hydrogels  fall under the  jurisdiction  of the FDA, the gels HDSI
manufactures  are exempt from the FDA approval  and/or  pre-market  notification
requirements (this would include 510K, NDA and PMA submission).  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 HDSI  manufactures
products  which would require such filings or  registration,  HDSI 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.

There are no patents related to the hydrogel products. HDSI holds a registered
trademark on Aquamatrix TM which is used on its hydrogels.

     Employees

As of  September  1, 2004 HDSI 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, the Company entered into a ten-year lease 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 the Company's
proportionate  share of increases in real estate taxes and maintenance costs. On
March 4, 2000,  the Company  entered into a sublease  agreement  for the October
1998  lease  with a company  in which a major  shareholder  of the  Company is a
stockholder.  The sublease  expires on September 30, 2008.  The sublease rent is
being paid directly to the landlord by the sublease tenant.

HDSI entered into a seven-year sub-lease agreement for a manufacturing  facility
in Langhorne,  PA with an affiliated entity,  effective February 14, 1997, which
provided for minimum  monthly rental  payments of $9,625 and expired in 2004. On
January 25, 2002, this  manufacturing  facility was purchased by an entity owned
by a related party of HDSI and HDSI entered into a lease with the 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  December  1,  2001,  HDSI,  along  with  other  co-tenants,  entered  into a

                                       10
<PAGE>

month-to-month  lease for office space in New York, NY with an entity owned by a
related party, which provided for a monthly lease payment of $3,735.  This lease
payment  was  reduced  to $2,500  per month  effective  November  1, 2003 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

We are not currently involved in any material legal proceedings.

The NAC  entities  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
HDSI on May 25, 2004,  between  Nesco and NAC Calabria  Acquisition  Corporation
(the  "Purchaser"),  the Purchaser became responsible for all liabilities of our
previous business conducted by the NAC Entities.

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, we requested consent to the share
exchange  agreement  regarding HDSI,  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.


                                       11
<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.

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 (Pink Sheets
through 3/26/02; OTCBB from 3/27/02 to Present):
<TABLE>
<CAPTION>
                                                          Closing Bid
                                                     High              Low
                                                     ----              ---
Year ended April 30, 2004
-------------------------
    <S>                                              <C>               <C>
    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

Year ended April 30, 2003
-------------------------
    First Quarter  (ended 7/31/02)                   $0.75             $0.30
    Second Quarter (ended 10/31/02)                  $0.25             $0.10
    Third Quarter  (ended 1/31/03)                   $0.12             $0.10
    Fourth Quarter (ended 4/30/03)                   $0.12             $0.10
</TABLE>


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 September 1, 2004, there were 54 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.

                                       12
<PAGE>

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:

     --   In January 2002, we issued  five-year  warrants to purchase a total of
          200,000 shares of Common Stock at an exercise price of $0.50 per share
          to KSH Strategic Investment Fund I, LP and Cleveland Overseas, Ltd. in
          connection  with a January  2002 bridge loan  financing  of  $500,000.
          These  investors  also  received  secured   promissory  notes  in  the
          aggregate  principal amount of $500,000 which bore interest at 10% per
          annum. KSH Investment Group,  Inc., a registered  broker-dealer and an
          affiliate of KSH Strategic Investment Fund I, LP, received $25,000 and
          was granted  75,000  shares of Common Stock (which were issued in June
          2002) as a fee for arranging the bridge loan  financing.  We relied on
          Section 4(2) of the  Securities Act in issuing the warrants and shares
          of Common Stock without registration under the Act. Under the terms of
          the bridge loan financing,  we had agreed to undertake to register the
          shares of Common  Stock  issuable  upon the  exercise of the  warrants
          issued to the bridge  investors  and the shares of Common Stock issued
          to KSH  Investment  Group,  Inc.  These  warrants  were  cancelled  in
          connection with the share exchange agreement with HDSI.

     --   In June 2002, we 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 our Preferred Stock to accredited  investors at
          $2.00 per share.  Each share of Preferred Stock was  convertible  into
          four shares of Common Stock at a conversion  price of $0.50 per share.
          KSH Investment  Group,  Inc.  served as placement  agent and received,
          among other things,  a cash commission  equal to 7.5% of the aggregate
          purchase price of the shares sold, a non-accountable expense allowance
          equal to 1.5% of the aggregate  purchase price of the shares sold, and
          warrants to purchase  402,500 shares of Common Stock as commissions in
          connection with the June 2002 private placement.  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 HDSI.

     --   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.

As described  elsewhere,  the Company subsequently entered into a share exchange
agreement with HDSI.  Additional  securities have been issued in connection with
that exchange agreement.

Repurchases of Equity Securities
N/A

                                       13
<PAGE>

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

Nesco  Industries,  Inc.  (hereinafter  sometimes  referred  to as  "we"  or the
"Company")  was  incorporated  in Nevada in March 1993,  and was  inactive for a
number of years. In March 1998, Nesco acquired  National  Abatement  Corporation
("NAC")  and  NAC  Environmental  Services,  Inc.("NACE").  By  virtue  of  this
acquisition, which was the result of arms length negotiations between previously
non-affiliated  parties,  the  former  shareholders  of NAC  and  NACE  acquired
5,000,000 shares of the Company's common stock, or 80% of the total outstanding,
immediately  following the acquisition.  The former shareholders of NAC were the
same as the  former  shareholders  of NACE.  For  accounting  purposes,  NAC was
treated as the acquiring corporation.  Thus, the historical financial statements
of NAC prior to that acquisition date were deemed to be the historical financial
statements of the Company.

The Company was a provider of asbestos abatement and indoor air quality testing,
monitoring and  remediation  services.  In the fiscal year ended April 30, 2003,
the Company  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  NAC. Prior to this
consolidation,   the  Company  also  operated  through  two  other  wholly-owned
subsidiaries, NAC/Indoor Air Professionals, Inc. ("IAP") and NACE.

In the fourth  quarter of fiscal 2003,  the Company  elected to  deactivate  the
environmental  services  operating  unit,  and  authorized NAC to cease business
operations,  in order to  conserve  financial  and other  resources  until a new
business focus was  identified.  The Company ceased  business  operations in May
2003.  As a  result  of  ceasing  business  operations,  the  Company  wrote-off
goodwill, fixed assets and inventory in fiscal 2003.

On April 29, 2004,  the Company  entered into a share  exchange  agreement  with
Hydrogel Design Systems,  Inc. ("HDSI"),  a Delaware privately held corporation,
whereby HDSI would become a majority-  owned  subsidiary of the Company and upon
completion of the exchange, the holders of HDSI common stock and debt would hold
a majority interest of the Company. This exchange was completed on May 25, 2004.
The accounting  for the  transaction is a  recapitalization  of HDSI,  with HDSI
treated as the acquirer. The acquired assets and assumed liabilities, if any, of
the Company are carried forward at their historical  values.  HDSI's  historical
financial  statements are carried forward as those of the combined entity.  HDSI
is engaged in the manufacture, marketing, selling and distribution of an aqueous
polymer-based radiation ionized gel, commonly referred to as a "hydrogel", which
is used in various medical and cosmetic consumer products.

Nesco had  intended  to issue  shares of its common  stock in  exchange  for the
equity  securities  of HDSI in certain  ratios as provided  for in the  exchange
agreement. However, because Nesco 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 for, among others,
equity  and  debt of HDSI and the  Company.  Upon  filing  of a  Certificate  of
Amendment to the Certificate of  Incorporation  to increase the number of shares
of common stock which Nesco is authorized  to issue,  each share of the Series B
Preferred  Stock will be  automatically  converted  into shares of Nesco  common
stock.

Plan of Operation

As  previously  stated,  in fiscal 2004,  we did not conduct any  business,  but
actively sought new business opportunities, resulting in the consummation of the
share exchange agreement with HDSI.

HDSI develops, manufactures and markets high water content, electron beam
cross-linked, aqueous polymer hydrogels used for wound care, medical

                                       14
<PAGE>

diagnostics, transdermal drug delivery and cosmetics. HDSI gels are produced
using unique proprietary manufacturing technologies which enable HDSI to
develop, manufacture and market electron beam cross-linked aqueous polymer sheet
gels. One of two known manufacturers in the world, HDSI specializes in custom
gels capitalizing on unique proprietary manufacturing technologies.

As a result of the  completion of the share  exchange  agreement  with HDSI, the
Company was  effectively  able to obtain a new  business  focus and to eliminate
substantially all of its current  liabilities.  This transaction has enabled the
Company to obtain  additional  financing.  In June 2004,  Nesco  entered  into a
securities  purchase  agreement with third parties  whereby Nesco would issue 8%
senior  convertible  notes to private investors for an aggregate of a minimum of
$250,000  and a maximum  of  $3,000,000.  As of August  26,  2004,  the  Company
received  approximately  $1,868,000  of net  proceeds  in  connection  with this
transaction.

Management  intends to focus its efforts in the next  twelve  months on building
the  business of HDSI which it  believes  will be  possible  through  additional
financing as described above.  Management  believes this will enable the Company
to expand its current  operations,  develop new products and explore new markets
and increase its current sales force to achieve these objectives.

Liquidity and Capital Resources

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

                                               Year ended April 30,
                                             2004                 2003
                                             ----                 ----
<S>                                       <C>                 <C>
Current assets                            $  139,755          $ 1,202,270
Current liabilities                        1,024,533            2,604,356

Working capital (deficiency)              $ (884,778)         $(1,402,086)
                                           =========           ==========
</TABLE>
The  Company's  cash at April 30,  2004  increased  to  $135,462,  or by 72%, as
compared to $78,695 in the prior fiscal year.  The increase is primarily  due to
the  collection  of  accounts   receivable   during  the  year  related  to  the
discontinuation of business operations in May 2003.

Net cash provided by (used in) operating activities in fiscal 2004 was $316,065,
as compared with  $(398,524) in the prior fiscal year.  The net cash provided by
operations  during fiscal 2004 was  primarily due to the  collection of accounts
receivable and reduction of billings in excess of costs on uncompleted contracts
for the period related to the discontinuation of business operations in May 2003
and a  reduction  in  general  and  administrative  expenses.  Net cash  used in
investing  activities during fiscal 2004 was $179,298,  as compared with no cash
used in investing  activities  in the prior  fiscal  year.  The net cash used in
investing  activities  was due  primarily to interim  loans to HDSI prior to the
share exchange  agreement.  Net cash provided by (used in) financing  activities

                                       15
<PAGE>

was  $(80,000) in fiscal  2004,  as compared  with  $365,959 in the prior fiscal
year.  The net cash used in fiscal  2004 was  primarily  used for  repayment  of
shareholder  loans and the net cash provided in fiscal 2003 was derived from the
June 2002 private  placement of 512,500 shares of the Company's  Preferred Stock
to accredited investors at $2.00 per share.

On April 1, 2002, the Company issued  interest-free,  unsecured promissory notes
to certain  shareholders  in the aggregate  amount of $1,032,501 in exchange for
and in full  satisfaction  of all  outstanding  balances  due on  demand  loans,
management  fees,  and  consulting  fees.  In fiscal 2004,  the Company began to
impute  interest  on the  shareholder  loans at 6% per annum with an  equivalent
offset to additional  paid in capital.  Repayment on the  shareholder  loans was
scheduled to commence in February and May 2003,  however,  the lenders agreed to
defer the commencement dates indefinitely. The Company made sporadic payments on
shareholder  loans  totaling  $80,000 in the year ended April 30, 2004. At April
30, 2004, the  shareholder  loans totaled  $952,501.  Upon the completion of the
transaction with HDSI on May 25, 2004, the shareholder  loans were exchanged for
an equity interest in the Company.  Accordingly, such loans have been classified
as long-term at April 30, 2004.

At April 30, 2004,  the Company had a net  shareholders  deficit of  $1,787,639,
negative  working  capital of $884,778 and incurred a net loss  attributable  to
common shareholders of $2,038,031 for the fiscal year then ended.  Approximately
$1,564,000 of the loss was  attributable to stock based  compensation  resulting
from the  issuance of warrants in December  2003 and the  repricing  of warrants
previously  issued.  The  balance of the loss is  attributable  to  general  and
administrative expenses related to the discontinuance of the operations.

As a result of the completion of the share  exchange  agreement with HDSI on May
25, 2004, the Company was effectively able to obtain a new business focus and to
eliminate substantially all of its current liabilities. Management believes that
this  transaction  will  enable the  Company to seek  additional  debt or equity
financing.  In June 2004,  Nesco entered into an securities  purchase  agreement
with third  parties  whereby  Nesco would issue 8% senior  convertible  notes to
private  investors  for an  aggregate  of a minimum of $250,000 and a maximum of
$3,000,000. As of August 26, 2004, the Company received approximately $1,868,000
of net proceeds in connection with this transaction

As  part  of  this  transaction,   the  Company  transferred  its  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  the  Company.   The  transferee   assumed  all  liabilities  and
obligations  with respect to these  subsidiaries  and agreed to indemnify  Nesco
against any claims. In consideration for the indemnity,  the transferee received
3,000,000 shares of common stock of the Company and certain related registration
rights.  In support  of the value of the common  stock  delivered,  the  Company
agreed that the transferee,  at its election,  may demand the Company repurchase
from the  transferee  up to 2,400,000 of the common  shares upon written  notice
from the transferee 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.

In addition to the  transfer of its  subsidiaries,  the Company 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 Nesco Series B Preferred Stock which will be converted into 15,000,000 shares
of common  stock.  The Company was also required to obtain the consent to cancel
an aggregate of 602,500  special  warrants prior to the closing.  The holders of
these special warrants were granted shares in the exchange as part of the common
advisor shares issued. The Company Series A Preferred  shareholders also agreed,
that upon completion of the exchange agreement,  they would convert their shares
to common  stock and that the  Company  would  have no  further  obligations  in
respect to these  preferred  shares.  In  addition,  the Company was required to

                                       16
<PAGE>

retain net cash of approximately $350,000 as part of the terms of the agreement,
of which  approximately  $208,500  was paid as a bridge  loan prior to April 30,
2004 and is included in assets at April 30,  2004.  This bridge loan became part
of the closing requirements in May 2004.

The  following  table  provides a summary of the  Company's  loans  payable  and
commitments for operating leases at April 30, 2004:
<TABLE>
<CAPTION>
                                                                 Less than                           3 or More
                                              Total ($)          1 Year ($)         1-3 Years ($)    Years ($)
                                              ---------          ----------         -------------    ---------
<S>                                           <C>                <C>                    <C>           <C>
Notes Payable, Shareholders                    952,501               --                 --              --
Less amounts subsequently
 converted to equity                          (952,501)
Operating leases                               759,518              178,710             536,130       $ 44,678
                                             ----------          ----------             -------        -------

         Total Contractual Obligations       $  759,518          $  178,710             536,130       $ 44,678
                                             ==========          ==========            ========       ========
</TABLE>
     Notes Payable, Shareholders:

On April 1, 2002, the Company issued  interest-free,  unsecured promissory notes
to certain  shareholders  in the aggregate  amount of $1,032,501 in exchange for
and in full  satisfaction  of all  outstanding  balances  due on  demand  loans,
management  fees,  and  consulting  fees.  In fiscal 2004,  the Company began to
impute  interest  on the  shareholder  loans at 6% per annum with an  equivalent
offset to additional  paid in capital.  Repayment on the  shareholder  loans was
scheduled to commence in February and May 2003,  however,  the lenders agreed to
defer the commencement dates indefinitely. The Company made sporadic payments on
shareholder  loans  totaling  $80,000 in the year ended April 30, 2004. At April
30, 2004, the  shareholder  loans totaled  $952,501.  Upon the completion of the
transaction with HDSI on May 25, 2004, the shareholder  loans were exchanged for
an equity interest in the Company.  Accordingly, such loans have been classified
as long-term at April 30, 2004 for financial reporting purposes.

     Operating leases:

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

                                       17
<PAGE>

     Off-Balance Sheet Arrangements

At  April  30,  2004,   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 HDSI, 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.

     Basis of Presentation - Going Concern

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.  As of April 30,
2004, the Company has a net shareholders  deficit of $1,787,639 and has incurred
net losses  attributable to common shareholders of $2,038,031 and $2,612,111 for
the years ended April 30, 2004 and 2003, respectively. The Company has a working
capital deficit of  approximately  $885,000 as of April 30, 2004.  These matters
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.

In May 2003, the Company ceased its prior  business  operations.  As a result of
the  completion of the share  exchange  agreement with HDSI on May 25, 2004, the
Company was  effectively  able to obtain a new  business  focus and to eliminate
substantially  all of its current  liabilities.  Management  believes  that this
transaction will enable the Company to seek additional debt or equity financing.
In June 2004,  Nesco  entered into a securities  purchase  agreement  with third
parties  whereby  Nesco  would  issue 8%  senior  convertible  notes to  private
investors for an aggregate of a minimum of $250,000 and a maximum of $3,000,000.
As of August 26, 2004,  the Company  received  approximately  $1,868,000  of net
proceeds in  connection  with this  transaction.  Management  believes  that the
current  cash on hand,  the  additional  capital  to be  raised,  and the future
operations  of HDSI will enable the Company to meet its  financing  requirements
for the next twelve months.

There can be no  assurance  that the Company  will be able to obtain  additional
sufficient  debt or equity  financing on  favorable  terms if at all, or that it
will be successful in building the operations of its new business  focus,  HDSI.
If the Company is  unsuccessful  in building the operations of HDSI 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  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.

                                       18
<PAGE>
     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  2002, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement No. 148,  "Accounting for  Stock-Based  Compensation -- Transition and
Disclosure:  an  amendment  of  FASB  Statement  123,"  to  provide  alternative
transition  methods  for a voluntary  change to the fair value  based  method of
accounting for  stock-based  employee  compensation.  In addition,  SFAS No. 148
amends  the  disclosure  requirements  of  SFAS  No.  123 to  require  prominent
disclosures in annual  financial  statements  about the method of accounting for
stock-based  employee  compensation and the pro forma effect on reported results
of applying  the fair value based  method for  entities  that use the  intrinsic
value method of accounting.  The pro forma effect  disclosures are also required
to be  prominently  disclosed  in  interim  period  financial  statements.  This
statement is effective  for financial  statements  for fiscal years ending after
December 15, 2002 and is effective for financial  reports  containing  condensed
financial statements for interim periods beginning after December 15, 2002, with
earlier  application  permitted.  The Company has elected to continue accounting
for  stock-based  compensation  using the intrinsic value method.  However,  the
Company has adopted the new  disclosure  requirements  specified  under SFAS No.
148.

In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others"  ("FIN 45"),  was issued.  FIN 45  requires a guarantor  entity,  at the
inception  of  a  guarantee  covered  by  the  measurement   provisions  of  the
interpretation,  to  record a  liability  for the fair  value of the  obligation
undertaken in issuing the  guarantee.  The Company  previously  did not record a
liability  when  guaranteeing  obligations  unless it became  probable  that the
Company would have to perform under the guarantee.  FIN 45 applies prospectively
to guarantees  the Company  issues or modifies  subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate that FIN 45 will
have a material impact on its financial position, results of operations and cash
flows.

In  January  2003,   the  FASB  issued  FASB   Interpretation   46  ("FIN  46"),
"Consolidation of Variable Interest  Entities." FIN 46 clarifies the application
of Accounting  Research  Bulletin 51,  Consolidated  Financial  Statements,  for
certain  entities that do not have  sufficient  equity at risk for the entity to
finance its activities  without additional  subordinated  financial support from
other parties or in which equity investors do not have the  characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its expected  returns,  or both.  FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable  interest entities in which an enterprise holds a variable
interest  that it acquired  before  February 1, 2003.  The Company is  currently

                                       19
<PAGE>
evaluating the impact, if any, of FIN 46 on its financial  position,  results of
operations and cash flows.


In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments,  which under previous guidance were
accounted  for as  equity,  be  accounted  for  as  liabilities.  The  financial
instruments  affected include  mandatory  redeemable  stock,  certain  financial
instruments  that  require  or may  require  the  issuer to buy back some of its
shares in exchange for cash or other assets and certain  obligations that can be
settled  with  shares of stock.  SFAS No.  150 is  effective  for all  financial
instruments entered into or modified after May 31, 2003.

                                       20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

                                C O N T E N T S

                                                                      Page



Reports of Independent Registered Public Accounting Firms          F-1 - F-2


Financial Statements

      Consolidated Balance Sheet                                      F-3

      Consolidated Statements of Operations                           F-4

      Consolidated Statement of Stockholders' Deficit                 F-5

      Consolidated Statements of Cash Flows                           F-6

      Notes to Consolidated Financial Statements                  F-7 to F-24

                                       21


<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors of

Nesco Industries, Inc.:


We have audited the accompanying consolidated balance sheet of Nesco Industries,
Inc. and  Subsidiaries  (the  "Company")  as of April 30, 2004,  and the related
consolidated statements of operations,  stockholders' deficit and cash flows for
the  year  then  ended.   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 audit.

We  conducted  our audit in  accordance  with  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 financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of  Nesco  Industries,  Inc.  and
Subsidiaries  at April 30, 2004,  and the results of their  operations and their
cash flows for the year then ended,  in conformity  with  accounting  principles
generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  described  in  Note A to the
financial  statements,  the Company has suffered  losses from operations and has
net working capital and stockholders' equity deficiencies that raise substantial
doubt about its ability to continue as a going  concern.  Management's  plans in
regard to these matters are also described in Note A. The accompanying financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



/s/ BP Audit Group, PLLC



Farmingdale, New York
August 6, 2004 except as to Note J, for
 which the date is September 10, 2004



                                      F-1
<PAGE>



            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
        NESCO Industries, Inc.


We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity  (deficit)  and cash flows of NESCO  Industries,  Inc. and
Subsidiaries for the year ended April 30, 2003.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.

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 financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated  results of operations and consolidated
cash flows of NESCO  Industries,  Inc. and  Subsidiaries for the ended April 30,
2003 in conformity with accounting  principles  generally accepted in the United
States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements on the Form 10-KSB for the year ended April 30, 2003, as of April 30,
2003  the  Company  had  an  accumulated  deficit  in  stockholders'  equity  of
$4,193,199,  negative working capital of $1,402,086, and had incurred net losses
available to common  shareholders of $2,612,111 and $352,838 for the years ended
April 30, 2003 and 2002, respectively. These factors, among others, as discussed
in Note A to the consolidated  financial  statements on Form 10-KSB for the year
ended April 30, 2003,  raised  substantial  doubt about the Company's ability to
continue as a going concern.  Management's plans in regard to these matters were
also  described  in Note A of the  consolidated  financials  statements  on Form
10-KSB for the year ended April 30, 2003. The consolidated  financial statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

As disclosed in Note F of the consolidated  financial  statements on Form 10-KSB
for the year ended April 30, 2003, the Company  adopted SFAS No. 142,  "Goodwill
and Other Intangible Assets," on May 1, 2002.




/s/GRANT THORNTON LLP

New York, New York
 July 31, 2003



                                      F-2
<PAGE>

                             NESCO Industries, Inc.
                           CONSOLIDATED BALANCE SHEET
                                 April 30, 2004

                                     ASSETS
<TABLE>
<CAPTION>
<S>                                                                                                 <C>
CURRENT ASSETS
    Cash                                                                                              $135,462
    Accounts receivable, net of allowance                                                                4,293
                                                                                                    -----------
           Total current assets                                                                        139,755

LOANS RECEIVABLE, MERGER CANDIDIATE                                                                    208,500

FIXED ASSETS, NET                                                                                        4,940
                                                                                                   -----------
                                                                                                     $ 353,195
                                                                                                   ===========


                 LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
    Accounts payable and accrued expenses                                                          $   928,828
    Accounts payable  related parties                                                                   95,705
                                                                                                  ------------
          Total current liabilities                                                                  1,024,533

DEFERRED SUBLEASE INCOME                                                                               163,800

LOANS PAYABLE-SHAREHOLDERS, SUBSSEQUENTLY CONVERTED TO EQUITY                                          952,501
                                                                                                  ------------
                                                                                                     2,140,834
                                                                                                  ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
    10% convertible preferred stock, $0.001 par value;
       1,000,000 shares authorized; 512,500 shares issued and outstanding                                  513
    Preferred stock issuable 289,333 shares, and additional paid-in-capital attributable thereto       242,245
    Common stock, $0.001 par value; 25,000,000 shares authorized;
       7,019,963 issued and outstanding shares                                                           7,020
    Common stock issuable 607,142 shares                                                                   607
    Capital in excess of par value                                                                   4,193,206
    Accumulated deficit                                                                             (6,231,230)
                                                                                                  ------------
                                                                                                    (1,787,639)
                                                                                                  ------------
                                                                                                    $  353,195
                                                                                                  ============

</TABLE>

The accompanying notes are an integral part of this statement.

                                      F-3
<PAGE>



                             NESCO Industries, Inc.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                              Year ended April 30,


<TABLE>
<CAPTION>
Operations of Discontinued Business
-----------------------------------
                                                                                            2004                    2003
                                                                                        ------------             -----------
<S>                                                                                     <C>                       <C>
Revenues                                                                                $     25,364              $4,589,693

Cost of earned revenues                                                                      (27,867)              4,389,116
Stock based compensation                                                                   1,563,960
General and administrative expenses                                                          361,545               2,279,603
Interest expense, net                                                                                                102,889
Interest imputed on shareholders loans                                                        58,876
Sublease income                                                                              (46,800)                (46,800)
Miscellaneous income                                                                                                  (1,800)
Gain on sale of fixed assets                                                                    (300)
                                                                                        ------------             -----------
         Loss  before income taxes                                                        (1,884,050)             (2,133,315)

Income tax benefit                                                                                                  (121,968)
                                                                                        -------------             ------------

         Net loss                                                                         (1,884,050)             (2,011,347)



Recurring convertible preferred stock dividends in kind                                     (126,189)                (88,264)
Additional dividend in kind to preferred stockholders                                        (27,792)
Value related to beneficial conversion feature of
         convertible preferred stock                                                                                (512,500)
                                                                                        ------------             -----------

Net loss attributable to common shareholders                                            $ (2,038,031)           $ (2,612,111)
                                                                                        =============             ===========
Basic and diluted loss per share                                                              $(0.30)                 $(0.39)
                                                                                              ======                  ======
Weighted average common shares outstanding                                                 6,891,743               6,754,474
                                                                                           =========               =========
</TABLE>


The accompanying notes are an integral part of these statements

                                      F-4
<PAGE>




                             NESCO Industries, Inc.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                      Years ended April 30, 2004 and 2003
<TABLE>
<CAPTION>
                                                                                   Preferred stock issuable and
                                                                                    additional paid-in-capital
                                                             Preferred   stock        attributable thereto          Common stock
                                                               Shares   Amount         Shares       Amount         Shares  Par value
                                                             -------------------    ------------------------      ------------------
<S>                                                          <C>        <C>            <C>        <C>             <C>         <C>

Balance at May 1, 2002                                                                                            6,694,963   $6,695

Convertible preferred stock issuance                         512,500    $513
Convertible preferred stock dividends                                                   93,182     $88,264
Convertible preferred stock beneficial conversion feature
Common stock issued in connection with bridge financing                                                              75,000       75
Net loss for the year ended April 30, 2003
                                                            --------    ----           -------    --------       ----------   ------

Balance at April 30, 2003                                    512,500     513            93,182      88,264        6,769,963    6,770


Convertible preferred stock dividends                                                  170,526     126,189
Penalty shares issuable to holders of convertible
  preferred stock                                                                       25,625      27,792
Issuance and repricing of warrants
Imputed interest on shareholder loans
Exercise of warrants                                                                                                250,000      250
Net loss for the year ended April 30, 2004
                                                            --------    ----           -------    --------       ----------   ------

Balance at April 30, 2004                                    512,000    $513           289,333    $242,245        7,019,963   $7,020
                                                            ========    ====           =======    ========        =========   ======
</TABLE>

The accompanying notes are an integral part of this statement.
<PAGE>


                             NESCO Industries, Inc.
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                      Years ended April 30, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                     Capital in
                                                        Common stock issuable        excess of     Accumulated
                                                           Shares  Par value         par value        deficit             Total
                                                        ----------------------        ---------     -----------         ----------
<S>                                                         <C>          <C>          <C>             <C>              <C>
Balance at May 1, 2002                                        -          -            $ 1,119,105    $ (1,581,088)    $    (455,288)

Convertible preferred stock issuance                                                      865,446                           865,959
Convertible preferred stock dividends                                                                     (88,264)
Convertible preferred stock beneficial conversion feature                                 512,500        (512,500)
Common stock issued in connection with bridge financing                                    74,176                            74,251
Net loss for the year ended April 30, 2003                                                             (2,011,347)       (2,011,347)
                                                        -----------   ----------       -----------    ------------     -------------

Balance at April 30, 2003                                    -            -             2,571,227      (4,193,199)       (1,526,425)


Convertible preferred stock dividends                                                                    (126,189)
Penalty shares issuable to holders of convertible
  preferred stock                                                                                         (27,792)
Issuance and repricing of warrants                                                       1,563,960                        1,563,960
Imputed interest on shareholder loans                                                       58,876                           58,876
Exercise of warrants                                        607,142        $607               (857)
Net loss for the year ended April 30, 2004                                                             (1,884,050)       (1,884,050)
                                                         ----------   ---------      ------------     -----------     -------------

Balance at April 30, 2004                                   607,142        $607       $ 4,193,206     $(6,231,230)    $ (1,787,639)
                                                         ==========    ========      ============     ============    ==============
</TABLE>


The accompanying notes are an integral part of this statement.

                                      F-5
<PAGE>

                             NESCO Industries, Inc.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                              Year ended April 30,
<TABLE>
<CAPTION>
                                                                                            2004               2003
                                                                                         -----------         ---------
<S>                                                                                      <C>                <C>
Cash flows from operating activities
   Net loss                                                                              $(1,884,050)      $(2,011,347)
   Adjustments to reconcile net loss to net cash provided by (used in)
     operating activities
       Write off of goodwill                                                                                   416,954
       Write off of inventory                                                                                  134,908
       Write off of fixed assets                                                                                45,875
       Reserve against advances                                                                                 47,970
       Compensation due to repricing and issuance of warrants                              1,563,960
       Gain on sale of fixed assets                                                             (300)
       Imputed interest on shareholders loans                                                 58,876
       Amortization of discount on bridge loan                                                                  52,726
       Common stock issued for bridge financing                                                                 74,252
       Amortization of deferred sublease income                                              (46,800)          (46,800)
       Depreciation and amortization                                                           1,160            54,400
       Bad debt expense recovery                                                             (17,874)          (93,527)
       Changes in operating assets and liabilities
         Accounts receivable                                                               1,004,482         1,530,083
         Prepaid expenses and taxes                                                          112,674            (7,587)
         Inventory                                                                            20,000                84
         Unbilled costs and estimated earnings in excess of
           billings on uncompleted contracts                                                                   222,700
         Other assets                                                                        51,259            (51,898)
         Accounts payable and accrued expenses                                             (473,736)          (443,217)
         Billings in excess of costs and estimated earnings on
           uncompleted contracts                                                            (73,586)          (324,100)
                                                                                         -----------         ---------

         Net cash provided by (used in) operating activities                                316,065           (398,524)
                                                                                         -----------         ---------

Cash flows from investing activities
   Loan receivable, merger candidate                                                       (208,500)              -
   Proceeds on sale of fixed asset                                                           29,202               -
                                                                                         -----------         ---------

         Net cash used in investing activities                                             (179,298)              -
                                                                                         -----------         ---------
Cash flows from financing activities
   Repayment of bridge loan                                                                                   (500,000)
   Repayment of shareholders loans                                                          (80,000)
   Net proceeds of convertible preferred stock offering                                                        865,959
                                                                                         -----------         ---------

         Net cash provided by (used in) financing activities                                (80,000)           365,959
                                                                                         -----------         ---------

         NET INCREASE (DECREASE) IN CASH                                                     56,767            (32,565)

Cash at beginning of year                                                                    78,695            111,260
                                                                                         -----------         ---------

Cash at end of year                                                                      $  135,462          $  78,695
                                                                                         ===========         =========


</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>



                             NESCO Industries, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             April 30, 2004 and 2003

NOTE  A -  ORGANIZATION,  BASIS  OF  PRESENTATION,  OPERATIONS  AND  SIGNIFICANT
ACCOUNTING POLICIES

Organization

NESCO  Industries,  Inc. ( the  "Company") was  incorporated  in Nevada in March
1993. The Company ceased  business  operations and became  inactive in May 2003.
Previously,  the Company was a provider  of  asbestos  abatement  and indoor air
quality testing,  monitoring and remediation  services. In the fiscal year ended
April  30,  2003,  the  Company  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 ("NAC").  Prior to this consolidation,
the  Company  also  operated  through  two  other   wholly-owned   subsidiaries,
NAC/Indoor Air Professionals,  Inc. ("IAP") and NAC Environmental Services, Inc.
("NACE").

In the fourth  quarter of fiscal 2003,  the Company  elected to  inactivate  the
environmental  services  operating  unit,  and  authorized NAC to cease business
operations,  in order to  conserve  financial  and other  resources  until a new
business focus was  identified.  The Company ceased  business  operations in May
2003.  As a  result  of  ceasing  business  operations,  the  Company  wrote-off
goodwill, fixed assets and inventory totaling $597,737 in fiscal 2003.

On April 29, 2004,  the Company  entered into a share  exchange  agreement  with
Hydrogel Design Systems,  Inc. ("HDSI") , a Delaware privately held corporation,
whereby HDSI would become a  majority-owned  subsidiary  of the Company and upon
completion of the exchange, the holders of HDSI common stock and debt would hold
a majority interest of the Company. This exchange was completed on May 25, 2004.
(See Note Q). The  accounting  for the  transaction,  commonly  called a reverse
acquisition,  will be a  recapitalization  of HDSI, which will be treated as the
acquirer.  The acquired assets and assumed  liabilities,  if any, of the Company
will be carried forward at their historical values.  HDSI's historical financial
statements will be carried forward as those of the combined  entity.  As part of
this transaction,  the Company conditionally  transferred its three wholly owned
subsidiaries,  NAC,  IAP and NACE,  to a consultant  and interim  officer of the
Company who resigned his  position as officer at the time of the  transfer.  The
transferee  assumed  all  liabilities  and  obligations  with  respect  to these
subsidiaries  and agreed to indemnify  Nesco against any claims and, in exchange
therefor,  received 3,000,000 shares of common stock of the Company. The Company
also converted all outstanding  shareholder loans to equity.  HDSI is engaged in
the manufacture,  marketing,  selling and  distribution of hydrogel,  an aqueous
polymer-based  radiation  ionized  gel,  which is used in  various  medical  and
cosmetic consumer products. The results of HDSI prior to the transaction are not
reflected herein.

The Company's fiscal year ends on April 30 and, therefore,  references to fiscal
2004 and fiscal  2003 refer to the fiscal  years  ended April 30, 2004 and April
30, 2003, respectively.

Basis of Presentation - Going Concern

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.  As of April 30,
2004, the Company has an accumulated  deficit of $6,231,230 and has incurred net
losses  attributable to common shareholders of $2,038,031 and $2,612,111 for the
years  ended April 30,  2004 and 2003,  respectively.  The Company has a working
capital  deficit  of  approximately  $885,000  and a  stockholders'  deficit  of
approximately  $1,788,000 as of April 30, 2004. These matters raise  substantial
doubt about the Company's ability to continue as a going concern.

In May 2003, the Company ceased its prior  business  operations.  As a result of
the  completion of the share  exchange  agreement with HDSI on May 25, 2004, the
Company was  effectively  able to obtain a new  business  focus and to eliminate
substantially  all of its current  liabilities.  Management  believes  that this
transaction will enable the Company to seek additional debt or equity financing.
As of July 1 2004,  Nesco entered into an investment  banking  agreement  with a
third party  whereby  Nesco would issue 8% senior  convertible  notes to private
investors for an aggregate of a minimum of $250,000 and a maximum of $3,000,000.
As of August 26, 2004,  the Company  received  approximately  $1,868,000  of net
proceeds in  connection  with this  transaction.  Management  believes  that the
current  cash on hand,  the  additional  capital  to be  raised,  and the future
operations of HDSI will enable to Company to meet its financing requirements for
the next  twelve  months.  (See Note Q).

                                      F-7
<PAGE>

                        NESCO Industries, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            April 30, 2004 and 2003

NOTE A (continued)

Basis of Presentation - Going Concern (continued)

There can be no  assurance  that the Company  will be able to obtain  additional
sufficient  debt or equity  financing on  favorable  terms if at all, or that it
will be successful in building the operations of its new business  focus,  HDSI.
If the Company is  unsuccessful  in building the operations of HDSI 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  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.

Principles of Consolidation

The accompanying  financial  statements  include the accounts of the Company and
its  wholly  owned  subsidiaries  on  a  consolidated   basis.  All  significant
intercompany accounts and transactions have been eliminated.

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   reported   amounts  of  assets  and
liabilities,  disclosure of contingent assets and liabilities at the date of the
financial statements, and revenues and expenses during the reporting period.

Revenue and Cost Recognition

Earned revenues are recorded using the  percentage-of-completion  method.  Under
this method,  earned  revenues  are  determined  by  reference to the  Company's
engineering estimates,  contract expenditures incurred, and work performed.  The
calculation  of earned  revenue  and the effect on several  asset and  liability
amounts is based on the common industry standard revenue  determination  formula
of  actual  costs-to-date   compared  to  total  estimated  job  costs.  Due  to
uncertainties  inherent in the estimation process, and uncertainties relating to
future  performance  as the contracts are completed,  it is at least  reasonably
possible that estimated job costs, in total or on individual contracts,  will be
revised. When a loss is anticipated,  the entire amount of the estimated loss is
provided for in the period.

Cash and Cash Equivalents

The Company classifies highly liquid debt instruments, purchased with a maturity
of three months or less, as cash equivalents.

Fixed Assets and Depreciation

Depreciation  is  computed   principally  using  accelerated  methods  over  the
estimated useful lives of the assets. Expenditures for maintenance, repairs, and
minor renewals are charged to operations.  Major  renewals and  betterments  are
capitalized.

Income Taxes

Provisions  for income taxes are based on taxes  payable or  refundable  for the
current year and deferred taxes on temporary  differences  between the tax bases
of  assets  and  liabilities  and  their  reported   amounts  in  the  financial
statements.  Deferred tax assets and  liabilities  are included in the financial
statements at enacted  income tax rates  expected to apply to taxable  income in
the years when such temporary  differences and net operating losses are expected
to be recovered as  prescribed  in Statement of Financial  Accounting  Standards
("SFAS") No. 109, "Accounting for Income Taxes." As changes in tax laws or rates
are  enacted,  deferred  tax assets and  liabilities  are  adjusted  through the
provision for income taxes.

An allowance for bad debts is provided for financial  statement purposes and the
direct write-off method is used for tax reporting. In accordance with income tax
regulations,  NAC, IAP and NACE were required to report income from construction
contracts using the percentage-of-completion  method.

                                      F-8
<PAGE>

                             NESCO Industries, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             April 30, 2004 and 2003

NOTE A (continued)

Reclassifications

Certain  prior  period  items have been  reclassified  to conform to the current
period presentation.

Stock Based Compensation

The Company has one effective  stock-based employee  compensation plan described
more fully in Note J. Depending upon the grantee, the Company applies either APB
Opinion  25,   "Accounting   for  Stock  Issued  to   Employees",   and  related
Interpretations or FASB Statement 123, "Accounting for Stock-Based Compensation"
as amended in accounting for its stock-based  compensation.  The following table
illustrates the effect on net loss and loss per share if the Company had applied
the  fair  value  recognition  provisions  of  FASB  Statement  123,  using  the
assumptions   described  in  Note  J,  to  its  effective  stock-based  employee
compensation plan.
<TABLE>
<CAPTION>
                                                                                 2004                      2003
                                                                                 ----                      ----
<S>                                                                         <C>                      <C>
Net loss, as reported                                                       $ (1,884,050)            $ (2,011,347)

Add:  Total stock-based employee
compensation expense determined under
fair value based method for awards
granted, re-priced, modified, or settled,
net of related tax effects                                                            -                    23,101
                                                                             ------------               ----------
Pro-forma net loss                                                            (1,884,050)              (2,034,448)

Recurring convertible preferred stock
dividends in kind                                                               (126,189)                 (88,264)
Additional dividend in kind to preferred stockholders                            (27,792)
Value related to beneficial conversion
feature of convertible preferred stock                                                                   (512,500)
                                                                              ------------             -----------
Pro-forma net loss attributable
to common  shareholders                                                      $ (2,038,031)           $ (2,635,212)
=                                                                             ============           =============
Basic and diluted loss per share,
as reported                                                                       $ (0.30)                $ (0.39)
                                                                                   =======                 =======

Basic and diluted loss per share, pro-forma                                       $ (0.30)                $ (0.39)
                                                                                   =======                 =======
</TABLE>


                                      F-9
<PAGE>


                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE A (continued)

Loss Per Share

Basic loss per share  excludes  dilution and is  calculated by dividing the loss
attributable  to common  stockholders  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. As a result of the Company's net loss,  diluted net loss per share
was the same as basic net loss per share for the years  ended April 30, 2004 and
2003,  since  the  effect  of  any  potentially  dilutive  securities  would  be
anti-dilutive.  Options and warrants which were excluded from the calculation of
diluted loss per share totaled  4,212,500 with a weighted average exercise price
of $0.18 as of April 30, 2004.

Recent Accounting Pronouncements

In December  2002, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement No. 148,  "Accounting for  Stock-Based  Compensation -- Transition and
Disclosure:  an  amendment  of  FASB  Statement  123,"  to  provide  alternative
transition  methods  for a voluntary  change to the fair value  based  method of
accounting for  stock-based  employee  compensation.  In addition,  SFAS No. 148
amends  the  disclosure  requirements  of  SFAS  No.  123 to  require  prominent
disclosures in annual  financial  statements  about the method of accounting for
stock-based  employee  compensation and the pro forma effect on reported results
of applying  the fair value based  method for  entities  that use the  intrinsic
value method of accounting.  The pro forma effect  disclosures are also required
to be  prominently  disclosed  in  interim  period  financial  statements.  This
statement is effective  for financial  statements  for fiscal years ending after
December 15, 2002 and is effective for financial  reports  containing  condensed
financial statements for interim periods beginning after December 15, 2002, with
earlier  application  permitted.  The Company has elected to continue accounting
for  stock-based  compensation  using the intrinsic value method.  However,  the
Company has adopted the new  disclosure  requirements  specified  under SFAS No.
148.

In November 2002, FASB Interpretation 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others"  ("FIN 45"),  was issued.  FIN 45  requires a guarantor  entity,  at the
inception  of  a  guarantee  covered  by  the  measurement   provisions  of  the
interpretation,  to  record a  liability  for the fair  value of the  obligation
undertaken in issuing the  guarantee.  The Company  previously  did not record a
liability  when  guaranteeing  obligations  unless it became  probable  that the
Company would have to perform under the guarantee.  FIN 45 applies prospectively
to guarantees  the Company  issues or modifies  subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate that FIN 45 will
have a material impact on its financial position, results of operations and cash
flows.

In  January  2003,   the  FASB  issued  FASB   Interpretation   46  ("FIN  46"),
"Consolidation of Variable Interest  Entities." FIN 46 clarifies the application
of Accounting  Research  Bulletin 51,  Consolidated  Financial  Statements,  for
certain  entities that do not have  sufficient  equity at risk for the entity to
finance its activities  without additional  subordinated  financial support from
other parties or in which equity investors do not have the  characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its expected  returns,  or both.  FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable  interest entities in which an enterprise holds a variable
interest  that it acquired  before  February 1, 2003.  The Company is  currently
evaluating the impact, if any, of FIN 46 on its financial  position,  results of
operations and cash flows.


                                      F-10
<PAGE>


                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE A (continued)

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments,  which under previous guidance were
accounted  for as  equity,  be  accounted  for  as  liabilities.  The  financial
instruments  affected include  mandatory  redeemable  stock,  certain  financial
instruments  that  require  or may  require  the  issuer to buy back some of its
shares in exchange for cash or other assets and certain  obligations that can be
settled  with  shares of stock.  SFAS No.  150 is  effective  for all  financial
instruments entered into or modified after May 31, 2003.


NOTE B - ACCOUNTS RECEIVABLE

Prior  to  ceasing  operations  in  2003,  the  Company  submitted  requisitions
(invoices)  to  customers  based  on  work   performed.   Pursuant  to  contract
provisions, these requisitions included amounts, referred to as retainage, which
are retained until completion and acceptance of the contract.  The allowance for
uncollectible accounts at April 30, 2004 was $188,983.

The Company's  principal  accounts  receivable are due from owners of commercial
real estate and other  contractors.  There are no contracts in progress at April
30, 2004.

NOTE C - LOAN RECEIVABLE  MERGER CANDIDATE

On April 29, 2004,  the Company  entered into a share  exchange  agreement  with
HDSI,  a Delaware  privately  held  corporation,  whereby  HDSI  would  become a
majority-owned  subsidiary  of the  Company  and upon  completion  of the  share
exchange  agreement,  the  holders  of HDSI  common  stock and debt would hold a
majority  interest of the Company.  This exchange was completed on May 25, 2004.
On January 12, 2004, the Company entered into an agreement to make term loans of
up to $125,000 to HDSI, which was  subsequently  increased prior to the closing.
The term loans were to mature  January 1, 2005 and bear interest at 8% per annum
if the  closing  did not  take  place.  If the  Company  did not  enter  into an
agreement with HDSI  shareholders  to purchase a minimum of 50.1 % and up to all
of the capital stock of HDSI in exchange for the Company's securities by July 1,
2004, or failed to purchase such  securities by July 1, 2004, the Company at its
election could convert the terms loans into HDSI Series B Convertible  Preferred
Stock or accelerate the maturity of the term loan to August 1, 2004. The Company
advanced an aggregate of $208,500 to HDSI as of April 30, 2004. On May 25, 2004,
the  exchange  was  completed  and the  outstanding  amount of the term loan was
included as part of the minimum  cash  requirement  as per the  agreement  to be
provided to HDSI. (See Note Q).




NOTE D - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
                                                                                             Year ended April 30,
                                                                                        -------------------------------
                                                                                          2004                  2003
                                                                                        --------             ----------
<S>                                                                                      <C>                   <C>
      Cash paid during the periods for:
          Interest                                                                          -                  $ 27,739
          Taxes                                                                             -                     3,038

      Non-cash investing and financing items:
          Beneficial conversion feature of convertible preferred stock                                          512,500
          Issued and issuable preferred stock dividends in kind                          153,981                 88,264



</TABLE>
                                      F-11
<PAGE>


                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE E - FIXED ASSETS

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement  addresses  financial  accounting
and reporting for the impairment of long-lived  assets and assets to be disposed
of. This statement  supersedes  SFAS No. 121,  "Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of";  however,  it
retains  the  fundamental  provisions  of SFAS No. 121 for (a)  recognition  and
measurement of the  impairment of long-lived  assets to be held and used and (b)
measurement  of  long-lived  assets to be disposed  of by sale.  SFAS No. 144 is
effective for the Company's  first quarter of the year ending April 30, 2003. As
a result of the ceasing of business operations, the Company recorded a write-off
to their fixed assets of $45,875 during the fourth quarter of fiscal 2003.  This
amount is included in general and  administrative  expenses in the  statement of
operations.

In June 2003, the Company sold vehicles, furniture and equipment to an affiliate
of former  President  Michael J. Caputo in a private  transaction for a purchase
price of $25,000.

In January  2004,  the Company sold  certain  remaining  office  furniture to an
affiliate of former President  Michael J. Caputo in a private  transaction for a
purchase price of $4,200

The major classes of remaining  fixed assets and the range of their useful lives
are as follows:
<TABLE>
<CAPTION>
                                                                    Estimated
                                                      April 30,    useful life
                                                       2004          (years)
                                                      -------      -----------
<S>                                                    <C>            <C>
Furniture and fixtures                                 4,940          10
</TABLE>


NOTE F - GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets,"  which is effective for all fiscal years  beginning  after December 31,
2001. SFAS No. 142 requires,  among other things, the discontinuance of goodwill
amortization.   In  addition,   the  standard   includes   provisions   for  the
reclassification  of  certain  existing  recognized   intangibles  as  goodwill,
reassessment   of  the  useful   lives  of  existing   recognized   intangibles,
reclassification  of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairment  of  goodwill.  SFAS No. 142 also  requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption.  The
transitional  goodwill  impairment test was conducted as of the end of the first
quarter of fiscal 2003 and  indicated  no  impairment  of goodwill at that time.
Ongoing,  periodic  testing is required  under SFAS No. 142. As a result of this
periodic testing,  continuing losses,  inability to obtain adequate financing to
complete an indoor air quality  merger/acquisition  and sell the  business,  the
Company  recorded an impairment  charge of $416,594 for goodwill in fiscal 2003.
Such charge is included in general and administrative expenses.



                                      F-12
<PAGE>


                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003



NOTE G - INCOME TAXES

     The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                   2004                   2003
                                                ---------               --------
      <S>                                      <C>                    <C>
      Current
          Federal                              $      -               $(125,645)
          State and local                             -                   3,677
                                                ---------              --------

                                               $      -              $ (121,968)
                                                ---------              --------
</TABLE>

The tax  effects of  temporary  differences  and tax  credits  that give rise to
deferred tax assets at April 30, 2004 are as follows:
<TABLE>
<CAPTION>
  <S>                                                             <C>
  Deferred tax assets
     Net operating loss                                           $1,103,550
     Accounts receivable allowance                                    79,747
     Goodwill write off                                              143,925
     Other                                                            20,148
                                                                  ----------
                                                                   1,347,370
  Valuation allowance                                             (1,347,370)
                                                                  ----------
  Net deferred tax asset (liability)                              $    -
                                                                  ==========

</TABLE>
A reconciliation of the income tax expense shown in the statements of operations
to the effective federal tax rate is as follows:
<TABLE>
<CAPTION>

                                                  2004              2003
                                                --------          --------
<S>                                              <C>               <C>
Federal statutory rate (recovery)                (34.0)%           (34.0)%
State and local income taxes, net of                 -                 -
    federal tax benefit                             .6                 -
Nondeductible items                               27.8               1.7
Carryback claim                                     -               (5.7)
Other                                               -                 .3
Asset valuations                                   (.9)              8.2
                                                --------          --------

Rate before valuation allowance                   (6.5)            (29.5)

Valuation allowance adjustment                     6.5              23.8
                                                --------          --------
                                                    -  %            (5.7)%
                                                ========          ========
</TABLE>

The valuation allowance increased by approximately $ 81,000 and $761,000 for the
years ended April 30, 2004 and 2003, respectively.

During the year ended April 30,  2004,  the Company was unable to utilize any of
its federal net  operating  loss.  As of April 30,  2004,  the Company has a net
operating  loss  carryforward  of  approximately  $2,627,500  which  expires  in
2021-2023.

During  the year  ended  April 30,  2003,  the  Company  utilized  approximately
$213,000 in federal,  state and city net operating  loss carryback  claims.  The
current  benefit  for  income  taxes  in  2003  includes  an  adjustment  for an
overaccrual of state taxes in prior years.

                                      F-13
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003



NOTE H - LOANS PAYABLE

Shareholder Loans

On April 1, 2002, the Company issued  interest-free,  unsecured promissory notes
to certain  shareholders  in the aggregate  amount of $1,032,501 in exchange for
and in full  satisfaction  of all  outstanding  balances  due on  demand  loans,
management  fees,  and  consulting  fees.  In fiscal 2004,  the Company began to
impute  interest  on the  shareholder  loans at 6% per annum with an  equivalent
offset to additional  paid in capital.  Repayment on the  shareholder  loans was
scheduled to commence in February and May 2003,  however,  the lenders agreed to
defer the commencement dates indefinitely.  The lenders could,  however,  demand
that repayment begin on the shareholder  loans at any time. The Company has made
sporadic  payments on shareholder loans totaling $80,000 in the year ended April
30, 2004. At April 30, 2004, the shareholder  loans totaled  $952,501.  Upon the
completion of the transaction with HDSI on May 25, 2004, as more fully described
in Note Q, the  shareholder  loans were exchanged for an equity  interest in the
Company.  In accordance with FASB No.6, such liabilities have been classified as
long-term at April 30, 2004.

Bridge Loans

On January 10, 2002, the Company  secured bridge loan financing in the aggregate
sum of $500,000 from KSH Strategic Investment Fund I, LP and Cleveland Overseas,
Ltd.  The  Company  received  net  proceeds  of  $475,000  from the bridge  loan
financing. The bridge loan investors were issued secured promissory notes in the
aggregate principal amount of $500,000, which bore interest at a rate of 10% per
annum. These investors were also granted warrants to purchase a total of 200,000
shares of common stock at an exercise  price of $0.50 per share.  KSH Investment
Group,  Inc., a  registered  broker-dealer  and an  affiliate  of KSH  Strategic
Investment Fund I, LP,  received  $25,000 and was issued 75,000 shares of common
stock as a fee for arranging  the  financing.  In June 2002,  the Company used a
portion of the proceeds derived from the private  placement of 512,500 shares of
its 10% Series A Convertible  Preferred  Stock (as discussed in Note K) to repay
the bridge loan in the principal amount of $400,000, and all accrued and payable
interest on the bridge loans to date. On October 10, 2002,  the Company issued a
secured convertible  promissory note in the principal amount of $100,000 in full
payment and satisfaction of the remaining bridge loan in the principal amount of
$100,000. The convertible note was secured by substantially all of the assets of
the Company,  bore interest at a rate of 7% per annum and was  convertible  into
shares of common  stock at a  conversion  price of $1.00 per share.  The Company
repaid the  convertible  note in two  installments of principal in the amount of
$50,000, and the accrued interest thereon, in December 2002 and March 2003.

In conjunction with the completion of the share exchange  agreement with HDSI on
May 25, 2004, the Company was able to obtain the consent of the warrant  holders
to cancel the 200,000 warrants as KSH was an advisor on the exchange transaction
and received advisor shares. (See Note Q).


NOTE I - BUSINESS SEGMENT INFORMATION

In fiscal 2003, the Company operated in one business segment. The Company ceased
operations in May 2003.


                                      F-14
<PAGE>
                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE J - 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, 2004 and 2003, there
were 850,000 and 780,000 options available for future grants, respectively.  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.

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.

During the fiscal  year ended  April 30,  2004 the  Company  issued to  officers
1,060,000 fully vested warrants exercisable at a price of $.05 per share. During
the fiscal year ended April 30, 2003, the Company issued to one officer  500,000
fully vested warrants  exercisable at a price of $0.55 per share. Such issuances
were free-standing grants,  outside of the 1999 plan. The fair value per warrant
was estimated at approximately  $0.35 and $0.07 for the fiscal years ended April
30,  2004 and  2003,  respectively.  This  transaction  resulted  in a charge to
operations of $370,295 in the fiscal year ended April 30, 2004.

In December 2003, the exercise price for previously  issued warrants to purchase
3,440,000  shares of common stock,  of which 3,400,000 were granted to officers,
employees and  consultants,  was repriced from $.55 to $.05 per share.  The fair
value  per  warrant  was  estimated  at  approximately  $0.35 on the date of the
repricing.  This transaction resulted in a charge to operations of $1,193,665 in
the current year.

The fair value of each warrant or option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions  for the years  ended April 30,  2004 and 2003:  no dividend  yield,
expected  volatility  of 249  percent in fiscal  2004 and 112  percent in fiscal
2003, risk-free interest rate of .95 and 3.5 percent, respectively, and three to
five-year expected lives.

In March 2004, an interim officer and consultant  exercised  1,000,000  warrants
for $.05 in a cashless exercise. An aggregate of 857,142 shares were received 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.

The cashless exercise of warrants on March 26, 2004 subsequently resulted in the
issuance of 857,412  common  shares.  Such  shares  were issued as  free-trading
without  restrictive  legend  under  Rule  144K  of the  Securities  Act of 1933
pursuant to an opinion  provided by  counsel,  based in part on  representations
made  that  the  purchaser  had not been an  affiliate  of the  Company  for the
preceding three months.  The status of the purchaser as a non-affiliate  at that
time could be subject to varying  interpretations.  However,  management  of the
Company, as concurred by counsel,  does not believe any significant liability to
the Company is likely to result from the issuance.

                                      F-15
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE J (continued)

The following  table  summarizes  the options and warrants  granted to officers,
employees and consultants  under the 1999 Plan and outside the 1999 Plan for the
period from April 30, 2002 through April 30, 2004:
<TABLE>
<CAPTION>
                                                                       Number of shares
                                                           ---------------------------------------
                                            Total                  Options                                  Exercise
                                           number          ------------------------                         price per
                                          of shares        Qualified   Nonqualified       Warrants            share
                                         ----------        ---------   ------------       --------          ---------
<S>                                      <C>                <C>              <C>          <C>                 <C>
Options and Warrants outstanding
    at May 1, 2002                       3,170,000          186,000          84,000       2,900,000           $0.63

Cancelled - Options                         50,000           50,000                                            1.50

Granted - Warrants                         500,000                                          500,000            0.55
                                         ---------          -------         -------       ---------           -----

Options and Warrants outstanding
    at April 30, 2003                    3,620,000          136,000          84,000       3,400,000           $0.61
                                         ----------         -------          ------       ----------          -----

Cancelled  options                         70,000           70,000                                            $1.50

Granted  Warrants                       1,060,000                                         1,060,000           $0.05

Warrants exercised                       1,000,000                                        1,000,000           $0.05
                                        -----------         --------        ---------    -----------        -------
Options and Warrants outstanding
    At April 30, 2004                    3,610,000           66,000          84,000       3,460,000           $0.11
                                       ===========          =======         =======      ==========           ======

</TABLE>



                                      F-16
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE J (continued)

The following table summarizes  information about the stock options and warrants
granted to officers, employees and consultants at April 30, 2004:
<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               2004                Life            Price             2004               Price
---------------            -----------         -----------      ---------        -----------         ---------
      <S>                  <C>                  <C>               <C>             <C>                  <C>

      $0.05                3,460,000            3.21 years        $0.05           3,460,000            $0.05
      $1.50                  150,000             .13 years        $1.50             150,000            $1.50
                           ---------                              -----           ---------            -----
                           3,610,000                              $0.11           3,610,000            $0.11
                           =========                              =====           =========            =====
</TABLE>

As of April 30, 2004,  there are an aggregate  of  4,212,500  total  options and
warrants outstanding. This number includes special investment placement warrants
in the aggregate of 602,500 shares,  which are not reflected in the above table.
(See Notes H and K).

NOTE K - PREFERRED SHARES

On March 11,  1998,  the  Company's  Articles of  Incorporation  were amended to
authorize 1,000,000 shares of preferred stock, par value $0.001 per share, to be
issued with rights,  preferences and  designations as determined by the Board of
Directors.

In June 2002, the Company  completed the initial closing of a private  placement
of a minimum of 500,000  and a maximum of  1,000,000  shares of its 10% Series A
Convertible  Preferred  Stock to accredited  investors at $2.00 per share.  Five
hundred twelve thousand five hundred shares of preferred stock were issued, each
of which is convertible  into four shares of common stock at a conversion  price
of $0.50 per share. As of the closing, it was determined that the holders of the
preferred  stock  received a common  stock  conversion  preference  based on the
excess of the common  stock's then current  market value of $0.75 per share over
the preferred  stock's $0.50 per share  conversion  price.  This  preference was
assigned a value of $512,500  relative  to the  2,050,000  underlying  shares of
common stock into which the issued preferred stock may be converted. The Company
received  net proceeds of $865,959  from the  issuance of the 512,500  shares of
preferred  stock,  a portion of which was used to retire  $400,000 in principal,
and all  accrued  and  payable  interest  to  date,  on the  bridge  notes.  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 at an  exercise  price of $0.65 per share in  connection  with the
private  placement.  Warrants  for  325,625  shares were issued in June 2002 and
warrants for the remaining 76,875 shares were issued in September 2002.

In conjunction with the completion of the share exchange  agreement with HDSI on
May 25, 2004, the Company was able to obtain the consent of the warrant  holders
to cancel the 402,500 warrants as KSH was an advisor on the exchange transaction
and received advisor shares. (See Note Q).

                                      F-17
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE K (continued)


Dividends  on the  preferred  stock at the rate of $0.20 per share per annum are
payable in kind,  or in shares of common stock if a sufficient  number of shares
of preferred  stock is not available.  Dividends  shall accrue and be payable in
May of each year. As of April 30, 2004, the Company has accrued  preferred stock
dividends in kind of 263,708 shares valued at $214,453.  The preferred  stock is
redeemable,  at the option of the Company,  after the second  anniversary of the
closing and has been classified as equity.

The Company is also  required to issue to holders of the preferred  stock,  on a
pro-rata basis,  shares of preferred stock in the aggregate  amount of 5% of the
total  amount  sold,  or 25,625  shares,  because it did not file with the SEC a
registration  statement  within 60 days of the final  closing  of the  preferred
stock  offering  as  required  under the  registration  rights  agreements  with
preferred  stock  holders.  As of April 30,  2004,  the  Company has accrued for
preferred stock penalty shares of 25,625 shares valued at $27,792.

On May 25, 2004, in conjunction with the closing of the exchange  agreement with
HDSI, all preferred stock and issuable preferred stock were converted to a fixed
number of common  shares to be issued  based on certain  ratios in the  exchange
agreement. (See Note Q).

NOTE L - RELATED PARTY TRANSACTIONS

Rental payments to an affiliated  company in fiscal 2004 and 2003 totaled $2,108
and $79,729, respectively.

At April 30, 2004 and 2003, the Company had notes due to  shareholders  totaling
$952,501  and  $1,032,501,   respectively.  (See  Note  H).  In  May  2004,  the
outstanding shareholder loans were converted to equity.

In June 2003, the Company sold vehicles, furniture and equipment to an affiliate
of former  President  Michael J. Caputo in a private  transaction for a purchase
price of $25,000.

In January  2004,  the Company sold  certain  remaining  office  furniture to an
affiliate of former President  Michael J. Caputo in a private  transaction for a
purchase price of $4,200.


NOTE M - EMPLOYEE BENEFIT PLANS

The  Company  has  established  a  profit  sharing  and a 401(k)  plan  covering
substantially all full-time,  non-union employees who have completed one year of
continuous  service  and  who  meet  certain  other  eligibility   requirements.
Contributions to the plan are  discretionary  and are allocated in proportion to
compensation.  For the  years  ended  April  30,  2004  and  2003,  the  Company
contributed $3,664 and $24,217, respectively, to the profit sharing plan.

                                      F-18
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE N - COMMITMENTS AND CONTINGENCIES

Litigation


NAC and/or NACE are co-defendants in lawsuits  involving  property damage and/or
personal  injury  claims  which arose in the  ordinary  course of business  from
job-site  accidents.  During the year ended  April 30,  2004,  four  claims were
settled  within  limits of  applicable  insurance  coverage.  At April 30, 2004,
unsettled   asserted  claims  did  not  exceed  NAC's  and/or  NACE's  insurance
coverages.

On January 15,  2003,  NAC and its employee  were charged with  violation of the
Clean Air Act in a  one-count  federal  indictment  filed in the  United  States
District  Court for the Southern  District of New York.  The  indictment,  which
relates to work  performed  in January  1998,  alleges that NAC and the employee
caused  asbestos  material to be  stripped  from a building  without  adequately
wetting it, failed to lower the asbestos  material to the floor without dropping
or  otherwise  damaging  it, and did not keep  asbestos  material  that had been
removed wet until it was collected and contained.  The  prosecutor  subsequently
filed a three-count  prosecutor's information that superseded the indictment and
charged NAC with two additional violations of the Clean Air Act.

On July 1, 2003, NAC pled guilty to the three-count  prosecutor's information in
accordance with the terms of a negotiated plea agreement. The plea agreement and
plea were  intended to conclude  the  proceedings  commenced  against NAC by the
filing of the federal  indictment in January 2003. In connection  with the plea,
NAC received a fine totaling $76,200.  A five year probationary  period was also
imposed on NAC, and in addition, NAC agreed, as a condition of probation, to not
engage in any activity relating to (i) inspection,  sampling or analysis for the
presence of asbestos,  (ii) removal,  transportation or disposal of asbestos, or
(iii) demolition or renovation of buildings. This prohibition does not extend to
any  construction  work limited  exclusively to the  installation or addition of
building  components  to a structure,  not involving the removal of any building
components  or  construction  debris.  The fine  imposed  upon NAC has been paid
during the first and second quarter of 2004.

In July 2003, an individual commenced an action against IAP in the Supreme Court
of New York, County of Queens.  The plaintiff alleges to have been injured in an
automobile  accident  with an IAP  employee,  and seeks damages in the amount of
$1,000,000.  This claim for  damages is within  limits of  applicable  insurance
coverage.

From time to time, the Company is subject to other legal  proceedings and claims
in the ordinary  course of business.  The Company  currently is not aware of any
such  legal   proceedings  or  claims  that  the  Company  believes  will  have,
individually  or in the  aggregate,  a material  adverse effect on the Company's
business,  financial  condition or operating results.  However,  any judgment or
settlement in excess of applicable  insurance  coverage would require payment by
the  Company,  which  could have a material  impact on its  financial  position,
results of operations and cash flows.

                                      F-19
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 20023

NOTE N (continued)

Leases

On October 1, 1998, the Company 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,  the  Company
entered into a sublease  agreement  for the October 1998 lease with a company in
which a major shareholder of the Company is a stockholder.  The sublease expires
on September 30, 2008.  The sublease rent is being paid directly to the landlord
by the sublease tenant.

On July 15, 2002, the Company  entered into a three-year  lease through July 15,
2005 for rental of warehouse  facilities in Rahway,  New Jersey. In August 2003,
the  Company  agreed to pay  $9,350 in  charges  to cancel  the lease  effective
September  30, 2003.  This payment was recorded as a charge to operations in the
second quarter of 2004. The Company was refunded the $40,000 security deposit.

Aggregate  future  minimum  rental  payments  and  sublease  payments  under the
operating lease set forth above as of April 30, 2004 are as follows:
<TABLE>
<CAPTION>
                                   Rent            Sublease
                                  payment           income            Net
                                -----------       -----------      --------
<S>                             <C>               <C>              <C>
Year ending April 30,
    2005                        $   178,710       $   178,710      $      -
    2006                            178,710           178,710             -
    2007                            178,710           178,710             -
    2008                            178,710           178,710             -
    2009                             44,678            44,678             -
                                -----------       -----------      --------

                                $   759,518       $   759,518      $      -
                                ===========       ===========      ========

</TABLE>

In June 2000,  the Company  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.

Starting in April 2000, the Company  subleased its executive and  administrative
offices and warehouse from an affiliated  company,  PEC Realty Corp.,  an entity
owned and controlled by a stockholder and his family.  Prior to the cessation of
business  operations  in fiscal  2003,there  was no  specified  term or  written
agreement for this lease. In connection with the cessation of business operation
in fiscal 2003,however, the Company renegotiated the terms of this sublease to a
month-to-month  term and substantially  reduced its executive and administrative
offices and  eliminated its warehouse  space at no charge.  Rents due under this
new sublease total  approximately  $500 per month effective August 1, 2003. Rent
expense  for the years  ended  April 30,  2004 and 2003 was $2,108 and  $79,729;
respectively.

                                      F-20
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003



NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
financial instruments:

Accounts Receivable and Accounts Payable

The carrying amounts of accounts  receivable and accounts payable in the balance
sheet approximate fair values, principally because of the short-term maturity of
these items.

NOTE P - FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of the year ended April 30, 2004, the Company recorded
one  adjustment to its accounts,  which  resulted in increasing  the net loss by
$192,074.  The adjustment for the year ended April 30, 2004 was  attributable to
the  additional  compensation  expense  related to the  issuance of warrants and
repricing of warrants previously reported in the third quarter.  This adjustment
would have increased the  previously  reported loss per share for both the third
quarter and the nine months then ended by $.03.

During the fourth quarter of the year ended April 30, 2003, the Company recorded
significant  adjustments  to its accounts,  which resulted in increasing the net
loss by approximately $89,284. The adjustments for the year ended April 30, 2003
were principally  attributable to the write-off of fixed assets of approximately
$45,875; the write-off of inventory of approximately  $134,908;  an over accrual
of estimated workman's  compensation  insurance which was reversed in the fourth
quarter  of  approximately  $139,469  and  reserve  against  loan  advances  for
approximately $47,970.


                                      F-21
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE Q - SUBSEQUENT EVENTS - UNAUDITED

Share Exchange Agreement

On April 29, 2004,  the Company  entered into a share  exchange  agreement  with
HDSI,  a Delaware  privately  held  corporation,  whereby  HDSI  would  become a
majority-owned  subsidiary  of the  Company  and upon  completion  of the  share
exchange  agreement,  the  holders  of HDSI  common  stock and debt would hold a
majority  interest of the Company.  This exchange was completed on May 25, 2004.
The accounting for the transaction,  commonly called a reverse acquisition, will
be a  recapitalization  of HDSI,  which  will be treated  as the  acquirer.  The
acquired assets and assumed liabilities,  if any, of the Company will be carried
forward at their historical values.  HDSI's historical financial statements will
be  carried  forward  as those of the  combined  entity.  HDSI is engaged in the
manufacture,  marketing,  selling  and  distribution  of  hydrogel,  an  aqueous
polymer-based  radiation  ionized  gel  which  is used in  various  medical  and
cosmetic consumer products. The results of HDSI prior to the transaction are not
reflected herein.

Nesco had  intended  to issue  shares of its common  stock in  exchange  for the
equity  securities  of HDSI in certain  ratios as provided  for in the  exchange
agreement. However, because Nesco 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 for, among others,
equity  and  debt of HDSI and the  Company.  Upon  filing  of a  Certificate  of
Amendment to the Certificate of  Incorporation  to increase the number of shares
of common stock which Nesco is authorized  to issue,  each share of the Series B
Preferred  Stock will be  automatically  converted  into shares of Nesco  common
stock.

As part of this  transaction,  the Company  conditionally  transferred its three
wholly  owned  subsidiaries,  NAC,  IAP and NACE,  to a  consultant  and interim
officer of the Company who  resigned  his position as officer at the time of the
transfer. The transferee assumed all liabilities and obligations with respect to
these  subsidiaries  and agreed to  indemnify  Nesco  against any claims and, in
exchange therefor,  received 3,000,000 shares of common stock of the Company and
certain  related  registration  rights.  As  additional  consideration  for  the
indemnification  by the  transferee,  the Company  agreed that if the transferee
cannot in good  faith  resell  the  shares of  common  stock in an arm's  length
transaction during the twelve month period immediately following the closing for
a price equal to the lesser of (i) all liabilities  resulting from the agreement
between  NAC and its labor  union  plus legal  fees or (ii)  $330,000,  then the
Company will repurchase from the transferee  2,400,000 of the common shares upon
written notice from the transferee requesting such.

In addition to the  transfer of its  subsidiaries,  the Company 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 Nesco Series B Preferred Stock which will be converted into 15,000,000 shares
of common  stock.  The Company was also required to obtain the consent to cancel
an aggregate of 602,500 special warrants prior to the closing.  (See Notes H and
K). The holders of these special warrants were granted shares in the exchange as
part of the  common  advisor  shares  issued.  The  Company  Series A  Preferred
shareholders also agreed, that upon completion of the exchange  agreement,  they
would  convert  their shares to common stock and that the Company  would have no
further  obligations with respect to these preferred  shares.  In addition,  the
Company was required to retain net cash of approximately $350,000 as part of the
terms of the  agreement,  of which  approximately  $208,500 was paid as a bridge
loan prior to April 30, 2004 and is included in assets at April 30,  2004.  This
bridge loan became part of the closing requirements in May 2004.

On May 25, 2004, HDSI common  shareholders  exchanged  3,240,593 shares of stock
for  38,887  shares of Nesco  Preferred  B Stock  which will be  converted  into
29,165,250 shares of common stock (a ratio of approximately 9 Nesco shares for 1
share of HDSI stock). The HDSI preferred  shareholders  exchanged 295,853 shares
of stock for 14,201  shares of Nesco  Preferred B Stock which will be  converted
into 10,650,750 shares of common stock (a ratio of approximately 36 Nesco shares
for 1 share  of HDSI  stock).  Approximately  72% of the  common  and 57% of the
preferred  shareholders  exchanged  their shares at this time.  This resulted in
approximately  44.6% of Nesco's  voting  securities  exchanged and owned by HDSI
stockholders.  The  Company  anticipates  that  the  majority  of the  remaining
shareholders will exchange their shares in the near future, which will result in
54.3% of Nesco's voting  securities owned by HDSI  stockholders upon exchange of
all outstanding HDSI securities. Upon completion of this exchange,

                                      F-22
<PAGE>

                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE Q - SUBSEQUENT EVENTS - UNAUDITED (continued)

HDSI common  shareholders will exchange a total of 4,452,806 shares of stock for
53,434 shares of Nesco Preferred B Stock which will be converted into 40,075,167
shares of common stock (a ratio of  approximately  9 Nesco shares for 1 share of
HDSI stock).  The HDSI preferred  shareholders  will exchange a total of 522,487
shares of stock for  25,079  shares of Nesco  Preferred  B Stock  which  will be
converted into 18,809,574  shares of common stock (a ratio of  approximately  36
Nesco shares for 1 share of HDSI stock).

The Company  Series A Preferred  shareholders  will exchange  512,500  shares of
stock for an aggregate of 20,500 shares of Nesco Preferred B Stock which will be
converted into 15,375,000  shares of common stock (a ratio of  approximately  30
Nesco common shares for 1 share of Series A preferred stock).

In  connection  with the share  exchange  agreement,  the Company also issued an
aggregate  of  6,500,000  common  shares  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.  (See Notes H
and K). The  Company  will  recognize  expense  for the fair value of the shares
($.15) of  approximately  $975,000  in  fiscal  2005 for the  issuance  of these
shares.

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

In addition to the exchange of shares,  all outstanding  warrants and options of
HDSI were  exchanged for Nesco  warrants and options based on the same ratios as
the stock  exchange.  This resulted in the issuance of  approximately  5,512,500
options and  19,624,320  warrants.  The HDSI debt holders were also granted,  in
consideration  of an  extension of term debt , a warrant to acquire one share of
Nesco  Common  Stock  for each  dollar of HDSI  debt,  for an  aggregate  of the
issuance of 2,736,000 warrants.  The total HDSI term debt of $2,736,000 was also
exchanged  for Nesco  convertible  debt and the holders may convert this debt to
approximately 28,551,000 shares of the Company's common stock.

Prior to the transaction,  the Company had  approximately  4,212,500 options and
warrants outstanding. After giving effect to the transactions above, the Company
will have  approximately  31,483,000  options and warrants  outstanding and debt
convertible into approximately 28,551,000 common shares.

Commitments and Contingencies

     Employment Agreement

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. 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 of the  Company.  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 the
Company's common stock for 30 consecutive trading days prior to the closing date
and (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.


                                      F-23
<PAGE>


                             NESCO Industries, Inc.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                            April 30, 2004 and 2003

NOTE Q - SUBSEQUENT EVENTS - UNAUDITED (continued)



     Consulting Agreements

On May 25, 2004, the Company entered into a two year  consulting  agreement with
an affiliate of an interim  officer and  consultant of Nesco which  provided for
the  issuance  of  2,000,000  shares  of  common  stock  and a  minimum  monthly
consulting fee of $7,500 to be credited against any other cash fees earned under
the terms of the  agreement.  The monthly  fee is not payable  until the Company
closes on  additional  financing  in  excess of  $300,000.  The  agreement  also
provides  for certain  transaction  fees to be paid to the  consultant  based on
sales and contracts with strategic alliances. The Company will record an expense
for the fair value of the shares ($.15) of approximately $300,000 in fiscal 2005
for the issuance of these shares.

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 monthly fee is not payable  until
the Company closes on additional financing in excess of $500,000.  The agreement
also provides for certain transaction fees to be paid to the consultant based on
sales and contracts with strategic alliances. The Company will record an expense
for the fair value of the shares ($.15) of approximately $102,250 in fiscal 2005
for the issuance of these shares.

     Investment Banking Agreement

As of July 1, 2004,  Nesco entered into an investment  banking  agreement with a
third party  pursuant to which  Nesco would issue 8% senior  convertible  notes,
which are  convertible  into 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 of 20,000,000  shares) at $.25 per share or 666,667  warrants
for each $100,000 of principal  amount of notes  purchased.  Through  August 26,
2004,  the Company has  received  approximately  $1,868,000  in net  proceeds in
connection  with this  agreement  and issued  warrants  to  purchase  14,533,333
shares.  The notes  mature on December  1, 2005.  Under the terms of the private
placement  Nesco has agreed to undertake  to register the common stock  issuable
upon the conversion of the notes and the exercise of the warrants.



                                      F-24
<PAGE>

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

     Changes in Registrant's Certifying Accountant

Effective  September 25, 2003, Grant Thornton LLP ("Grant Thornton") resigned as
the  independent  auditors that audit and report on the financial  statements of
the Company.

During the past two fiscal years,  and the subsequent  interim period  preceding
Grant  Thornton's  resignation,  the  Company  had no  disagreements  with Grant
Thornton  on  any  matter  of  accounting  principles  or  practices,  financial
statement disclosure, or auditing scope or procedure,  which, if not resolved to
Grant  Thornton's  satisfaction,  would  have  caused  Grant  Thornton  to  make
reference to the subject matter of the disagreements in its reports.

Grant Thornton's reports on the Company's financial  statements for the past two
fiscal years did not contain an adverse  opinion or disclaimer  of opinion,  and
were 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, 2003 raised a substantial doubt about the ability of
the Company to  continue as a going  concern  due to,  among other  things,  the
accumulated  deficit in shareholders'  equity,  negative working capital and net
losses of the Company.

Effective  September  29, 2003,  the Company  engaged BP Audit Group,  PLLC ("BP
Audit Group") as independent  auditors to replace Grant  Thornton.  The Board of
Directors of the Company has approved the engagement of BP Audit Group.

During the past two fiscal years, and the subsequent interim period preceding BP
Audit Group's  engagement,  the Company had no consultations with BP Audit Group
concerning the application of accounting  principles to a specific  completed or
contemplated  transaction,  or the type of opinion that might be rendered on the
Company's  financial  statements and no written or oral advise was provided that
was an important  factor  considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue.

ITEM 8A.  CONTROLS AND PROCEDURES

The principal  executive officer and principal financial officer of the Company,
who are the same person  (the  "Certifying  Officer"),  with the  assistance  of
advisors,  evaluated  the  effectiveness  of the  design  and  operation  of the
Company's   disclosure   controls  and   procedures   (as  defined  in  sections
240.13a-14(c) and 240.15d-14(c)  under the Exchange Act) within 90 days prior to
the  filing  date of  this  annual  report.  Based  upon  that  evaluation,  the
Certifying  Officer  concluded  that  the  Company's   disclosure  controls  and
procedures are effective in timely alerting  management to material  information
relative  to the  Company  which is required  to be  disclosed  in its  periodic
filings with the SEC.

There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their  evaluation,  including any corrective  actions with regard to significant
deficiencies and material weaknesses.

                                       22
<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 April 30, 2004, our directors and executive officers were as follows:
<TABLE>
<CAPTION>
        Name                       Age       Position with the Company
        ----                       ---       -------------------------
        <S>                        <C>       <C>
        Santo Petrocelli, Sr.      68        Chairman of the Board and Director

        Michael J. Caputo          50        President, Principal Executive
                                             and Financial Officer and
        Santo Petrocelli, Jr.      37        Director

        Ronald Kuzon               59        Treasurer
</TABLE>
As of September 1, 2004, our directors and executive officers were as follows:
<TABLE>
<CAPTION>
        Name                      Age        Position with the Company
        ----                      ---        -------------------------
        <S>                       <C>       <C>
        Matthew Harriton          40         President, Principal Executive
                                             and Financial Officer and
                                             Director
</TABLE>

As set forth earlier,  in May, 2004, we completed the transactions  contemplated
by the share exchange Agreement including entering into an Employment  Agreement
with Matthew Harriton to act as our President.  Shortly thereafter,  we accepted
the resignations of Messrs. Petrocelli, Caputo, Petrocelli Jr. and Kuzon.

Matthew L.  Harriton  has served as the  President  and  Director of the Company
since May 25,  2004.  Mr.  Harriton is also the  President  and Chief  Executive
Officer  and  a  Director  of  Embryo  Development  Corporation  since  1997,  a
corporation which holds a minority interest of approximately 5.42% of Nesco. Mr.
Harriton also serves as President and Chief Executive  Officer of HDSI. Prior to
joining Embryo  Development  Corporation in 1997,  Mr.  Harriton's  professional
experience  included  positions at CIBC Wood Gundy  Securities  Corporation from
June 1994 until December  1995,  Coopers & Lybrand from September 1990 until May
1994,  and The First Boston  Corporation  from June 1986 until May 1988. He is a
graduate of Lehigh  University  and received his M.B.A.  from Duke  University's
Fuqua School of Business.

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.

                                       23
<PAGE>

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 2004.

                                       24
<PAGE>
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 2004 and the
most highly compensated  executives officer of the Company other than the CEO or
interim CEO whose salary and bonus payments exceeded $100,000 in fiscal 2004.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                Summary Compensation Table
-------------------------------------------------------------------------------------------------------------------------------
                                                                                        Long Term Compensation
-------------------------------------------------------------------------------------------------------------------------------
                                        Annual Compensation                       Awards                     Payouts
-------------------------------------------------------------------------------------------------------------------------------
   Name and         Year       Salary ($)    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>

Santo               2004           12,750       -0-            *            -0-          1,275,000      -0-           -0-
Petrocelli,    ----------------------------------------------------------------------------------------------------------------
Sr., Chairman       2003            4,500       -0-            *            -0-           -0-           -0-           -0-
of the Board,   ----------------------------------------------------------------------------------------------------------------
and former          2002            3,300       -0-            *            -0-           -0-           -0-           -0-
President and
CEO (1)
-------------------------------------------------------------------------------------------------------------------------------
Jeffrey L.          2004              -0-       -0-            *            -0-          500,000        -0-           -0-
Powell, former ----------------------------------------------------------------------------------------------------------------
President,          2003           57,000       -0-            *            -0-           -0-           -0-           -0-
CEO and        ----------------------------------------------------------------------------------------------------------------
Director (2)        2002              -0-       -0-         108,500         -0-           -0-           -0-           -0-

-------------------------------------------------------------------------------------------------------------------------------
Michael J.          2004              -0-       -0-            *            -0-          500,000        -0-           -0-
Caputo,        ----------------------------------------------------------------------------------------------------------------
President,          2003          135,000       -0-            *            -0-           -0-           -0-           -0-
Principal      ----------------------------------------------------------------------------------------------------------------
Executive and       2002          135,000       -0-            *            -0-           -0-           -0-           -0-
Financial
Officer (3)
-------------------------------------------------------------------------------------------------------------------------------
Ronald              2004          -0-       -0-             300,000         -0-        1,000,000        -0-           -0-
Kuzon         ----------------------------------------------------------------------------------------------------------------
Treasurer (4)       2003          -0-       -0-                *            -0-           -0-           -0-           -0-
              ----------------------------------------------------------------------------------------------------------------
                    2002          -0-       -0-                *            -0-           -0-           -0-           -0-

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


-------------------------------------------------------------------------------------------------------------------------------
<FN>
* Less than $50,000

     (1)  Succeeded by Jeffrey L. Powell as President  and CEO,  effective  July
          10, 2002. Mr. Petrocelli is compensated through Petrocelli Industries,
          Inc.  Payments to this company may be referred to as "management fees"
          and  "consulting  fees" in the  Annual  Report on Form  10-KSB for the
          fiscal  years  ended  April 30,  2003 and other  reports  filed by the

                                       25
<PAGE>
          Company  with the SEC.  In  March  2002,  the  Company  issued  to Mr.
          Petrocelli a warrant  exercisable for 1,000,000 shares of Common Stock
          at an exercise  price of $0.55 per share.  On December 11, 2003,  this
          warrant  was  repriced  at an  exercise  price of $.05 per  share.  In
          addition,  on December 11, 2003,  Petrocelli  Industries  was issued a
          warrant  exercisable for 275,000 shares of Common Stock at an exercise
          price of $.05 per share.

     (2)  Succeeded by Michael J. Caputo as President  and  Principal  Executive
          Officer  (interim),  effective  October 25, 2002. Mr. Powell served as
          President,  CEO and  Director  of the  Company  from July 10,  2002 to
          October  25,  2002.  In  fiscal  2002  and  prior to his  election  as
          President,  CEO and Director in fiscal 2003,  Mr.  Powell  served as a
          consultant to the Company.  Mr. Powell received a total of $108,500 in
          compensation for his consulting  services in fiscal 2002. In addition,
          on  December  11,  2003,  the Company  issued to Mr.  Powell a warrant
          exercisable for 500,000 shares of Common Stock at an exercise price of
          $.05 per share.

     (3)  In fiscal 2003,  Mr.  Caputo served as Chief  Operating  Officer until
          October 25, 2002, and as interim  President,  Principal  Executive and
          Financial Officer from October 25, 2002 to April 29, 2003. On June 25,
          2003, the Company engaged Mr. Caputo,  on a limited basis, to serve as
          interim  President,  Principal  Executive and Financial  Officer.  Mr.
          Caputo's  engagement  terminated  on May 25, 2004.  In December  2002,
          Nesco issued to Mr. Caputo a warrant exercisable for 500,000 shares of
          Common Stock at an exercise price of $0.55 per share.  On December 11,
          2003,  this  warrant was  repriced  at an  exercise  price of $.05 per
          share.

     (4)  In fiscal  2004,  Mr.  Kuzon,  a former  consultant  served as interim
          Treasurer  from  February  26th until May 25th,  2004.  In March 2002,
          Nesco issued to Mr. Kuzon a warrant  exercisable for 1,000,000  shares
          of Common Stock at an exercise  price of $0.55 per share.  On December
          11, 2003,  this warrant was repriced at an exercise  price of $.05 per
          share and in March  2004 this  warrant  was  exercised  in a  cashless
          exercise.  An aggregate of 857,142  shares were received as the excess
          of the fair  value  $(.35) of the stock  purchased  over the  exercise
          price  ($.05)  was  used to pay for the  shares  in the  aggregate  of
          142,858 shares.
</FN>
</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  2004 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>
Santo Petrocelli Sr.        1,000,000         22.2%            $ .05           3/13/07        $346,995
                              275,000          6.1%              .05           12/11/07         96,067

Jeffrey L. Powell             500,000         11.1%              .05           12/11/07        174,667

Michael J. Caputo             500,000         11.1%              .05           12/26/07        173,497
Ronald Kuzon                1,000,000         22.2%              .05           3/13/07         346,995
<FN>

(1)  The market price  underlying  all of these options at the time of repricing
     was $.35. See repricing report.
</FN>
</TABLE>

The  hypothetical  value  of the  options  as of their  date of  grant  has been

                                       26
<PAGE>

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 249%, risk free interest rate of .95% and expected lives
of 3 to 5 years. The fair value per warrant was estimated at approximately $0.35
on the date of the issuance of the warrants  granted in the fiscal year 2004 and
on the repriced  warrants.  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:
<TABLE>
<CAPTION>
                Aggregated Option/SAR Exercises in Fiscal 2004 and Fiscal 2004 Year-End Option/SAR Value
---------------------------------------------------------------------------------------------------------------------------------
         (a)                       (b)                  (c)                         (d)                          (e)

        Name                 Shares Acquired       Value Realized           Number of Securities         Value of Unexercised
                              on Exercise              ($)                 Underlying Unexercised         In-the-Money Options/
                                                                          Options/SAR at 4/30/04            SARs at 4/30/04
                                                                          Exercisable/ Unexercisable   Exercisable/Unexercisable
                                                                                    (#) (1)                      ($) (2)
<S>                            <C>                    <C>                       <C>                            <C>
---------------------------------------------------------------------------------------------------------------------------------

Santo Petrocelli, Sr.             -0-                   -0-                     1,425,000/-0-                  127,500/-0-
---------------------------------------------------------------------------------------------------------------------------------


Jeffrey L. Powell                 -0-                   -0-                      500,000/ -0-                   50,000/-0-
---------------------------------------------------------------------------------------------------------------------------------

Michael J. Caputo                 -0-                   -0-                      500,000/-0-                    50,000/-0-
---------------------------------------------------------------------------------------------------------------------------------
Ronald Kuzon     (3)           1,000,000              300,000                     -0/-0-                           -0-/-0-
---------------------------------------------------------------------------------------------------------------------------------
<FN>
     (1)  Shares of Common Stock.
     (2)  Based on the high "bid" price of shares quoted on April 30, 2004. .
     (3)  Upon cashless exercise, Mr. Kuzon actually received 857,142 shares.
</FN>
</TABLE>

     Long-Term Incentive Plans

     Not Applicable.

     Compensation of Directors

During  the  fiscal  year  ended  April  30,  2004,  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.

                                       27
<PAGE>

Employment  Contracts  and  Termination  of  Employment  and  Change in  Control
Arrangements

At April 30,  2004,  we had no  employment  contracts or  compensatory  plans or
arrangements. However, in May 2004 in connection with our acquisition of HDSI 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 of the  Company.  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 the
Company's common stock for 30 consecutive trading days prior to the closing date
and (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 30
consecutive trading days prior to the closing was $.15.

Report on Repricing of Options/SARS

     In December  2003, we repriced  3,440,000  outstanding  warrants,  of which
3,400,000  were granted to officers,  employees and  consultants,  with exercise
prices lower than the terms of the original grants.  These actions were taken in
order to provide an incentive to these  individuals to engage in transactions on
behalf of the  Company.  The  following  table  sets forth  certain  information
concerning the repricing of options to the named  executive  officers within the
previous ten years.

<TABLE>
<CAPTION>
                                                      Ten-Year Options Repricings
                                                                                                   Length of Original
                                                          Market Price of Exercise Price           Option Term
                                    Number of Securities  Stock at Time   at Time of New           Remaining at Date
                                    Underlying            of Repricing    Repricing or   Exercise  of Repricing or
Name                    Date        Repriced or Awarded   or Amendment    Amendment      Price     Amendment (Yrs.)
----                    ----        --------------------  ------------    -------------- --------  ------------------
<S>                     <C>           <C>                     <C>           <C>          <C>         <C>
Ronald Kuzon (1)        12/11/03      1,000,000               $.35          $.55         $.05        3.25
Santo Petrocelli, Sr.   12/11/03      1,000,000                .35           .55          .05        3.25
Michael Caputo          12/11/03        500,000                .35           .55          .05        4.00

<FN>
(1)  These options were exercised by Mr. Kuzon in March 2004.
</FN>
</TABLE>

                                       28
<PAGE>

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

Beneficial Ownership

     On September 1, 2004 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
September 1, 2004 there were 19,127,105  shares of common stock,  512,500 shares
of Series A Stock and 73,088  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.

     The following table sets forth the beneficial  ownership as of September 1,
2004 with respect to the beneficial  ownership of the Company's  common stock by
officer and directors, individually and as a group, and all holders of more than
5% of the 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                        21.79%

Matthew Harriton
c/o Nesco Industries, Inc.
305 Madison Avenue
New York, NY  10165 (3)                                4,479,597                         4.89%

Santo Petrocelli, Jr.
c/o Nesco Industries, Inc.
305 Madison Avenue                                           -0-                        *
New York, NY  10165 (4)

Ronald Kuzon
c/o Nesco Industries, Inc.
305 Madison Avenue                                     5,357,142                        6.00%
New York, NY  10165 (5)
</TABLE>


                                      29
<PAGE>

<TABLE>
<CAPTION>

Name and Address of                         Amount and Nature of                         Percent
Beneficial Owner                            Beneficial Ownership (1)                     of Class
----------------------------------------------------------------------------------------------------
<S>                                                      <C>                           <C>
Karen Nazzareno
c/o Hydrogel Design Systems Inc.
305 Madison Avenue
New York, NY  10165 (6)                                  180,000                        *

Geoff Donaldson
c/o Hydrogel Design Systems Inc.
305 Madison Avenue
New York, NY  10165 (7)                                2,238,615                        2.44%

Richard Harriton
305 Madison Avenue, Suite 4510
New York, NY  10165 (8)                               12,144,007                        12.0%

KSH Strategic Investments
575 Jericho Turnpike
Jericho, NY  11753 (9)                                 6,416,500                        6.99%

Embryo Development Corp.
305 Madison Avenue, Suite 4510
New York, NY  10165 (3)                                4,837,500                        5.42%

Ronit Sucoff
575 Jericho Turnpike
Jericho, NY  11753 (10)                                5,268,130                        5.71%

Helen Kohn
575 Jericho Turnpike
Jericho, NY  11753 (11)                                4,953,130                        5.37%

Directors and Officers
As a Group (3 persons)                                 9,898,212                        10.21%
<FN>
     *  Less than 1% unless otherwise indicated.
</FN>
</TABLE>


(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 Stock, warrants and vested options.

(2) Mr. Petrocelli was the Chairman and a director of Nesco 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.

                                       30
<PAGE>

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. Harriton is the President,  Chief Executive Officer and sole director of
Nesco.  Prior to the  share  exchange  agreement  with HDSI and  currently,  Mr.
Harriton  remains as CEO and a director  of HDSI.  Mr.  Harriton  is also CEO of
Embryo  Development Corp., a public Company traded under the symbol "EMBR" which
holds a 5.42%  beneficial  interest in the  Compnay.  The above number of shares
beneficially   owned  does  not  include  2,430,647  shares  issuable  upon  the
conversion of debt. It does include  364,597 shares  issuable upon exercise of a
warrant  granted for the extension of debt,  and 2,000,000  shares 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. The remaining 3,000,000 shares are
not exercisable  until a minimum of one year after the closing date of the share
exchange agreement.

(4) Mr.  Petrocelli was a director of the Company until June 22, 2004. The above
number of shares  beneficially owned does not include shares owned by Petrocelli
Industries,  Inc., in which Mr. Petrocelli has an economic interest by reason of
his equity ownership of Petrocelli Industries, Inc.

(5) Mr. Kuzon served as an interim  officer during the period  February 26, 2004
until May 25, 2004 when the share exchange  agreement was  completed.  The above
number of shares  beneficially  owned  includes  2,700,000  shares  owned by NAC
Calabria  Acquisition  Corp., a corporation  controlled by Mr. Kuzon,  1,000,000
shares owned by JMK Associates,  a consulting firm controlled by a family member
of Mr. Kuzon,  and 1,657,142  shares owned by family members and  affilitates of
Mr. Kuzon.

(6) Ms.  Nazzareno is the Chief  Financial  Officer of Hydrogel  Design Systems,
Inc., a majority owned subsidiary of Nesco Industries, Inc.

(7) Mr.  Donaldson is the Chief  Operating  Officer of Hydrogel  Design Systems,
Inc., a majority owned subsidiary of Nesco Industries,  Inc. The above number of
shares  beneficially  owned does not include  2,924,100 shares issuable upon the
conversion of debt. It does include  438,615 shares  issuable upon exercise of a
warrant  granted for the extension of debt, and 1,800,000  shares  issuable upon
exercise of a warrant granted as part of Mr.  Donaldson's  employment  agreement
with Hydrogel Design Systems, Inc. in January 2000 which has been converted to a
Nesco warrant.

(8) The above number of shares  beneficially  owned by Mr. R.  Harriton does not
include  15,696,000  shares issuable upon the conversion of debentures.  It does
include  11,874,007  shares  issuable  upon the exercise of warrants  granted in
conjunction with convertible debentures and for the extensions of debenture debt
of Hydrogel Design Systems,  Inc. Both the convertible debenture and the related
warrants have been  converted to Nesco debt and  warrants.  Mr. R. Harriton is a
related party of Mr. M. Harriton, a director and officer of the Company (See (3)
above).

(9) The above number of shares  beneficially  owned by KSH Strategic  Investment
Fund  does not  include  3,900,000  shares  issuable  upon the  conversion  of a
debenture.  It does  include  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 Hydrogel  Design  Systems,  Inc. Both the
convertible debenture and the related warrants have been converted to Nesco debt
and warrants.

                                       31
<PAGE>

(10) The above  number  of  shares  beneficially  owned by Ms.  Sucoff  includes
2,981,880 shares issuable upon the exercise of investment  banking and placement
agent  warrants  granted in  conjunction  with a private  placement  of Hydrogel
Design  Systems,  Inc. in July 2001.  The warrants have been  converted to Nesco
warrants.

(11)  The  above  number  of  shares  beneficially  owned by Ms.  Kohn  includes
2,981,880 shares issuable upon the exercise of investment  banking and placement
agent  warrants  granted in  conjunction  with a private  placement  of Hydrogel
Design  Systems,  Inc. in July 2001.  The warrants have been  converted to Nesco
warrants.


Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth  information as of April 30, 2004 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              150,000(2)                   $1.50                    850,000
holders)

-------------------------------------------------------------------------------------------------------------------
Securities to be issued upon the
exercise of outstanding options,            3,460,000(3)                   $0.05                        --
warrants and rights granted to
officers, directors and employees
not pursuant to a plan

-------------------------------------------------------------------------------------------------------------------
                Total:                      3,610,000                      $0.11                    850,000
-------------------------------------------------------------------------------------------------------------------
<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 Santo Petrocelli Sr. in June 1999
     exercisable  for up to 150,000  shares of common stock at an exercise price
     of $1.50. Mr. Petrocelli  resigned in June 2004 and these options expire in
     June 2004.

     (3) Includes  warrants  issued to officers,  directors and employees of the
     Company  exercisable  for up to  3,460,000  shares  of  Common  Stock at an
     exercise price of $0.05.
</FN>
</TABLE>

                                       32
<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In fiscal 2004 and 2003, the Company paid PEC Realty Corp., a company controlled
by  Chairman  Santo   Petrocelli,   Sr.,  rents  totaling  $2,108  and  $79,729,
respectively.

On April 1, 2002, the Company issued  interest-free,  unsecured promissory notes
in favor of Mr.  Petrocelli,  Petrocelli  Industries,  Inc.,  a private  company
controlled by Mr.  Petrocelli and then Chief Financial Officer Lawrence S. Polan
in the aggregate  amount of $1,032,501 in exchange for and in full  satisfaction
of all outstanding balances due on demand loans, management fees, and consulting
fees. In fiscal 2004,  the Company began to impute  interest on the  shareholder
loans at 6% per annum with an equivalent  offset to additional  paid in capital.
Repayment on the shareholder loans was scheduled to commence in February and May
2003, however,  the lenders agreed to defer the commencement dates indefinitely.
The Company made sporadic  payments on shareholder loans totaling $80,000 in the
year ended April 30, 2004.  At April 30, 2004,  the  shareholder  loans  totaled
$952,501.  Upon the completion of the transaction with HDSI on May 25, 2004, the
shareholder  loans  were  exchanged  for an  equity  interest  in  the  Company.
Accordingly,  such  liabilities  have been  classified as long-term at April 30,
2004.

During the fiscal year ended April 30, 2004 the Company issued 500,000  warrants
to Jeffrey  Powell,  former  President and CEO,  275,000  warrants to Petrocelli
Industries,  Inc., a private company controlled by Mr.  Petrocelli,  and 285,000
warrants to Richard  Cohen,  a former  officer,  all such  warrants  immediately
exercisable at a price of $.05 per share. During the fiscal year ended April 30,
2003, the Company issued 500,000 fully vested warrants to then interim President
and Principal Executive Officer Michael Caputo,  exercisable at a price of $0.55
per share. Such issuances were free-standing  grants,  outside of the 1999 plan.
The fair value per warrant was  estimated at  approximately  $0.35 and $0.07 for
the fiscal years ended April 30, 2004 and 2003,  respectively.  This transaction
resulted  in a charge to  operations  of $370,295 in the fiscal year ended April
30, 2004.

In December 2003, the exercise price for previously  issued warrants to purchase
3,440,000  shares of common stock,  of which 3,400,000 were granted to officers,
employees  and  consultants,  was  repriced  from $.55 to $.05 per share.  These
warrants  were issued to the parties as  described  under  Item.  10,  Report on
Repricing  for an aggregate of  2,500,000  shares and to former Chief  Financial
Officer Lawrence S. Polan in the aggregate of 900,000  warrants.  The fair value
per warrant was estimated at  approximately  $0.35 on the date of the repricing.
This transaction resulted in a charge to operations of $1,193,665 in the current
year.

In March 2004, Mr. Ronald Kuzon,  an interim  officer and consultant and officer
exercised  1,000,000 warrants for $.05 in a cashless  exercise.  An aggregate of
857,142 shares were received 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.  The cashless  exercise of these warrants in March,
2004 subsequently resulted in the issuance of 857,412 common shares. Such shares
were issued as free-trading  without  restrictive  legend under Rule 144K of the
Securities Act of 1933 pursuant to an opinion provided by counsel, based in part
on  representations  made that the  purchaser  had not been an  affiliate of the
Company  for the  preceding  three  months.  The  status of the  purchaser  as a

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<PAGE>

non-affiliate at that time could be subject to varying interpretations. However,
management  of the  Company,  as  concurred  by  counsel,  does not  believe any
significant liability to the Company is likely to result from the issuance.

On April 29, 2004,  the Company  entered into a share  exchange  agreement  with
HDSI,  whereby HDSI would become a majority-owned  subsidiary of the Company and
upon  completion  of the share  exchange  agreement,  the holders of HDSI common
stock and debt would hold a majority interest of the Company.  This exchange was
completed on May 25,  2004.  On January 12,  2004,  the Company  entered into an
agreement to make term loans of up to $125,000 to HDSI,  which was  subsequently
increased  prior to the closing.  The term loans were to mature  January 1, 2005
and bear  interest at 8% per annum if the  closing  did not take  place.  If the
Company did not enter into an  agreement  with HDSI  shareholders  to purchase a
minimum of 50.1 % and up to all of the capital stock of HDSI in exchange for the
Company's  securities by July 1, 2004, or failed to purchase such  securities by
July 1, 2004,  the Company at its  election  could  convert the terms loans into
HDSI Series B Convertible Preferred Stock or accelerate the maturity of the term
loan to August 1, 2004. The Company advanced an aggregate of $208,500 to HDSI as
of  April  30,  2004.  On May 25,  2004,  the  exchange  was  completed  and the
outstanding  amount of the term loan was  included as part of the  minimum  cash
requirement as per the agreement to be provided to HDSI.

As  part  of  this  transaction,   the  Company  transferred  its  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  the  Company.   The  transferee   assumed  all  liabilities  and
obligations  with respect to these  subsidiaries  and agreed to indemnify  Nesco
against any claims. In consideration for the indemnity,  the transferee received
3,000,000 shares of common stock of the Company and certain related registration
rights.  In support  of the value of the common  stock  delivered,  the  Company
agreed that the transferee,  at its election,  may demand the Company repurchase
from the  transferee  up to 2,400,000 of the common  shares upon written  notice
from the transferee 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.

In  connection  with the share  exchange  agreement,  the Company also issued an
aggregate  of  6,500,000  common  shares  to an  advisor,  a  limited  liability
corporation  owned by an  affiliate  of Ronald  Kuzon 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.  The Company will recognize expense for
the fair value of the shares ($.15) of approximately $975,000 in fiscal 2005 for
the issuance of these shares.

On May 25, 2004, the Company entered into a two year  consulting  agreement with
an affiliate of Ronald Kuzon which provided for the issuance of 2,000,000 shares
of common stock and a minimum  monthly  consulting  fee of $7,500 to be credited
against  any other  cash fees  earned  under  the  terms of the  agreement.  The
agreement  also  provides  for  certain  transaction  fees  to be  paid  to  the
consultant  based on sales and contracts with strategic  alliances.  The Company
will record an expense for the fair value of the shares ($.15) of  approximately
$300,000 in fiscal 2005 for the issuance of these shares.

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<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K


     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

4.1(a)            Common Stock Certificate

4.2(a)            1999 Incentive Stock Option Plan

4.3(c)            Form of Registration Rights Agreement related to the June 2002
                  private placement of the Company's 10% Series A Convertible
                  Preferred Stock

10.1(d)           Promissory Note issued to Santo Petrocelli, Sr. dated April 1,
                  2002

10.2(d)           Promissory Note issued to Lawrence S. Polan dated April 1,
                  2002

10.3(d)           Promissory Note issued to Petrocelli Industries Inc. dated
                  April 1, 2002

10.4(e)           Share Exchange Agreement by and among HDSI, Nesco, HDSI
                  Signatory Stockholders and Nesco Signatory Stockholders dated
                  April 29, 2004.

21(a)             Subsidiaries

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

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

                                       35
<PAGE>


(a) Filed as Exhibits  with the Company's  Registration  Statement on Form 10-SB
filed with the SEC on November 30, 1999, and incorporated by reference herein.

(b) Filed as an Exhibit with the  Company's  Annual  Report on Form 10-KSB filed
with the SEC on August 13, 2002, and incorporated by reference herein.

(c) Filed as an Exhibit with the Company's Quarterly Report on Form 10-QSB filed
with the SEC on September 23, 2002, and incorporated by reference herein.

(d) Filed as an Exhibit with the Company's Current Report on Form 8-K filed with
the SEC on April 18, 2002, and incorporated by reference herein.

(e) 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.

B. Reports on Form 8-K

Current  Reports on Form 8-K filed  during the fiscal  year ended April 30, 2004
and the subsequent interim period ended August 28, 2004 are as follows:


     --   Report on Form 8-K,  filed with the SEC on June 26,  2003,  announcing
          the  election of Michael J. Caputo to serve as interim  President  and
          Principal Executive and Financial Officer under Item 5 - Other Events.

     --   Report on Form 8-K, filed with the SEC on July 17, 2003 announcing the
          plea agreement entered into by National  Abatement Corp. in connection
          with  charges of  violation  of the Clean Air Act under Item 5 - Other
          Events.

     --   Report  on Form  8-K,  filed  with  the  SEC on  September  30,  2003,
          announcing the change in the Company's independent auditors under Item
          4 - Changes in Registrant's Certifying Accountant.

     --   Report on Form 8-K, filed with the SEC on June 9, 2004, announcing the
          completion  of the  transactions  contemplated  by the Share  Exchange
          Agreement  and a Change of Address  under Items 1, 2 and 5, Changes in
          Control of Registrant,  Acquisition or Disposition of Assets and Other
          Events, respectively.

     --   Report on Form  8-K/A,  filed  with the SEC on August 9, 2004 to amend
          the  Report  8-K  filed  with the SEC on June 9, 2004 to  provide  the
          required financial information under Item 7 (a) and (b).

     --   Report on Form 8-K filed  with the SEC on August 27,  2004  announcing
          the  unregistered  sales of equity  securities under Item 3.02 under a
          Securities  Purchase Agreement with Ocean Drive Holdings,  LLC for the
          issuance of 8% senior convertible promissory notes and warrants.

                                       36
<PAGE>


ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The  following  is a  summary  of the fees  billed  to the  Company  by its
independent  accountants,  BP Audit  Group PLLC,  applicable  to the fiscal year
ended April 30, 2004, and its  independent  accountants,  Grant  Thornton,  LLP,
applicable to the fiscal year ended April 30, 2003:


<TABLE>
<CAPTION>
                             BP Audit            Grant
                           Group,  PLLC       Thornton, LLP

Fee category                   2004               2003
------------                   ----               ----
<S>                         <C>                  <C>
Audit fees                  $  82,552            $137,764

Audit-related fees                  -                -

Tax fees                            -                -

All other fees                      -                -
                            ----------          ----------
Total fees                  $  82,552            $137,764
                            ==========          ==========
</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."

     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.


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<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                   September 15, 2004
Matthew Harriton             Director
                             Principal Executive
                             and Financial Officer






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