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



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FORM 10-K

(Mark One)x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2002

Commission File Number 0-2000

ENTRX CORPORATION
(Exact name of registrant as specified in its charter)

|                                                               |  |                         
|-------------------------------------------------------------- |  | ------------------------
|Delaware                                                       |  | 95-2368719              
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer ID No.)

|                                        |  |           
|--------------------------------------- |  | ----------
|800 Nicollet Mall, Suite 2690           |  |           
|Minneapolis, Minnesota                  |  | 55402     
|(Address of Principal Executive Office) |  | (Zip Code)

Registrants telephone number, including area code (612) 333-0614

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|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of each exchange
|Title of each class |  | on which registered  
|                    |  |                      
|None                |  | None                 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock  $.10 Par Value
(Title of Class)



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x

The aggregate market value of the Common Stock held by non-affiliates of
the registrant on March 4, 2003 was approximately $2,756,845, based upon the
average of the bid and asked prices of the Common Stock, as reported on The
Nasdaq Stock Market®.

The number of shares of the Common Stock of the registrant outstanding as
of March 7, 2003 was 7,504,215.

Documents incorporated by reference:

Portions of the Companys Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Companys 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III hereof.



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TABLE OF CONTENTS



|                                                                       |  |  |  |  |  |  |  | 
|---------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                
|PART II                                                               
|Equity Compensation Plan Information                                  
|Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.
|Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.
|PART III                                                              
|PART IV                                                               
|SIGNATURES                                                            
|CERTIFICATIONS                                                        
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                            
|INDEPENDENT AUDITORS REPORT                                          
|CONSOLIDATED BALANCE SHEETS                                           
|CONSOLIDATED STATEMENTS OF OPERATIONS                                 
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                       
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            
|Independent Auditors Report on Supplementary Information             
|SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS                       
|EX-3.2 Certificate of Amendment                                       
|EX-4.1 Form of Certificate for Common Stock                           
|EX-10.19 Stock Purchase Agreement                                     
|EX-10.20 Loan Agreement between Zamba Corporation                     
|EX-10.21 Amendment No. 1 to Loan Agreement                            
|EX-21 List of Subsidiaries of the Registrant                          
|EX-99.1 CEO Certification Pursuant to 18 Sec 1350                     
|EX-99.2 CFO Certification Pursuant to 18 Sec 1350                     



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All statements, other than statements of historical fact, included in this Form
10-K, including without limitation the statements under Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Business are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. Such forward-looking statements
involve assumptions, known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of Entrx
Corporation, (the Company) to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements contained in this Form 10-K. Such potential risks
and uncertainties include, without limitation, potential reversion of liability
for the companies sold in Mexico; competitive pricing and other pressures from
other businesses in the Companys markets; adequacy of insurance, including the
adequacy of insurance to cover potential future asbestos-related injury claims;
economic conditions generally and in the Companys primary markets;
availability of capital; the adequacy of its cash and cash equivalents; the
expansion of material sales; cost of labor and other risk factors detailed
herein and in other of the Companys filings with the Securities and Exchange
Commission. The forward-looking statements are made as of the date of this
Form 10-K and the Company assumes no obligation to update the forward-looking
statements or to update the reasons actual results could differ from those
projected in such forward-looking statements. Therefore, readers are cautioned
not to place undue reliance on these forward-looking statements.




PART I

ITEM 1. BUSINESS

Principal Offices.

The Companys principal executive offices are located at 800 Nicollet
Mall, Suite 2690, Minneapolis, Minnesota 55402. The Companys telephone number
is (612) 333-0614.

General Development of Business

Corporate Structure.The Company, incorporated originally in 1947 as an
Arizona corporation, was reincorporated in Delaware on November 24, 1993. In
addition to the parent company, the Company conducts its business through three
wholly owned subsidiaries: Metalclad Insulation Corporation (MIC), a
California corporation, Eco-Metalclad (Eco-MTLC), a Utah corporation and
Metalclad Environmental Contractors (MEC), a California corporation. As of
December 31, 2001, both Eco-MTLC and MEC became inactive. On May 31, 2002, the
Company acquired 3,625,000 shares of common stock, constituting approximately
90% of the outstanding shares, of Surg II, Inc. (Surg II) (Nasdaq: SURG), and
on September 25, 2002 acquired an additional 357,142 shares. On October 22,
2002, the Company distributed 3,791,576 shares of Surg II to its shareholders
as a dividend. The Company still owns 190,566 shares of Surg II common stock.

In the past, the Company conducted business in Mexico in three wholly
owned subsidiaries, which as of December 31, 2001 became inactive: Ecosistemas
del Potosi, S.A. de C.V. (ECOPSA), Consultoria Ambiental Total, S.A. de CV.
(CATSA) and Confinamiento Tecnico de Residues Industriales, S.A. de C.V.
(COTERIN).

Unless otherwise indicated, the term Company refers to Entrx
Corporation, formerly Metalclad Corporation, and, where appropriate, its United
States and Mexican subsidiaries.

On December 20, 2001, Mr. Wayne Mills filed Form 13D/A with the Securities
and Exchange Commission, indicating his intent to seek a change in management
and the Board of the Company. Mr. Mills indicated that, absent a cooperative
solution, he would seek shareholder consents to replace the entire Board. It
was managements decision that the shareholders would benefit by not involving
the Company in a proxy contest. Consequently, on February 13, 2002, Grant S.
Kesler, Anthony C. Dabbene and Bruce H. Haglund resigned as members of the
Board of Directors of the Company. The remaining three members of the Board of
Directors elected Messrs. Wayne W. Mills, Kenneth W. Brimmer, Gary W. Copperud
and Joseph M. Senser to fill an existing vacancy on the Board of Directors and
the vacancies created by the resignations of Messrs. Kesler, Dabbene and
Haglund. In addition, Messrs. Kesler and Dabbene resigned as officers of the
Company, and Mr. Mills was elected President and Chief Executive Officer and
Brian D. Niebur was elected Treasurer and Chief Financial Officer.

Business.For over 30 years, the Company has been providing insulation
and asbestos abatement services, primarily on the West Coast. Through MIC, the
Company provides these services to a wide range of industrial, commercial and
public agency clients. Insulation services include the installation of high-
and low-temperature insulation on pipe, ducts, furnaces, boilers, and other
types of industrial equipment and commercial applications. Asbestos abatement
services include removal and disposal of asbestos-containing products in
similar applications. The Company fabricates specialty items for the





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insulation industry, and sells insulation material and accessories incident to
its services business to its customers as well as to other contractors. A
diverse list of clientele includes refineries, utilities,
chemical/petrochemical plants, manufacturing facilities, commercial properties,
office buildings and various governmental facilities.

Narrative Description of Business

Insulation Contracting Services

Background.The Companys insulation contracting services include the
installation of high- and low-temperature insulation on pipe, ducts, furnaces,
boilers, and various other types of equipment. Insulation services are
provided for new construction and maintenance of existing facilities. The
Company is a licensed general contractor and typically provides project
management, labor, tools, equipment and materials necessary to complete the
installation.

The Company usually performs substantially all of the work required to
complete its contracts, generally subcontracting to others the scaffolding and
painting. In a typical insulation contract, the Company obtains plans and
specifications prepared by the owner of a facility or its agent. In projects
where the customer is the owner of the facility, the Company acts as the
general contractor. The Company also works as a subcontractor for other
general contractors. Insulation contracts for new construction may require one
or more years to complete. Maintenance contracts typically extend over a
period of one or more years.

The Companys insulation contracting business has historically included,
among other things, maintenance, removal, repair, and re-installation of
insulation on existing facilities and equipment. These activities included
asbestos removal services in most cases in which the insulation at such
facilities has included asbestos-containing material (ACM).

The Company removes all forms of ACM after first treating the asbestos
with water and a wetting agent to minimize fiber release. Dry removal is
conducted in special cases where wetting is not feasible, provided
Environmental Protection Agency (EPA) approval is obtained. The Companys
workers also remove pipe insulation by cutting the wrapping into sections in an
enclosed containment area or utilizing special glovebags which provide
containment around the section of pipe insulation being removed. In some
instances, the Company performs asbestos removal and provides related
re-insulation contracting services, including insulation material sales; in
other cases, the Company performs only asbestos removal services

Insulation Contracts.The Company obtains contracts, which ordinarily
fall within one of the types set forth below, on the basis of either
competitive bids or direct negotiations:

Cost-plus.These contracts, sometimes referred to as time and materials
contracts, generally provide for reimbursement of costs incurred by the Company
and the payment of a fee equal to a percentage of the cost of construction.
They generally provide for monthly payments covering both reimbursement for
costs incurred to date and a portion of the fee based upon the amount of work
performed and are customarily not subject to retention of fees or costs.

Fixed-price.These contracts generally require the Company to perform all
work for an agreed upon price, often by a specified date. Such contracts
usually provide for increases in the contract price if the Companys
construction costs increase due to changes in or delays of the project
initiated or caused by the customer or owner or by escalating project labor
rates. However, absent causes resulting in increases in contract prices, the
Company takes certain risks associated with its fixed prices. Under these
types of contracts the Company receives periodic payments based on the work
performed to date, less certain retentions. The amounts retained are held by
the customer pending either satisfactory completion of the Companys work or in
some cases, satisfactory completion of the entire project.

In accordance with industry practice, most of the Companys contracts are
subject to termination or modification by the customer, with provision for the
recovery of costs incurred and the payment to the Company of a proportionate
part of its fees, in the case of a cost-plus contract, and overhead and profit,
in the case of a fixed price contract. At various times, contracts that the
Company has with its customers have been terminated or modified. However, such
termination or modification occurs in the regular course of the Companys
business due to changes in the work to be performed as determined by the
customer. No single termination or modification has had or is expected to have
a material adverse impact on the Companys business.

Operations and Employee Safety.All contract work is performed by trained
Company personnel and supervised by project managers trained and experienced in
construction and asbestos abatement. Each employee involved in asbestos

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abatement must complete a general training and safety program conducted by the
Company. Training topics include approved work procedures, instruction on
protective equipment and personal safety, dangers of asbestos, methods for
controlling friable asbestos and asbestos transportation and handling
procedures. In addition, all full-time employees engaged in asbestos abatement
activities are required to attend a minimum four-day course approved by the EPA
and the Occupational Safety and Health Administration (OSHA), and all
supervisors of abatement projects are required to attend an eight-hour first
aid/CPR/safety course and an eight-hour EPA/AHERA refresher course annually.
One of the Companys full-time salaried employees and 22 hourly employees have
been trained and certified as competent individuals under EPA regulations
relating to the training of asbestos abatement workers. All employees are
issued detailed training materials and the Company typically conducts a job
safety analysis in the job bidding stage.

The Company requires the use of protective equipment and sponsors periodic
medical examination of all field employees. During removal procedures, ACM is
generally wetted to minimize fiber release and filtration devices are used to
reduce contamination levels. Air monitoring to determine asbestos fiber
contamination levels is conducted on all abatement projects involving the
removal of friable asbestos. The Company has a comprehensive policy and
procedure manual that covers all activities of an asbestos abatement project
and the specific responsibilities and implementation of Company procedures and
policies to be followed on each project. The manual is reviewed periodically
by management and updated to insure compliance with federal, state, and local
regulations, to include information from in-house project review findings, and
to include updated information regarding industry practices. To separate its
responsibilities and to limit liability, the Company utilizes third party,
unaffiliated laboratories for asbestos sampling analysis and licensed
independent waste haulers for the transportation and disposal of asbestos waste
from its projects.

Materials and Supplies.The Company purchases its insulating and asbestos
abatement materials and supplies from a number of national manufacturers and
the Company is not dependent on any one source for these materials and
accessories used in its insulation services and asbestos abatement business.

Material Sales

The emphasis in this area is primarily to provide insulation material
direct to other insulation contractors and to warehouse and supply material for
projects where other Company services are provided. The warehoused material is
based on economics of bulk purchases of the most commonly used products.

Marketing and Sales

Insulation Contracting Services.The Company currently obtains most of
its insulation contracting business from existing customers and referrals by
customers, engineers, architects, and construction firms. Additional business
is obtained by referrals obtained through labor, industry, and trade
association affiliations.

Projects are also awarded through competitive bidding, although major
companies frequently rely on selected bidders chosen by them based on a variety
of criteria such as adequate capitalization, bonding capability, insurance
carried, and experience. The Company is frequently invited in this manner to
bid on projects and obtains a significant amount of its contracts through the
competitive bidding process. The Company believes that its bids are
competitively priced and anticipates that in the future its bids will continue
to be competitively priced compared with bids submitted by others.

The Companys marketing and sales effort emphasizes its experience,
reputation for timely performance, and knowledge of the insulation and asbestos
abatement industry. The Company is a member of the Western Insulation
Contractors Association, the National Insulation Contractors Association, and
various local business associations.

Curtom-Metalclad Joint Venture.In 1989, the Company entered into a joint
venture with a minority service firm, which qualifies for preferential contract
bidding because of minority status. The Company owns a 49% interest in the
joint venture. The joint venture, known as Curtom-Metalclad, submits bids
for insulation and asbestos abatement services. When contracts are obtained by
the joint venture, the Company performs the work specified in the contract as a
subcontractor to the joint venture. The Company also receives an interest in
49% of the profits or losses of the joint venture. Sales for the year ended
December 31, 2002 to Curtom-Metalclad were approximately $6,384,000 or 42.5% of
revenue. While the revenues and gross profit of Curtom-Metalclad are
significant to the Company, the assets, liabilities and earnings of that joint
venture are insignificant, and not material to the Company. The termination of
the Curtom-Metalclad joint venture could have a material adverse affect on the
Company due to loss of revenues.

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Customers.The Companys insulation customers generally fall into two
categories, industrial or commercial. The industrial customers are
predominately public utilities (power, natural gas and water/water treatment),
major oil companies for oil refineries and petrochemical plants, chemical and
food processors, other heavy manufacturers, and engineering/construction
companies. The commercial customers are primarily government installations,
schools, hospitals, institutions, an array of manufacturing/commercial
facilities, and the general or mechanical construction contractors. During
2002, the Company earned a significant portion of its revenues from Southern
California Edison Company (37.2%) (through Curtom-Metalclad), Kiewit Industrial
Corporation (13.1%) and Equilon Enterprises LLC (10.5%). The Company
anticipates that a significant portion of its revenues in 2003 will continue to
be from work performed for these customers. (See Note 18 to the Financial
Statements.)

Competition.Competition in the insulation contracting services business
is intense and is expected to remain intense in the foreseeable future.
Competition includes a few national and regional companies that provide
integrated services and many regional and local companies that provide
insulation and asbestos abatement specialty contracting services. Most of the
national and regional competitors providing integrated services are well
established and have substantially greater marketing, financial, and
technological resources than the Company. The regional and local specialty
contracting companies, which compete with the Company, either provide one
service or they provide integrated services by subcontracting part of their
services to other companies. The Company believes that the primary competitive
factors for its services are price, technical performance, and reliability.
The Company obtains a significant number of its insulation service contracts
through the competitive bidding process. The Company believes that its bids
are competitively priced and anticipates that in the future its bids will
continue to be competitively priced compared with bids submitted by others.

Backlog.The Companys backlog for insulation services at December 31,
2002 and December 31, 2001 was $5,848,000 and $10,450,000, respectively. The
backlog has been reduced due to continuing work on existing contracts including
a major asbestos abatement project at the San Onofre Nuclear Plant and a
utility pole abatement project for Southern California Edison Company. Backlog
is calculated in terms of estimated revenues on fixed-price and cost-plus
projects in progress or for which contracts have been executed. The Company
believes that backlog as of any date is not necessarily indicative of future
revenues. The Company estimates that its entire backlog as of December 31,
2002 will be completed during the next eighteen months. The majority of the
Companys present business is on cost-plus contracts for which backlog is
estimated. The Company fulfills product and supply orders promptly, and there
is no backlog in the material sales business.

Insurance and Bonding.

The Companys combined general liability and contractor pollution
insurance policy provides base coverage of $1,000,000 per occurrence and excess
liability coverage of $10,000,000.

Prior to 1975, the Company was engaged in the sale and installation of
asbestos related insulation materials, and has been the subject of numerous
claims of personal injury allegedly related to asbestos exposure. Many of
these claims are now being brought by the children and close relatives of
persons who have died, allegedly as a result of the direct or indirect exposure
to asbestos.

The number of asbestos related claims which have been initiated naming the
Company as a defendant have increased from 254 in 1999, to 527 in 2000 and 685
in 2001, but slightly decreased to 583 in 2002. The sympathies of juries, the
aggressiveness of the plaintiffs bar, and the declining defendant base as a
result of business failures, has also led to a trend of larger payments and
settlements per claim. As of December 31, 2002, there were approximately 660 of
such claims pending, down from 700 at the end of 2001.

The Company in the past has believed that it has adequate insurance to
cover these claims; however, the terms of such insurance policies are complex
and the coverage for many types of claims is limited. If the current trend of
the increasing claim occurrence and amounts is not significantly reversed, it
will likely have a material adverse effect on the financial condition and
business of the Company in the future. Because of its insurance coverage, the
Company does not anticipate any adverse effect on the Companys financial
condition to develop for at least the next three to five years. Beyond that,
however, the effect of those claims is uncertain.

While the Companys current insulation and asbestos abatement services
customers generally do not require performance bonds, an increasing number of
customers have requested such bonds. Due to changes in the bonding industry,
the Company had difficulty obtaining performance bonds for two large projects
in 2002. The Company satisfied the bonding requirements on one of these
projects by obtaining a standby letter of credit payable to the customer and
collateralized by cash. The other projects bonding requirement was satisfied
by supplying the customer with a deposit of cash to guarantee the Companys

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performance on the project. While the changes in the bonding industry have
made it more difficult to obtain performance bonds, the Company believes that
its current bonding arrangements are adequate for the Companys anticipated
future needs.

Employees.

As of December 31, 2002, the Company had two part-time salaried employees
in its executive offices and 14 full-time salaried employees in its insulation
business, for a total of 16 employees. These included three executive
officers, project managers/estimators, purchasing, accounting, and office
staff.

As of December 31, 2002, the Company employed approximately 115 hourly
employees for insulation contracting services, nearly all of whom are members
of the International Association of Heat and Frost Insulators and Asbestos
Workers (AFL-CIO). The Company is a party to agreements with various local
chapters of various trade unions. The number of hourly employees employed by
the Company fluctuates depending upon the number and size of projects that the
Company has under construction at any particular time. It has been the
Companys experience that hourly employees are generally available for its
projects, and the Company has continuously employed a number of them on various
projects over an extended period of time. The Company considers its relations
with its hourly employees and the unions representing them to be good, and has
experienced no recent work stoppages due to strikes by such employees.
Additionally, the trade union agreements the Company is a party to include no
strike, no work stoppage provisions. Certain of these agreements expire in
December of 2003 and August 2004.

Government Regulation

Insulation Services and Material Sales Regulation.The Company, as a
general contractor and insulation specialty contractor, is subject to
regulation requiring it to obtain licenses from several state and municipal
agencies. Other than licensing, the Companys industrial insulation services
and material sales business is not subject to material or significant
regulation.

Asbestos Abatement Regulation.Asbestos abatement operations are subject
to regulation by federal, state, and local governmental authorities, including
OSHA and the EPA. In general, OSHA regulations set maximum asbestos fiber
exposure levels applicable to employees and the EPA regulations provide
asbestos fiber emission control standards. The EPA requires use of accredited
persons for both inspection and abatement. In addition, a number of states
have promulgated regulations setting forth such requirements as registration or
licensing of asbestos abatement contractors, training courses for workers,
notification of intent to undertake abatement projects and various types of
approvals from designated entities. Transportation and disposal activities are
also regulated. The Company believes that similar legislation may be adopted
in other states and in local building codes.

OSHA has promulgated regulations specifying airborne asbestos fiber
exposure standards for asbestos workers, engineering and administrative
controls, workplace practices, and medical surveillance and worker protection
requirements. OSHAs construction standards require companies removing
asbestos on construction sites to utilize specified control methods to limit
employee exposure to airborne asbestos fibers, to conduct air monitoring, to
provide decontamination units and to appropriately supervise operations. EPA
regulations restrict the use of spray applied ACM and asbestos insulation,
establish procedures for handling ACM during demolition and renovations, and
prohibit visible emissions during removal, transportation and disposal of ACM.

The Company believes that it is substantially in compliance with all
regulations relating to its asbestos abatement operations, and currently has
all material government permits, licenses, qualifications and approvals
required for its operations.

ITEM 2. PROPERTIES

The Companys executive offices are located in Minneapolis, Minnesota,
which consists of approximately 2,400 square feet leased at a current rate of
$6,900 per month, on a month-to-month basis.

The Companys wholly owned subsidiary, Metalcald Insulation Corporation,
is housed in a facility in Anaheim, California. This facility consists of
26,000 square feet of office and warehouse space. In May, 2002 the Company
purchased this facility for $2,047,000.

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ECOPSA owns an approximately 92-hectare parcel (approximately 227 acres)
of land in Santa Maria del Rio near San Luis Potosi, Mexico. The Company is
presently attempting to dispose of this property. Such sale or disposition
will not have a material effect on the Company.

Management believes properties currently owned and leased by the Company
are adequate for its operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Asbestos Related Claims

Prior to 1975, the Company was engaged in the sale and installation of
asbestos related insulation materials, and has been the subject of numerous
claims of personal injury allegedly related to asbestos exposure. Many of
these claims are now being brought by the children and close relatives of
persons who have died, allegedly as a result of the direct or indirect exposure
to asbestos.

The number of asbestos related claims which have been initiated naming the
Company as a defendant have increased from 254 in 1999, to 527 in 2000 and 685
in 2001, but slightly decreased to 583 in 2002. The sympathies of juries, the
aggressiveness of the plaintiffs bar, and the declining defendant base as a
result of business failures, has also led to a trend of larger payments and
settlements per claim. As of December 31, 2002, there were approximately 660 of
such claims pending, down from 700 at the end of 2001.

The Company in the past has believed that it has adequate insurance to
cover these claims; however, the terms of such insurance policies are complex
and the coverage for many types of claims is limited. If the current trend of
the increasing claim occurrence and amounts is not significantly reversed, it
will likely have a material adverse effect on the financial condition and
business of the Company in the future. Because of its insurance coverage, the
Company does not anticipate any adverse effect on the Companys financial
condition to develop for at least the next three to five years. Beyond that,
however, the effect of those claims is uncertain.

Claim Against Former Employee, Etc.

On November 13, 2000, the Company filed a complaint in the Superior Court
of California against a former employee, the U.S. parent of the buyer and its
representative for breach of contract, fraud, collusion and other causes of
action in connection with the Companys sale of its Mexican businesses. This
case is one where the Company has suffered damages and continues to accrue
damages and a monetary award is sought as the remedy. An arbitration hearing
was held in September, 2002 in Mexico City, as requested by one of the
defendants. This arbitration hearing was solely to determine the validity of
the assignment of the purchase and sale agreement by the buyer to a company
formed by a former employee. The arbitrator has yet to give its ruling.
Consequently, until this arbitration is completed, all legal proceedings in
Orange County have been stayed. Upon completion of the arbitration, the
Company believes it will be able to move forward in the U.S. with its
complaint. No assurances can be given on the outcome.

Claim by Former Attorney

On February 5, 2003, a Notice of Involuntary Lien was filed against the Company
with the County Recorder for Orange County California in the amount of
$104,046. This lien relates to a judgment against the Company for attorney
fees in the Companys NAFTA settlement. The Company has been indemnified by a
third party against any judgment and costs related to this case and has
contacted the third party seeking indemnification.

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

None

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PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCK HOLDER MATTERS

Market for Common Stock

The Companys Common Stock is traded on The Nasdaq SmallCap Market under
the symbol ENTX. The following table sets forth, for the fiscal periods
indicated, the high and low sales prices for the Common Stock as reported by
Nasdaq:

|                                    |  |             |       |  |     |   |       | 
|----------------------------------- |  | ----------- | ----- |  | --- | - | ----- | 
|                                    |  | Sales Price |      
|                                    |  |             |      
|                                    |  | High        |       |  | Low |  
|                                    |  |             |       |  |     |  
|Fiscal Year Ended December 31, 2001 |  |             |       |  |     |   |       | 
|Quarter Ended March 31, 2001        |  | $           | 2.031 |  |     | $ | 0.938 | 
|Quarter Ended June 30, 2001         |  |             | 2.07  |  |     |   | 1.02  | 
|Quarter Ended September 30, 2001    |  |             | 1.98  |  |     |   | 1.35  | 
|Quarter Ended December 31, 2001     |  |             | 2.36  |  |     |   | 1.47  | 
|Fiscal Year Ended December 31, 2002 |  |             |       |  |     |   |       | 
|Quarter Ended March 31, 2002        |  | $           | 3.65  |  |     | $ | 1.80  | 
|Quarter Ended June 30, 2002         |  |             | 2.40  |  |     |   | 1.59  | 
|Quarter Ended September 30, 2002    |  |             | 1.92  |  |     |   | 0.80  | 
|Quarter Ended December 31, 2002     |  |             | 2.00  |  |     |   | 0.70  | 

As of March 3, 2003, the closing price for the common shares on The Nasdaq
SmallCap Market was $.50.

On December 11, 2002, the Company received a notice from The Nasdaq Stock
Market, Inc. advising the Company that because the minimum bid price of the
Companys Common Stock was not at least $1.00 for thirty (30) consecutive
trading days, the Company does not meet the requirements for continued listing
on The Nasdaq SmallCap Market. The Company has 180 calendar days from the
notice, or until June 9, 2003, to regain compliance or be delisted. If such
delisting occurs, it is likely that the Companys common stock will be traded
on the over-the-counter Bulletin Board, or the newly established BBX, which may
result in significantly less interest in and liquidity for such stock. Once
delisted from the NASDAQ SmallCap Market, the standards for obtaining relisting
become more stringent, currently including a requirement that the Companys
common stock have a market price of $4.00 or more per share.

Shareholders of Record

As of March 3, 2003, the approximate number of record holders of the
Companys Common Stock was 1,500.

Dividends

The Company has not paid any cash dividends on its Common Stock since its
incorporation and anticipates that, for the foreseeable future, earnings, if
any, will continue to be retained for use in its business. On October 22,
2002, the Company distributed 3,791,576 shares of Surg II, Inc. common stock as
a dividend to its shareholders of record as of the close of business on October
11, 2002. The dividend was equal to one share of Surg II, Inc. common stock for
each two shares of the Companys common stock owned. Since that date, Surg II,
Inc. has changed its name to Chiral Quest, Inc., and its shares are being
traded on the over-the-counter Bulletin Board under the symbol CQST.

Unregistered Sales of Securities

The following table sets forth certain information regarding the sale of
common stock by the Company during the calendar year 2002 in transactions which
were not registered under the Securities Act of 1933 (the Act).

8



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##### Table of Contents



|        |  |           |         |                        |  |                                                      |  |                        |  |               |  |              |  |                |  | 
|------- |  | --------- | ------- | ---------------------- |  | ---------------------------------------------------- |  | ---------------------- |  | ------------- |  | ------------ |  | -------------- |  | 
|        |  |           |         |                        |  |                                                      |  |                        |  |               |  |              |  | Exemption from
|        |  | Number    |         |                        |  |                                                      |  |                        |  |               |  | Registration
|Date of |  | of Shares |         |                        |  |                                                      |  |                        |  |               |  | Relied Upon 
|Sale    |  | Sold      |         | Person(s) to Whom Sold |  | Consideration Paid                                   |  | Under the Act         
|        |  |           |         |                        |  |                                                      |  |                       
|2/14/02 |  |           | 226,000 |                        |  | Two executive
officers and directors of the Company1 |  | Severance compensation |  | Section 4 (2)
|10/7/02 |  |           | 25,000  |                        |  | James Marshall2                                      |  | $37,500 in cash        |  | Section 4 (2)

1 Grant S. Kesler and Anthony C. Dabbene were officers and directors of the
Company, and accredited investors as defined under the Act, who received
140,000 and 86,000 shares, respectively, for investment, valued at $2.57 per
share.

2 James Marshall, an accredited investor, acquired his shares for investment
upon the exercise of a previously issued common stock warrant at $1.25 per
share.

Equity Compensation

The following table sets forth certain information regarding equity
compensation plan information as of December 31, 2002.




Equity Compensation Plan Information

|                                                           |       |                     |                         |           |                     |                      |      |             |                         |      |                         |         | 
|---------------------------------------------------------- | ----- | ------------------- | ----------------------- | --------- | ------------------- | -------------------- | ---- | ----------- | ----------------------- | ---- | ----------------------- | ------- | 
|                                                           |       |                     |                         |           |                     |                      |      |             |                         |      | Number of securities    |        
|                                                           |       |                     |                         |           |                     |                      |      |             |                         |      | remaining available for |        
|                                                           |       |                     |                         |           |                     |                      |      |             |                         |      | future issuance under   |        
|                                                           |       |                     | Number of Securities to |           |                     | Weighted-average     |      |             | equity compensation     |     
|                                                           |       |                     | be issued upon exercise |           |                     | exercise price of    |      |             | plans (excluding        |     
|                                                           |       |                     | of outstanding options, |           |                     | outstanding options, |      |             | securities reflected in |     
|Plan Category                                              |       | warrants and rights |                         |           | warrants and rights |                      |      | column (a)) |                        
|                                                           |       |                     |                         |           |                     |                      |      |             |                        
|                                                           |       |                     | (a)                     |           |                     | (b)                  |      |             | (c)                     |     
|                                                           |       |                     |                         |           |                     |                      |      |             |                         |     
|Equity compensation
plans approved by
security holders     |       |                     | 1,932,800               |           |                     | $                    | 2.62 |             |                         |      | 737,200                 |        
|Equity compensation
plans not approved
by security holders |       |                     | 1,274,533               |           |                     | $                    | 5.84 |             |                         | none
|                                                           | Total |                     |                         | 3,207,333 |                     |                      | $    | 3.90        |                         |      |                         | 737,200 | 

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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is derived from the consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included herein.

|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |     |  |  |  | 
|------------------------------------------------------------------------ |  | -------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | --- |  | ---- | --------- | --- |  | - | --------- | --- |  |  |  | 
|                                                                         |  | Year Ended December 31,                            |          
|                                                                         |  |                                                    |          
|                                                                         |  | 2002 (4)                                           |           |   | 2001 |   |           | 2000 |  |   | 1999      |     |  | 1998 |           |     |  |   |          
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     |  |   |          
|                                                                         |  | (in thousands, except share and per share amounts) |          
|Statement of Operations Data (1)                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |     |  |  |  | 
|Revenues from continuing operations                                      |  | $                                                  | 15,021    |   |      | $ | 18,008    |      |  | $ | 17,769    |     |  | $    | 13,422    |     |  | $ | 10,009    |     |  |  |  | 
|Loss from continuing operations                                          |  |                                                    | (5,286    | ) |      |   | (1,503    | )    |  |   | (1,702    | )   |  |      | (1,971    | )   |  |   | (1,775    | )   |  |  |  | 
|Income (loss) from discontinued operations                               |  |                                                    |          |   |      |   | 7,079     |      |  |   | (63       | )   |  |      | (2,228    | )   |  |   | (3,003    | )   |  |  |  | 
|Net income (loss)                                                        |  |                                                    | (5,286    | ) |      |   | 5,576     |      |  |   | (1,765    | )   |  |      | (4,199    | )   |  |   | (4,778    | )   |  |  |  | 
|Earnings per share: (2)                                                  |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |     |  |  |  | 
|Loss per share of common stock,
continuing operationsbasic              |  | $                                                  | (.69      | ) |      | $ | (.21      | )    |  | $ | (.31      | )   |  | $    | (.50      | )   |  | $ | (.58      | )   |  |  |  | 
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     | 
|Loss per share of common stock,
continuing operationsdiluted            |  | $                                                  | (.69      | ) |      | $ | (.21      | )    |  | $ | (.31      | )   |  | $    | (.50      | )   |  | $ | (.58      | )   |  |  |  | 
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     | 
|Income (loss) per share of common stock,
discontinued operationsbasic   |  | $                                                  |          |   |      | $ | .98       |      |  | $ | (.01      | )   |  | $    | (.57      | )   |  | $ | (.99      | )   |  |  |  | 
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     | 
|Income (loss) per share of common stock,
discontinued operationsdiluted |  | $                                                  |          |   |      | $ | .97       |      |  | $ | (.01      | )   |  | $    | (.57      | )   |  | $ | (.99      | )   |  |  |  | 
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     | 
|Income (loss) per share of common stockbasic                            |  | $                                                  | (.69      | ) |      | $ | .77       |      |  | $ | (.32      | )   |  | $    | (1.07     | )   |  | $ | (1.57     | )   |  |  |  | 
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     | 
|Income (loss) per share of common stockdiluted                          |  | $                                                  | (.69      | ) |      | $ | .77       |      |  | $ | (.32      | )   |  | $    | (1.07     | )   |  | $ | (1.57     | )   |  |  |  | 
|                                                                         |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     | 
|Weighted average shares outstandingbasic (2)                            |  |                                                    | 7,608,823 |   |      |   | 7,200,490 |      |  |   | 5,470,002 |     |  |      | 3,918,912 |     |  |   | 3,036,277 |     |  |  |  | 
|Weighted average shares outstandingdiluted (2)                          |  |                                                    | 7,608,823 |   |      |   | 7,261,568 |      |  |   | 5,470,002 |     |  |      | 3,918,912 |     |  |   | 3,036,277 |     |  |  |  | 
|Balance Sheet Data                                                       |  |                                                    |           |   |      |   |           |      |  |   |           |     |  |      |           |     |  |   |           |     |  |  |  | 
|Total assets                                                             |  | $                                                  | 11,063    |   |      | $ | 17,792    |      |  | $ | 11,422    | (3) |  | $    | 9,472     | (3) |  | $ | 11,833    | (3) |  |  |  | 
|Convertible notes                                                        |  |                                                    |          |   |      |   |          |      |  |   | 1,029     |     |  |      | 2,071     |     |  |   | 1,640     |     |  |  |  | 
|Convertible debentures                                                   |  |                                                    |          |   |      |   |          |      |  |   | 310       |     |  |      | 360       |     |  |   | 1,202     |     |  |  |  | 
|Long-term debt                                                           |  |                                                    | 308       |   |      |   | 241       |      |  |   | 186       |     |  |      | 149       |     |  |   | 71        |     |  |  |  | 
|Mortgage payable                                                         |  |                                                    | 1,494     |   |      |   |          |      |  |   |          |     |  |      |          |     |  |   |          |     |  |  |  | 
|Shareholders equity                                                     |  |                                                    | 6,509     |   |      |   | 13,692    |      |  |   | 6,891     | (3) |  |      | 5,155     | (3) |  |   | 4,481     | (3) |  |  |  | 
|Common shares outstanding (2)                                            |  |                                                    | 7,504,215 |   |      |   | 7,448,015 |      |  |   | 6,581,114 |     |  |      | 4,859,498 |     |  |   | 3,056,912 |     |  |  |  | 



---

|(1) |  | In the fourth quarter of 1998, the Company committed to a plan to
discontinue its operations in Mexico and to seek a buyer. Consequently,
the Statement of Operations Data has been restated to reflect this
decision.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Effective July 2, 1999, the Company implemented a 1 for 10 reverse stock
split. All prior periods have been restated.                                                                                                 
|   
|(3) |  | Restated to reflect reclassification of certain related party
receivables.                                                                                                                                            
|   
|(4) |  | Includes the operations of the Companys majority-owned subsidiary Surg
II, Inc. for the period May 30, 2002 through October 22, 2002.                                                                                

No dividends were paid or declared during the years ended December 31,
2001, 2000, 1999, or 1998. On October 22, 2002 the Company distributed
3,791,576 shares of Surg II, Inc. common stock as dividend to its shareholders
of record as of the close of business on October 11, 2002. The dividend was
equal to one share of Surg II, Inc. common stock for each two shares of Entrx
Corporation common stock owned.

10



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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Presentation of Consolidated Financial Statements

The consolidated financial statements of the Company reflect the Companys
ongoing business in the insulation contracting segment and the discontinuance
of its waste management segment in Mexico. Certain amounts have been
reclassified from previously reported categories.

Results of Operations

General.Historically, the Companys revenues were generated primarily by
(i) revenues in the United States from insulation services and sales of
insulation products and related materials; and (ii) revenues in Mexico from the
collection of waste oils and solvents for recycling, rental of parts washing
machines, brokering the disposal of waste and remediation services.

In 1997, the Company filed a claim against the United Mexican States under
the North American Free Trade Agreement (NAFTA) to recover the value of its
investment in a completed, but unopened, treatment, storage and disposal
facility in San Luis Potosi. During the fourth quarter of 1998, the Company
determined, that due to political opposition in Mexico, its Mexican operations
would not be successful and committed to a plan to discontinue its Mexican
operations to minimize future losses and halted any further investment in
Mexico. The Company settled its claims against the Mexican Government in
October 2001 for $16,002,000. This settlement completed the Companys
activities in Mexico and essentially closed out all discontinued operations in
Mexico.




Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.

Revenue.Total revenues were $15,021,000 in 2002 as compared to
$18,008,000 for 2001, a decrease of 17%. Contract revenues for the year ended
December 31, 2002 were $14,837,000 as compared to $17,865,000 for the year
ended December 31, 2001, a decrease of 17%. The decrease is primarily
attributable to fires at two of the Companys customer sites that generated
incremental revenue in the year ended December 31, 2001 and also due to the
general economic slowdown in 2002.

Cost of Revenue and Gross Margin.Total cost of revenue for the year
ended December 31, 2002 were $13,158,000 as compared to $15,540,000 for the
year ended December 31, 2001, a decrease of 15%. This decrease is primarily
due to the decrease in revenue. The gross margin as a percentage of revenue
was approximately 12.4% for the year ended December 31, 2002 compared to 13.7%
for the year ended December 31, 2001. The decrease in gross margin as a
percentage of revenue is primarily attributed to the performance of several
major emergency jobs in response to major fires at a refinery and power plant
that allowed for higher contract margins in the year ended December 31, 2001.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses were $3,658,000 for the year ended December 31, 2002 as
compared to $3,015,000 for the year ended December 31, 2001, an increase of
21.3% due primarily to an increase in legal and professional fees, insurance
expense and board fees offset by a decrease in salaries and bonus expense.

Other Operating Expense.For the year ended December 31, 2002, the
Company recorded an allowance of $387,000 related to a loan to a corporate
officer. The Company adjusted the carrying value of the note to the value of
the collateral as of December 31, 2002. The collateral consists of 500,000
shares of the Companys common stock and 250,000 shares of the $0.01 par value
common stock of Chiral Quest, Inc. (OTC Bulletin Board: CQST). The carrying
value will continue to fluctuate as the market value of the collateral changes.

Restructuring Charges.On December 20, 2001, Wayne Mills filed Form 13D/A
with the Securities and Exchange Commission, indicating his intent to seek a
change in management and the Board of the Company. Mr. Mills indicated that,
absent a cooperative solution, he would seek shareholder consents to replace
the entire Board.

It was managements decision that the shareholders would benefit by not
involving the Company in a proxy contest. Consequently, on February 13, 2002,
Grant S. Kesler, Anthony C. Dabbene and Bruce H. Haglund resigned as members of
the Board of Directors of the Company. The three remaining members of the
Board of Directors elected Messrs. Wayne W.

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##### Table of Contents



Mills, Kenneth W. Brimmer, Gary W.
Copperud and Joseph M. Senser to fill an existing vacancy on the Board of
Directors and the vacancies created by the resignations of Messrs. Kesler,
Dabbene and Haglund. In addition, Messrs. Kesler and Dabbene resigned as
officers of the Company, and Mr. Mills was elected President and Chief
Executive Officer and Brian D. Niebur was elected Treasurer and Chief Financial
Officer.

In connection with their resignations, and in lieu of compensation which
would otherwise be due under change of control provisions contained in
previously executed and adopted employment contracts, which were amended and
restated as of January 1, 2002, the Company issued Mr. Kesler 140,000 shares of
the Companys common stock valued at $359,800, forgave a loan due from Mr.
Kesler in the amount of $543,000 in exchange for future consulting services and
paid Mr. Kesler $832,000 in cash. In addition, the Company issued Mr. Dabbene
86,000 shares of the Companys common stock valued at $221,020 and paid Mr.
Dabbene $637,000 in cash. In addition, all outstanding unvested stock options
held by the prior Board of Directors, including Messrs. Kesler and Dabbene,
were immediately vested and became exercisable. Messrs. Kesler and Dabbene each
agreed to act as consultants to Entrx under two-year and three-month consulting
agreements, respectively. In addition to the payment discussed above, Mr.
Dabbenes compensation for consulting was $5,000 per month. A portion of the
cash payments due to Mr. Kesler and Mr. Dabbene ($482,000 and $425,000,
respectively) was deposited by Entrx as income and payroll tax withholding on
the total compensation paid to each of them.

In March 2002, the Company reimbursed Mr. Mills $100,000 for legal fees
expended by him in excess of that amount to effect this change in management.

During the year ended December 31, 2002, the Company recognized $3,333,000
of expense related to the change of management, including insurance premiums,
legal fees, severance pay and relocation of the Companys headquarters. The
cash payments related to these expenses were approximately $2,008,000. The
non-cash charges primarily relate to the forgiveness of the loan due from Mr.
Kesler, the issuance of common stock to Messrs. Kesler and Dabbene, the expense
pursuant to APB No. 25 and the related interpretations related to the
accelerated vesting of stock options for the prior directors.

Interest Income and Expense.Interest income for the year ended December
31, 2002 was $293,000 as compared with $80,000 for the year ended December 31,
2001. The increase in 2002 is primarily due to the larger cash balances, that
resulted from the receipt of the NAFTA award and to an interest-bearing loan to
a corporate officer in December 2001 that remained outstanding at December 31,
2002. Interest expense was $119,000 for the year ended December 31, 2002
compared to interest expense of $132,000 for the year ended December 31, 2001.
This reduction in interest expense was primarily due to the conversions of debt
to equity and the repayment of convertible zero coupon notes, with an interest
rate of 15% in the year ended December 31, 2001, partially offset by bank
borrowings outstanding for all of 2002 as compared to only a portion of 2001.

Other Income and Expense.The Company recognized a $57,000 gain on sale
of available-for-sale securities in the year ended December 31, 2002. Other
expense of $904,000 in 2001 consists principally of the reserve established for
the note receivable related to the sale of the Mexican assets not included in
the NAFTA claim.

Discontinued Operations.The gain of $7,079,000 in 2001 is a result of
the settlement of the NAFTA claim, net of all fees and expenses, including the
write-off of all assets associated with the claim. No future costs are
anticipated. If any future costs arise, they will be charged to operations as
incurred.

Net Income (Loss).The Company experienced a net loss of $5,286,000 (or a
loss of $0.69 per share) for the year ended December 31, 2002, as compared to
net income of $5,576,000 (or income of $0.77 per share) for the comparable
period ended December 31, 2001. The net income for the year ended December 31,
2001, was due to the receipt of the NAFTA claim. The net loss from continuing
operations for the year ended December 31, 2002, was primarily related to the
restructuring charges. This net loss compares with net loss from continuing
operations of $1,503,000 for the comparable period ended December 31, 2001.
Excluding receipt of the NAFTA claim in 2001 and the restructuring charges in
2002, the Company would have lost $1,953,000 and $1,503,000 from continuing
operations in the year ended December 31, 2002 and 2001, respectively.




Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.

Revenue.Total revenues were $18,008,000 in 2001 as compared to
$17,769,000 for 2000, an increase of 1%. Contract revenues for the year ended
December

12



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##### Table of Contents



31, 2001 were $17,865,000 as compared to $17,674,000 for the year
ended December 31, 2000, an increase of 1%. The increase is attributed to the
continuing work on long-term maintenance projects as well as an increase in
asbestos abatement work.

Cost of Revenue and Gross Margin.Total cost of revenue for the year
ended December 31, 2001 were $15,540,000 as compared to $15,753,000 for the
year ended December 31, 2000, a decrease of 1%. The gross margin percentage
was approximately 13.7% for the year ended December 31, 2001 compared to 11.3%
for the year ended December 31, 2000. The increase in gross margin percentage
is primarily attributed to the performance of several major emergency jobs in
response to major fires at a refinery and power plant early in the year that
allowed for higher contract margins.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses were $3,015,000 for the year ended December 31, 2001 as
compared to $3,501,000 for the year ended December 31, 2000, a decrease of 14%
due primarily to a reduction in legal costs due to litigation completion
related to the NAFTA claim partially offset by an increase in costs as a result
of hiring a new full-time director of marketing.

Interest Income and Expense.Interest income for the year ended December
31, 2001 was $80,000 for the year ended December 31, 2001 as compared with
$40,000 for the year ended December 31, 2000. The increase is primarily due to
the larger cash balances, due to the NAFTA award, in 2001 as compared with
2000. Interest expense was $132,000 for the year ended December 31, 2001
compared to interest expense of $298,000 for the year ended December 31, 2000.
This reduction in interest expense was primarily due to the conversions of debt
to equity during the year and the repayment of convertible zero coupon notes,
with an interest rate of 15%, partially offset by new bank borrowings with an
interest rate of 5%, as of December 31, 2001.

Other Expense.Other expense of $904,000 in 2001 consists principally of
the reserve established for the note receivable related to the sale of the
Mexican assets not included in the NAFTA claim.

Discontinued Operations.The gain of $7,079,000 in 2001 is a result of
the settlement of the NAFTA claim, net of all fees and expenses, including the
write-off of all assets associated with the claim. No future costs are
anticipated. If any future costs arise, they will be charged to operations as
incurred.

Net Income (Loss).Net income for the year ended December 31, 2001 was
$5,576,000 (or $0.77 per share) as compared to a loss of $1,765,000 (or $0.32
per share) for 2000. Receipt of the NAFTA settlement in 2001 resulted in
income from discontinued operations of $7,079,000. Without the NAFTA
settlement the Company would have had a loss in 2001 of $1,503,000.

Liquidity and Capital Resources

As of December 31, 2002, the Company had $844,000 in cash and cash
equivalents, and working capital of $4,602,000. The Company has a line of
credit agreement with a bank for $1,000,000. Borrowings under the agreement
are limited to the lower of $1,000,000 or the Companys borrowing base, which
consists of a specified percentage of certain accounts receivable. As of
December 31, 2002, the Company had a balance of $996,000 outstanding on this
line of credit.

Cash used in continuing operations was $6,939,000 for 2002 compared with
cash provided by continuing operations of $1,187,000 in 2001. For 2000,
$2,357,000 of cash was used in continuing operations. Cash flows were used
primarily to fund operating losses for continuing operations in each of the
years 2002, 2001 and 2000, which were partially offset by non-cash expenses for
depreciation and amortization in 2002, 2001 and 2000 and the provision for
uncollectable notes receivable related to the 1999 sale of Mexican assets in
2001. In 2002, the Company placed $2,111,000 of cash in a certificate of
deposit at a bank to secure a standby letter of credit payable to a customer in
lieu of a performance bond. The letter of credit expires on July 1, 2003 and
the certificate of deposit also matures on July 1, 2003. The Company has
recorded the certificate of deposit as restricted cash. The Company used
$1,057,000 of cash in 2002 to decrease its accounts payable and accrued
expenses. In 2002, these uses were partially offset by non-cash expenses for
stock based compensation, the adjustment of the carrying value of the loan to a
corporate officer and the forgiveness of the loan to Mr. Kesler. In 2001, the
positive cash flow from continuing operations was primarily the result of a
decrease in accounts receivable. The large workload in the fourth quarter of
2000 as compared with 2001, resulted in a larger accounts receivable balance at
December 31, 2000 as compared with December 31, 2001. Increases in accounts
receivable, primarily related to increased revenues, reduced cash flows from
continuing operations in 2000 by $2,321,000, while increases in current
liabilities, primarily related to the Companys lack of cash and cash
equivalents, increased cash flows from continuing operations in 2000 by
$1,491,000. Increases in prepaid expenses and other current assets, primarily
related to prepaid insurance also resulted in decreased cash flows from
continuing operations in 2001 of $225,000.

13



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##### Table of Contents



Cash provided by discontinued operations was $13,450,000 for 2001 compared
with $403,000 of cash used in discontinued operations in 2000. In 2001, the
positive cash flow from discontinued operations was primarily the result of the
$16,002,000 received from the Mexican government as settlement of the Companys
claim under the North American Free Trade Agreement, offset by expenses related
to the settlement. The cash used in discontinued operations in 2000 related
primarily to expenses of ceasing business in Mexico and legal costs associated
with pursuing the Companys claim under NAFTA.

Net investing activities used $6,723,000, $1,230,000 and $99,000 of cash
in 2002, 2001 and 2000, respectively. Of these uses, $2,258,000, $231,000 and
$99,000 was used for additions to property and equipment in 2002, 2001 and
2000, respectively, primarily at the Companys subsidiary, Metalclad Insulation
Corporation. In 2002, $2,047,000 of the additions to property related to the
purchase of the building housing the business at Metalclad Insulation
Corporation. Also in 2002, the Company used $3,300,000 to acquire and
distribute 3,791,576 shares of Surg II, Inc. common stock to the Companys
shareholders as a dividend. Additionally in 2002, the Company used $197,000
for net purchases of available-for-sale securities. In 2001, the Company used
$1,000,000 of cash to make an equity investment in Catalytic Solutions, Inc.

On November 4, 2002 the Company signed an agreement (the Loan Agreement)
whereby it would lend up to $2.5 million to Zamba Corporation (OTCBB: ZMBA)
(Zamba) in the form of a collateralized convertible note. The loan is
collateralized with shares of NextNet Wireless, Inc. (NextNet Wireless) stock
owned by Zamba. The loan is not repayable in cash, but at the Companys
option, would be repaid either by conversion at any time into shares of Zambas
NextNet Wireless stock, or if and when fully funded, by conversion into 25% of
Zambas common stock outstanding prior to the conversion. Additionally,
depending upon the level of funding and other factors, the Company was to have
the option to purchase up to an additional 750,000 common equivalent shares of
NextNet Wireless stock from Zamba. Of the $2.5 million, $1.0 million was
advanced to Zamba on November 4, 2002. Under the Loan Agreement, if Zamba
achieved certain agreed-upon milestones on December 15, 2002, and February 15,
2003, the Company was to advance $750,000 on each of those dates. Zamba
achieved the milestones on both December 15, 2002 and February 15, 2003. On
February 19, 2003, the Loan Agreement was amended whereby the Company would
advance $750,000 to Zamba, and a third party introduced to Zamba by the Company
would advance the other $750,000. Furthermore, under that amendment, the
Company no longer has the right to convert the $1,750,000 advanced to Zamba
into common stock of Zamba, or the option to acquire 750,000 additional common
equivalent shares of NextNet. The Companys only recourse is to convert the
$1,750,000 advanced, plus accrued interest, into 292,815 shares of NextNet
preferred stock, or an equivalent of 878,444 shares of Next Net common stock.

Mr. Wayne Mills, the CEO of the Company, owns approximately 5.1% of the
outstanding common stock of Zamba and approximately 2.5% of NextNet Wireless.

Cash provided by financing activities totaled $1,372,000 in 2002 compared
with cash used in financing activities of $628,000 in 2001 and cash provided by
financing activities of $2,444,000 in 2000. The Company obtained a mortgage to
purchase the building housing Metalclad Insulation Corporation that provided
net cash of $1,494,000 in 2002. The Company used $222,000 of cash in 2002 to
repurchase 194,800 shares of its common stock. In 2001, $1,255,000 of cash was
loaned to Wayne Mills, at the time a principal shareholder of the Company and
now the Chief Executive Officer of the Company, under a note secured by 500,000
shares of the Companys common stock and any dividends received on the 500,000
shares of the Companys common stock. At December 31, 2002, the unsecured
portion of this note receivable was $387,000. The Company used $1,176,000 of
cash to repay long-term borrowings in 2001, primarily to repay Five-Year Zero
Coupon Notes originally issued in December 1997, and $123,000 to repay long
long-term borrowings in 2002. The uses of cash in 2001 were partially offset
by the Company obtaining an accounts receivable revolving line of credit that
provided $1,000,000 of cash flow, which was primarily used to repay the
Five-Year Zero Coupon Notes discussed above. The line of credit matures on May
1, 2003, but it is anticipated that this facility will be renewed in June 2003.
A private placement of the Companys common stock and warrants completed by
the Company in March 2001 also provided $600,000 of cash flow in 2001.
Long-term borrowings provided $190,000, $202,000 and $301,000 of cash in 2002,
2001 and 2000, respectively. During 2002 and 2000 net cash of $37,500 and
$2,196,000, respectively, was provided by proceeds from the exercise of common
stock warrants.

Prior to 1975, the Company was engaged in the sale and installation of
asbestos related insulation materials, and has been the subject of numerous
claims of personal injury allegedly related to asbestos exposure. Many of
these claims are now being brought by the children and close relatives of
persons who have died, allegedly as a result of the direct or indirect exposure
to asbestos.

The number of asbestos related claims which have been initiated naming the
Company as a defendant have increased from 254 in 1999, to 527 in 2000 and 685
in 2001, but slightly decreased to 583 in 2002. The sympathies of juries, the

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aggressiveness of the plaintiffs bar, and the declining defendant base as a
result of business failures, has also led to a trend of larger payments and
settlements per claim. As of December 31, 2002, there were approximately 660 of
such claims pending, down from 700 at the end of 2001.

The Company in the past has believed that it has adequate insurance to
cover these claims; however, the terms of such insurance policies are complex
and the coverage for many types of claims is limited. If the current trend of
the increasing claim occurrence and amounts is not significantly reversed, it
will likely have a material adverse effect on the financial condition and
business of the Company in the future. Because of its insurance coverage, the
Company does not anticipate any adverse effect on the Companys financial
condition to develop for at least the next three to five years. Beyond that,
however, the effect of those claims is uncertain.

During 2002, the Company recognized $3,333,000 of expense related to the
change of management, including insurance premiums, legal fees, severance pay
and relocation of the Companys headquarters. The cash payments related to
these expenses were approximately $2,044,000. The non-cash charges of
$1,156,000 primarily relate to the forgiveness of the loan due from Mr. Kesler
and the issuance of common stock to Messrs. Kesler and Dabbene.

The following summarizes our contractual obligations at December 31, 2002.
The long-term debt consists of various notes payable to a finance company for
vehicles used in the ordinary course of the Companys insulation business ( See
Note 13).

|                     |       |   |           |           |  |                |         |           |           |   |         |           |  |   |              |         |  |   |         |         | 
|-------------------- | ----- | - | --------- | --------- |  | -------------- | ------- | --------- | --------- | - | ------- | --------- |  | - | ------------ | ------- |  | - | ------- | ------- | 
|                     |       |   | Total     |           |  | 1 Year or Less |         |           | 1-3 Years |   |         | 4-5 Years |  |   | Over 5 Years |        
|                     |       |   |           |           |  |                |         |           |           |   |         |           |  |   |              |        
|Long-term debt       |       | $ | 308,388   |           |  | $              | 100,328 |           |           | $ | 203,033 |           |  | $ | 5,027        |         |  | $ |        |        
|Note payable         |       |   | 996,002   |           |  |                | 996,002 |           |           |   |        |           |  |   |             |         |  |   |        |        
|Mortgage payable     |       |   | 1,494,159 |           |  |                | 75,740  |           |           |   | 249,357 |           |  |   | 185,915      |         |  |   | 983,147 |        
|Zamba loan agreement |       |   | 750,000   |           |  |                | 750,000 |           |           |   |        |           |  |   |             |         |  |   |        |        
|                     |       |   |           |           |  |                |         |           |           |   |         |           |  |   |             
|                     | Total |   | $         | 3,548,549 |  |                | $       | 1,922,070 |           |   | $       | 452,390   |  |   | $            | 190,942 |  |   | $       | 983,147 | 
|                     |       |   |           |           |  |                |         |           |           |   |         |           |  |   |             

During 2002, 2001, and 2000 the Company did not pay or declare any cash
dividends and does not intend to pay any cash dividends in the near future.

Management believes that its cash, cash equivalents and borrowings
available under the credit agreement should be sufficient to satisfy its cash
requirements for at least the next 12 months.

Foreign Currency Translation

In the past the Company had been exposed to foreign currency translation risk
due to its Mexican operations. Since the Company has discontinued its Mexican
operations it no longer has exposure to these risks.

Impact of Inflation

The Company reflects price escalations in its quotations to its insulation
customers and in its estimation of costs for materials and labor. For
construction contracts based on a cost-plus or time-and-materials basis, the
effect of inflation on the Company is negligible. For projects on a
fixed-price basis, the effect of inflation may result in reduced profit margin
or a loss as a result of higher costs to the Company as the contracts are
completed; however, the majority of the Companys contracts are completed
within 12 months of their commencement and the Company believes that the impact
of inflation on such contracts is insignificant.

Significant Accounting Policies

Our critical accounting policies are those both having the most impact to the
reporting of our financial condition and results, and requiring significant
judgments and estimates. Our critical accounting policies include those
related to (a) revenue recognition, (b) investment, at cost and (c) allowance
for uncollectible accounts receivable. Revenue recognition for fixed price
insulation installation and asbestos abatement contracts are accounted for by
the percentage-of-completion method wherein costs and estimated earnings are
included in revenues as the work is performed. If a loss on a fixed price
contract is indicated, the entire amount of the estimated loss is accrued when
known. The investment at less than 20% of ownership is

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recorded at cost and
the carrying value is evaluated quarterly. Accounts receivable are reduced by
an allowance for amounts that may become uncollectible in the future. The
estimated allowance for uncollectible amounts is based primarily on
managements evaluation of the financial condition of the customer. Future
changes in the financial condition of a customer may require an adjustment to
the allowance for uncollectible accounts receivable.

New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, effective for fiscal years beginning after May 15, 2002. The
Company believes the adoption of SFAS No. 145 will not have a material effect
on the Companys consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires the
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred versus the date the Company commits to
an exit plan. In addition, SFAS No. 146 states the liability should be
initially measured at fair value. The requirements of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company believes the adoption of SFAS No. 146 will not have a
material effect on the Companys consolidated financial position or results of
operations.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 is effective October 1, 2002. The
adoption of SFAS No. 147 did not have a material effect on the Companys
consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. SFAS No. 148 is an
amendment to SFAS No. 123 providing alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and also provides additional disclosures about the method
of accounting for stock-based employee compensation. Amendments are effective
for financial statements for fiscal years ending after December 15, 2002 and
for the interim periods beginning after December 15, 2002. The Company adopted
the annual disclosure provision of SFAS No. 148 in 2002. The Company has
currently chosen to not adopt the voluntary change to the fair value based
method of accounting for stock-based employee compensation, pursuant to SFAS
No. 148, which, if adopted, could have a material effect on the Companys
consolidated financial position and results of operations.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The fair value of the Companys investments in available-for-sale securities at
December 31, 2002 was approximately $593,000. The Companys investment policy
is to manage its available-for-sale securities portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio. The
principal available-for-sale securities are shares of Surg II, Inc. stock and
Medstone International, Inc. stock. Specific changes in the value of the
common stock of Surg II, Inc. and Medstone International, Inc. will affect the
fair value of the available-for-sale securities portfolio; however, such gains
or losses would not be realized unless the investments were sold.

In December 2001, the Company loaned $1,250,000 to an individual who eventually
became an officer and director of the Company. The loan was made without
recourse, and is secured by 500,000 shares of the Companys common stock and
any dividends payable or received related to the 500,000 shares of common
stock, which currently includes 250,000 shares of Chiral Quest, Inc. (OTCBB
CQST). Since the loan is without recourse to the borrower, as the market price
of the Companys and Chiral Quest, Inc.s stock fluctuates, the carrying value
of the loan receivable will change. As of December 31, 2002, the Company had
recorded a reserve of $387,000 related to the market fluctuations of the
Companys and Chiral Quest, Inc.s common stock trading value. Additional
changes in the market value could result in additional reductions of the notes
receivable carrying value.

The Companys long-term debt and mortgage payable are subject to interest rate
risk since the interest rate is not a fixed rate. The Company does not expect
any fluctuations in the interest rates to have a material effect on their
consolidated financial position or results of operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements are attached hereto and
filed as a part of this Report under Item 15.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On April 4, 2002, Moss Adams LLP, the independent accountants previously
engaged by the Company to conduct an audit of its accounts for more than the
past two years, resigned as the Companys auditors. On April 16, 2002 the
Company engaged Virchow, Krause & Company, LLP, with offices in Minneapolis,
Minnesota, to audit the Companys financial statements for the year ending
December 31, 2002. The Company had not previously engaged or consulted with
Virchow, Krause & Company, LLP on any matter.

The reports of Moss Adams LLP on the financial statements of the Company
for the years 2001 and 2000 did not contain an adverse opinion or a disclaimer
of opinion, and were not qualified or modified as to audit scope or accounting
principles, but the report for 2000 did contain a paragraph regarding the
uncertainty of the ability of the Company to remain a going concern. The
opinion of Moss Adams LLP with respect to the financial statements for the
period ended December 31, 2000, indicated that there was substantial doubt
about the Companys ability to continue as a going concern without obtaining
additional debt or equity capital.

The engagement of Virchow, Krause & Company, LLP was approved by the Board
of Directors of the Company.

During the Companys fiscal years 2000 and 2001, and any subsequent
interim period through April 4, 2002, (i) there were no disagreements between
the management of the Company and Moss Adams LLP with respect to the financial
statements of the Company on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which if not
resolved to the satisfaction of Moss Adams LLP, would have caused Moss Adams
LLP to make reference to the subject matter of the disagreement in connection
with its reports, and (ii) and there were no reportable events, as defined in
Item 304(a)(1)(v) of Regulation S-K of the U.S. Securities and Exchange
Commission (the Commission).

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 401 of Regulation S-K is set forth in the
Companys 2003 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2002. The Companys 2003 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance, are incorporated herein by this reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is set forth in the
Companys 2003 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2002. The Companys 2003 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance, are incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTER

The information required by Item 403 of Regulation S-K is set forth in the
Companys 2003 Annual Meeting Proxy Statement which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2002. The Companys 2003 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance, are incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-K is set forth in the
Companys 2003 Annual Meeting Proxy Statement, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2002. The Companys 2003 Annual Meeting Proxy Statement, exclusive of the
information set forth under the captions Report of the Compensation Committee
and Company Performance are incorporated herein by this reference.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of the Report, we carried out an
evaluation, under the supervision and with the participation of our chief
executive and chief financial officers, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934). Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information required to be disclosed in our
periodic reports to the Securities and Exchange Commission. There have been no
significant changes in our internal controls or in other factors which could
significantly affect internal controls subsequent to such evaluation.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  The following documents are filed as part of this report on Form 10-K:



| | 1 |  | Financial Statements                           
| | - |  | -----------------------------------------------
|
| |   |  | Reports of Independent Public Accountants      
|
| |   |  | Consolidated Balance Sheets                    
|
| |   |  | Consolidated Statements of Operations          
|
| |   |  | Consolidated Statements of Shareholders Equity
|
| |   |  | Consolidated Statements of Cash Flows          
|
| |   |  | Notes to Consolidated Financial Statements     
|
| | 2 |  | Schedules to Financial Statements              
|
| |   |  | Schedule II  Valuation and Qualifying Accounts

All schedules, other than those listed above, are omitted, as the
information is not required, is not material or is otherwise furnished.



| | 3. |  | Exhibits
| | -- |  | --------

The following exhibits are being filed with this Annual Report on Form
10-K and/or are incorporated by reference therein in accordance with the
designated footnote references:

|      |  |                                                                                                                           
|----- |  | --------------------------------------------------------------------------------------------------------------------------
|3.    |  | Restated and Amended Certificate of Incorporation and Bylaws of
the Company, and all amendments thereto. (1)              
|      |  |                                                                                                                           
|3.2   |  | Certificate of Amendment to Certificate of Incorporation effective June 25, 2002.                                         
|      |  |                                                                                                                           
|4.1   |  | Form of Certificate for Common Stock.                                                                                     
|      |  |                                                                                                                           
|10.1  |  | Form of 1993 Omnibus Stock Option and Incentive Plan. (2)                                                                 
|      |  |                                                                                                                           
|10.2  |  | Form of 1996 Omnibus Stock Option and Incentive Plan. (3)                                                                 
|      |  |                                                                                                                           
|10.3  |  | Employment Agreement between the Company and Grant S. Kesler dated January 1, 1998. (4)                                   
|      |  |                                                                                                                           
|10.4  |  | Employment Agreement between the Company and Anthony C. Dabbene dated January 1, 1998. (5)                                
|      |  |                                                                                                                           
|10.5  |  | Form of 2000 Omnibus Stock Option and Incentive Plan. (6)                                                                 
|      |  |                                                                                                                           
|10.6  |  | Employment Agreement between MIC and Robert D. Rizzo dated September 1, 2000. (7)                                         
|      |  |                                                                                                                           
|10.7  |  | Decision of NAFTA Tribunal dated August 30, 2000. (8)                                                                     
|      |  |                                                                                                                           
|10.8  |  | Non-Recourse Security and Pledge Agreement Between the Company
and Wayne W. Mills dated December 10, 2001. (9)            
|      |  |                                                                                                                           
|10.9  |  | Non-Recourse Secured Note dated December 10, 2001. (10)                                                                   
|      |  |                                                                                                                           
|10.10 |  | Catalytic Solutions Shareholders Agreement dated November
15, 2001. (11)                                                  
|      |  |                                                                                                                           
|10.11 |  | Amended and Restated Articles of Incorporation of Catalytic
Solutions, Inc. a California Corporation. (12)                
|      |  |                                                                                                                           
|10.12 |  | Amended and Restated Employment Agreement between Grant S.
Kesler and Metalclad Corporation dated January 1, 2002. (13)   
|      |  |                                                                                                                           
|10.13 |  | Amended and Restated Employment Agreement between Anthony C.
Dabbene and Metalclad Corporation dated January 1, 2002. (14)
|      |  |                                                                                                                           
|10.14 |  | Consulting Agreement between Grant S. Kesler and Metalclad
Corporation dated February 14, 2002. (15)                      

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|      |  |                                                                                                                          
|----- |  | -------------------------------------------------------------------------------------------------------------------------
|10.15 |  | Consulting Agreement between Anthony C. Dabbene and Metalclad
Corporation dated February 14, 2002. (16)                  
|      |  |                                                                                                                          
|10.16 |  | Amended and Restated Bylaws adopted February 14, 2002. (17)                                                              
|      |  |                                                                                                                          
|10.17 |  | Agreement of Purchase and Sale of Anaheim facility at 2198
South Dupont Drive, Anaheim, California. (18)                 
|      |  |                                                                                                                          
|10.18 |  | Curtom-Metalclad Partnership Agreement and Amendment. (19)                                                               
|      |  |                                                                                                                          
|10.19 |  | Stock Purchase Agreement among the Company, Surg II, Inc.,
Theodore A. Johnson and Charles B. McNeil dated May 29, 2002. 
|      |  |                                                                                                                          
|10.20 |  | Loan Agreement between the Company and Zamba Corporation dated
November 4, 2002.                                         
|      |  |                                                                                                                          
|10.21 |  | Amendment No. 1 to Loan Agreement between the Company and
Zamba Corporation dated February 19, 2003.                     
|      |  |                                                                                                                          
|16.1  |  | Letter of concurrence from Moss Adams LLP dated April 9, 2002. (20)                                                      
|      |  |                                                                                                                          
|21.   |  | List of Subsidiaries of the Registrant                                                                                   
|      |  |                                                                                                                          
|99.1  |  | CEO Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|      |  |                                                                                                                          
|99.2  |  | CFO Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



---

|(1)  |  | Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by this reference.                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Filed with the Companys Transition Report on Form 10-K for the five
months ended May 31, 1993 and incorporated herein by this reference.           
|    
|(3)  |  | Filed with the Companys Proxy Statement dated April 17, 1997 and
incorporated herein by this reference.                                            
|    
|(4)  |  | Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 1998 as Exhibit 10.4 and incorporated herein by this
reference. 
|    
|(5)  |  | Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 1998 as Exhibit 10.7 and incorporated herein by this
reference. 
|    
|(6)  |  | Filed with the Companys Proxy Statement dated October 20, 2000 and
incorporated herein by this reference.                                          
|    
|(7)  |  | Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 as Exhibit 10.7 and incorporated herein by this
reference. 
|    
|(8)  |  | Filed with the Companys Form 8-K dated September 5, 2000 and
incorporated herein by this reference.                                                
|    
|(9)  |  | Filed with the Companys Form 8-K on December 21, 2001 as Exhibit A and
incorporated herein by this reference.                                      
|    
|(10) |  | Filed with the Companys Form 8-K on December 21, 2001 as Exhibit B and
incorporated herein by this reference.                                      
|    
|(11) |  | Filed with the Companys Form 8-K on December 21, 2001 as Exhibit C and
incorporated herein by this reference.                                      
|    
|(12) |  | Filed with the Companys Form 8-K on December 21, 2001 as Exhibit D and
incorporated herein by this reference.                                      
|    
|(13) |  | Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (i) and
incorporated herein by this reference.                                    
|    
|(14) |  | Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (ii)
and incorporated herein by this reference.                                   
|    
|(15) |  | Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (iii)
and incorporated herein by this reference.                                  
|    
|(16) |  | Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (iv)
and incorporated herein by this reference.                                   
|    
|(17) |  | Filed with the Companys Form 8-K on February 28, 2002 as Exhibit (v) and
incorporated herein by this reference.                                    
|    
|(18) |  | Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2001 as Exhibit 10.19 and incorporated herein by this
reference.
|    
|(19) |  | Filed with the Companys Annual Report on Form 10-K for the year ended
December 31, 2001 as Exhibit 10.20 and incorporated herein by this
reference.
|    
|(20) |  | Filed with the Companys Form 8-K on April 18, 2002 and incorporated
herein by this reference.                                                      

20



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##### Table of Contents



(b)  Reports on Form 8-K

The Company filed Form 8-K on November 1, 2002, disclosing that it had
distributed 3,791,576 shares of Surg II, Inc. (now Chiral Quest, Inc.) common
stock as a dividend to its shareholders.

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SIGNATURES

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

| |                   |                                                                                 
| | ----------------- | --------------------------------------------------------------------------------
| | ENTRX CORPORATION
|
| | By:               | /s/ Brian D. NieburBrian D. Niebur
Chief Financial Officer
Date:  March 25, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                         |  |                                                                      |  |               
|---------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|Signatures                               |  | Title                                                                |  | Date          
|                                         |  |                                                                      |  |               
|/s/ Wayne W. MillsWayne W. Mills         |  | Chief Executive Officer and Director
(Principal Executive Officer)   |  | March 25, 2003
|                                        
|/s/ Brian D. NieburBrian Niebur          |  | Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 25, 2003
|                                        
|/s/ Kenneth W. BrimmerKenneth W. Brimmer |  | Director, Chairman                                                   |  | March 25, 2003
|                                        
|/s/ Joseph M. CaldwellJoseph M. Caldwell |  | Director                                                             |  | March 25, 2003
|                                        
|/s/ Joseph M. SenserJoseph M. Senser     |  | Director                                                             |  | March 25, 2003




CERTIFICATIONS

I, Wayne W. Mills, certify that:

1.     I have reviewed this annual report on 10-K of Entrx Corporation;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  

22



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##### Table of Contents





| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                      |  |                                                                            
|--------------------- |  | ---------------------------------------------------------------------------
|Date:  March 25, 2003 |  | /s/  Wayne W. MillsBy: Wayne W. Mills
President and Chief Executive Officer

I, Brian D. Niebur, certify that:

1.     I have reviewed this annual report on 10-K of Entrx Corporation;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                      |  |                                                                
|--------------------- |  | ---------------------------------------------------------------
|Date:  March 25, 2003 |  | /s/  Brian D. NieburBy: Brian D. Niebur
Chief Financial Officer

23



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##### Table of Contents



ITEM 15(A)(1) and (2)

ENTRX CORPORATION AND SUBSIDIARIES




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The following Consolidated Financial Statements of Entrx Corporation and
subsidiaries are included in Item 8:

|                                                                                |                                                                                                    |  |  |      | 
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Reports of Independent Public Accountants on Consolidated Financial Statements: |                                                                                                    |  |  |     
|                                                                               
|                                                                                | Report of Virchow, Krause & Company, LLP                                                           |  |  | F-1  | 
|                                                                               
|                                                                                | Report of Moss Adams LLP                                                                           |  |  | F-2  | 
|                                                                               
|Financial Statements:                                                           |                                                                                                    |  |  |     
|                                                                               
|                                                                                | Consolidated Balance Sheets  December 31, 2002 and 2001                                           |  |  | F-3  | 
|                                                                               
|                                                                                | Consolidated Statements of Operations  the Years Ended December 31, 2002, 2001 and 2000           |  |  | F-4  | 
|                                                                               
|                                                                                | Consolidated Statements of Shareholders Equity  the Years Ended December 31, 2002, 2001 and 2000 |  |  | F-5  | 
|                                                                               
|                                                                                | Consolidated Statements of Cash Flows  the Years Ended December 31, 2002, 2001 and 2000           |  |  | F-6  | 
|                                                                               
|                                                                                | Notes to Consolidated Financial Statements                                                         |  |  | F-7  | 
|                                                                               
|Supplementary Financial Statement Schedules:                                    |                                                                                                    |  |  |     
|                                                                               
|                                                                                | Schedule II  Valuation and Qualifying Accounts                                                    |  |  | F-26 | 

24



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Shareholders and Audit Committee
Entrx Corporation
Minneapolis, Minnesota

We have audited the accompanying consolidated balance sheet of Entrx
Corporation as of December 31, 2002 and the related consolidated statements of
operations, shareholders equity 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Entrx Corporation
as of December 31, 2002 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.



| | /s/Virchow, Krause & Company, LLP
| | ---------------------------------

Minneapolis, Minnesota
January 31, 2003

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders of
Entrx Corporation (formerly Metalclad Corporation):

We have audited the accompanying consolidated balance sheets of Entrx
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entrx Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. The data for the years ended December 31, 2001 and 2000 has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

MOSS ADAMS LLP
Irvine, California
March 15, 2002

F-2



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##### Table of Contents






ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |              |             |            | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ---------- | ------------ | --------- | - | ------------ | ----------- | ---------- | 
|                                                 |                                                                                                                                                                                                                       |                           |            | December 31, |           |   | December 31, |            
|                                                 |                                                                                                                                                                                                                       |                           |            | 2002         |           |   | 2001         |            
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|ASSETS                                           |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|Current assets:                                  |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|                                                 | Cash and cash equivalents                                                                                                                                                                                             |                           | $          | 844,384      |           |   | $            | 13,133,311  |           
|                                                 | Available-for-sale securities                                                                                                                                                                                         |                           |            | 592,547      |           |   |              |            |           
|                                                 | Restricted cash                                                                                                                                                                                                       |                           |            | 2,110,870    |           |   |              |            |           
|                                                 | Accounts receivable, less allowance for doubtful accounts of $61,500 and $57,500 as
of December 31, 2002 and December 31, 2001                                                                                        |                           |            | 1,639,528    |           |   |              | 1,853,290   |           
|                                                 | Costs and estimated earnings in excess of billings on uncompleted contracts                                                                                                                                           |                           |            | 526,219      |           |   |              | 154,601     |           
|                                                 | Inventories                                                                                                                                                                                                           |                           |            | 157,527      |           |   |              | 159,924     |           
|                                                 | Prepaid expenses and other current assets                                                                                                                                                                             |                           |            | 229,926      |           |   |              | 362,885     |           
|                                                 | Other receivables                                                                                                                                                                                                     |                           |            | 429,007      |           |   |              |            |           
|                                                 | Note receivable                                                                                                                                                                                                       |                           |            | 1,000,000    |           |   |              |            |           
|                                                 | Receivables from related parties, net                                                                                                                                                                                 |                           |            |             |           |   |              | 537,794     |           
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|                                                 |                                                                                                                                                                                                                       | Total current assets      |            |              | 7,530,008 |   |              |             | 16,201,805 | 
|Property, plant and equipment, net               |                                                                                                                                                                                                                       |                           | 2,474,815  |              |           |   | 428,652      |            
|Investment in unconsolidated affiliates, at cost |                                                                                                                                                                                                                       |                           | 1,000,000  |              |           |   | 1,000,000    |            
|Other assets                                     |                                                                                                                                                                                                                       |                           | 58,539     |              |           |   | 161,452      |            
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|                                                 |                                                                                                                                                                                                                       | $                         | 11,063,362 |              |           | $ | 17,791,909   |            
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|LIABILITIES AND SHAREHOLDERS EQUITY             |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|Current liabilities:                             |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|                                                 | Note payable to bank                                                                                                                                                                                                  |                           | $          | 996,002      |           |   | $            | 1,000,000   |           
|                                                 | Current portion of long-term debt                                                                                                                                                                                     |                           |            | 100,328      |           |   |              | 84,749      |           
|                                                 | Current portion of mortgage payable                                                                                                                                                                                   |                           |            | 75,740       |           |   |              |            |           
|                                                 | Accounts payable                                                                                                                                                                                                      |                           |            | 1,093,375    |           |   |              | 735,426     |           
|                                                 | Accrued expenses                                                                                                                                                                                                      |                           |            | 649,558      |           |   |              | 2,064,326   |           
|                                                 | Billings in excess of costs and estimated earnings on uncompleted contracts                                                                                                                                           |                           |            | 13,352       |           |   |              | 59,114      |           
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|                                                 |                                                                                                                                                                                                                       | Total current liabilities |            |              | 2,928,355 |   |              |             | 3,943,615  | 
|Long-term debt, less current portion             |                                                                                                                                                                                                                       |                           | 208,060    |              |           |   | 156,692      |            
|Mortgage payable, less current portion           |                                                                                                                                                                                                                       |                           | 1,418,419  |              |           |   |             |            
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|                                                 |                                                                                                                                                                                                                       | Total liabilities         |            |              | 4,554,834 |   |              |             | 4,100,307  | 
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|Commitments and contingencies                    |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|Shareholders equity:                            |                                                                                                                                                                                                                       |                           |            |              |           |   |              |            
|                                                 | Preferred stock, par value $1 and $10 as of December 31, 2002 and
December 31, 2001, respectively; 5,000,000 and 1,500,000 shares authorized
as of December 31, 2002 and December 31, 2001, respectively; none issued |                           |            |             |           |   |              |            |           
|                                                 | Common stock, par value $.10; 80,000,000 shares authorized; 7,699,015 and 7,504,215
issued and outstanding as of December 31, 2002, respectively and 7,448,015 issued
and outstanding as of December 31, 2001         |                           |            | 769,901      |           |   |              | 744,801     |           
|                                                 | Additional paid-in capital                                                                                                                                                                                            |                           |            | 69,531,352   |           |   |              | 68,496,871  |           
|                                                 | Less treasury stock at cost, 194,800 shares as of December 31, 2002                                                                                                                                                   |                           |            | (222,159     | )         |   |              |            |           
|                                                 | Accumulated deficit                                                                                                                                                                                                   |                           |            | (62,667,676  | )         |   |              | (54,295,549 | )         
|                                                 | Officers receivable, net                                                                                                                                                                                             |                           |            | (984,438     | )         |   |              | (1,254,521  | )         
|                                                 | Deferred compensation                                                                                                                                                                                                 |                           |            | (66,065      | )         |   |              |            |           
|                                                 | Accumulated other comprehensive income                                                                                                                                                                                |                           |            | 147,613      |           |   |              |            |           
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|                                                 |                                                                                                                                                                                                                       |                           | 6,508,528  |              |           |   | 13,691,602   |            
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             
|                                                 |                                                                                                                                                                                                                       | $                         | 11,063,362 |              |           | $ | 17,791,909   |            
|                                                 |                                                                                                                                                                                                                       |                           |            |              |           |   |             

See Notes to Consolidated Financial Statements

F-3



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##### Table of Contents






ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                         |                                               |                          |              |            |                         |           |            |            |            |           |            |            |            |           | 
|------------------------------------------------------------------------ | --------------------------------------------- | ------------------------ | ------------ | ---------- | ----------------------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | 
|                                                                         |                                               |                          |              |            | Year Ended December 31, |          
|                                                                         |                                               |                          |              |            |                         |          
|                                                                         |                                               |                          |              |            | 2002                    |           |            | 2001       |            |           | 2000       |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |           |            |           
|Revenue:                                                                 |                                               |                          |              |            |                         |           |            |            |            |           |            |           
|                                                                         | Contract revenues                             |                          | $            | 14,836,587 |                         |           | $          | 17,864,776 |            |           | $          | 17,673,680 |           
|                                                                         | Material sales                                |                          |              | 183,984    |                         |           |            | 136,675    |            |           |            | 79,627     |           
|                                                                         | Other                                         |                          |              |           |                         |           |            | 6,470      |            |           |            | 15,545     |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|                                                                         |                                               | Total revenue            |              |            | 15,020,571              |           |            |            | 18,007,921 |           |            |            | 17,768,852 |          
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Cost of revenue:                                                         |                                               |                          |              |            |                         |           |            |            |            |           |            |           
|                                                                         | Contract costs and expenses                   |                          |              | 13,007,509 |                         |           |            | 15,431,410 |            |           |            | 15,703,563 |           
|                                                                         | Cost of materials sales                       |                          |              | 150,973    |                         |           |            | 108,542    |            |           |            | 49,263     |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|                                                                         |                                               | Total cost of revenue    |              |            | 13,158,482              |           |            |            | 15,539,952 |           |            |            | 15,752,826 |          
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|                                                                         |                                               |                          | Gross margin |            |                         | 1,862,089 |            |            |            | 2,467,969 |            |            |            | 2,016,026 | 
|Operating expenses:                                                      |                                               |                          |              |            |                         |           |            |            |            |           |            |           
|                                                                         | Selling, general and administrative           |                          |              | 3,658,488  |                         |           |            | 3,015,367  |            |           |            | 3,500,635  |           
|                                                                         | Increase in allowance on officers receivable |                          |              | 387,000    |                         |           |            |           |            |           |            |           |           
|                                                                         | Restructuring charges                         |                          |              | 3,332,726  |                         |           |            |           |            |           |            |           |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|                                                                         |                                               | Total operating expenses |              |            | 7,378,214               |           |            |            | 3,015,367  |           |            |            | 3,500,635  |          
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Operating loss                                                           |                                               |                          | (5,516,125   | )          |                         |           | (547,398   | )          |            |           | (1,484,609 | )         
|Interest income                                                          |                                               |                          | 293,073      |            |                         |           | 80,136     |            |            |           | 40,428     |           
|Interest expense                                                         |                                               |                          | (118,812     | )          |                         |           | (131,566   | )          |            |           | (297,791   | )         
|Gain on sale of available-for-sale securities                            |                                               |                          | 57,056       |            |                         |           |           |            |            |           |           |           
|Other income (expense), net                                              |                                               |                          | (3,794       | )          |                         |           | (904,190   | )          |            |           | 40,362     |           
|Minority interest in net loss of Surg II, Inc.                           |                                               |                          | 2,228        |            |                         |           |           |            |            |           |           |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Loss from continuing operations                                          |                                               |                          | (5,286,374   | )          |                         |           | (1,503,018 | )          |            |           | (1,701,610 | )         
|Income (loss) from discontinued operations                               |                                               |                          |             |            |                         |           | 7,078,726  |            |            |           | (63,187    | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Net income (loss)                                                        |                                               |                          | (5,286,374   | )          |                         |           | 5,575,708  |            |            |           | (1,764,797 | )         
|Other comprehensive income                                               |                                               |                          | 147,613      |            |                         |           |           |            |            |           |           |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Comprehensive income (loss)                                              |                                               | $                        | (5,138,761   | )          |                         | $         | 5,575,708  |            |            | $         | (1,764,797 | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Weighted average number of common shares  basic                         |                                               |                          | 7,608,823    |            |                         |           | 7,200,490  |            |            |           | 5,470,002  |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Weighted average number of common shares  diluted                       |                                               |                          | 7,608,823    |            |                         |           | 7,261,568  |            |            |           | 5,470,002  |           
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Loss per share of common stock, continuing operationsbasic              |                                               | $                        | (.69         | )          |                         | $         | (.21       | )          |            | $         | (.31       | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Loss per share of common stock, continuing operationsdiluted            |                                               | $                        | (.69         | )          |                         | $         | (.21       | )          |            | $         | (.31       | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Income (loss) per share of common stock, discontinued
operationsbasic   |                                               | $                        |             |            |                         | $         | .98        |            |            | $         | (.01       | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Income (loss) per share of common stock, discontinued
operationsdiluted |                                               | $                        |             |            |                         | $         | .97        |            |            | $         | (.01       | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Income (loss) per share of common stock  basic                          |                                               | $                        | (.69         | )          |                         | $         | .77        |            |            | $         | (.32       | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          
|Income (loss) per share of common stock  diluted                        |                                               | $                        | (.69         | )          |                         | $         | .77        |            |            | $         | (.32       | )         
|                                                                         |                                               |                          |              |            |                         |           |            |            |            |          

See Notes to Consolidated Financial Statements

F-4



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##### Table of Contents






ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Years Ended December 31, 2002, 2001 and 2000



|                                                          |  |              |           |   |            |   |         |          |  |   |            |  |  |   |          |  
|--------------------------------------------------------- |  | ------------ | --------- | - | ---------- | - | ------- | -------- |  | - | ---------- |  |  | - | -------- | -
|                                                          |  | Common Stock |           |   | Additional |   |         |          |  |  
|                                                          |  |              |           |   | Paid-in    |   |         | Treasury | 
|                                                          |  | Shares       |           |   | Amounts    |   |         | Capital  |  |   | Stock      | 
|                                                          |  |              |           |   |            |   |         |          |  |   |            | 
|Balance at December
31, 1999                              |  |              | 4,859,498 |   |            | $ | 485,950 |          |  | $ | 64,330,947 |  |  | $ |         |  
|Debt conversions
and interest                             |  |              | 843,662   |   |            |   | 84,366  |          |  |   | 1,220,706  |  |  |   |         |  
|Common stock issued
under warrants                        |  |              | 877,954   |   |            |   | 87,795  |          |  |   | 2,108,094  |  |  |   |         |  
|Net loss                                                  |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|                                                          |  |              |           |   |            |   |         |          |  |   |            | 
|Balance at December
31, 2000                              |  |              | 6,581,114 |   |            |   | 658,111 |          |  |   | 67,659,747 |  |  |   |         |  
|Debt conversions
and interest                             |  |              | 266,901   |   |            |   | 26,690  |          |  |   | 297,124    |  |  |   |         |  
|Sale of common
stock and warrants                         |  |              | 600,000   |   |            |   | 60,000  |          |  |   | 540,000    |  |  |   |         |  
|Officers loan and
interest                               |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|Foreign currency
translation
realized in NAFTA
settlement |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|Net income                                                |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|                                                          |  |              |           |   |            |   |         |          |  |   |            | 
|Balance at December
31, 2001                              |  |              | 7,448,015 |   |            |   | 744,801 |          |  |   | 68,496,871 |  |  |   |         |  
|Common stock issued
related to
restructuring              |  |              | 226,000   |   |            |   | 22,600  |          |  |   | 558,220    |  |  |   |         |  
|Stock option
compensation
related to
restructuring        |  |              |          |   |            |   |        |          |  |   | 348,600    |  |  |   |         |  
|Purchase of
treasury stock                                |  |              | (194,800  | ) |            |   |        |          |  |   |           |  |  |   | (222,159 | )
|Issuance of common
stock upon exercise
of stock warrants  |  |              | 25,000    |   |            |   | 2,500   |          |  |   | 35,000     |  |  |   |         |  
|Allowance on
officers
receivable                         |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|Interest on
officers
receivable                          |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|Unrealized gain on
available-for-sale
securities          |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|Distribution of
Surg II, Inc.
common stock as
dividend    |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|Value of stock
options issued of
unrelated entity         |  |              |          |   |            |   |        |          |  |   | 92,661     |  |  |   |         |  
|Net loss                                                  |  |              |          |   |            |   |        |          |  |   |           |  |  |   |         |  
|                                                          |  |              |           |   |            |   |         |          |  |   |            | 
|Balance at December
31, 2002                              |  |              | 7,504,215 |   |            | $ | 769,901 |          |  | $ | 69,531,352 |  |  | $ | (222,159 | )
|                                                          |  |              |           |   |            |   |         |          |  |   |            | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  |                     |            |   |  |   |            |  
|--------------------------------------------------------- |  | ----------- | ----------- | - | ---------- | - | ---------- | -------- |  | - | ------------- | - |  | ------------------- | ---------- | - |  | - | ---------- | -
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  | Accumulated         |            |   |  |   |           
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  | Other               |            |   |  |   |           
|                                                          |  | Accumulated |             |   | Officer's  |   |            | Deferred |  |   | Comprehensive |   |  | Total Shareholder's |           
|                                                          |  | Deficit     |             |   | Receivable |   |            | Comp.    |  |   | Income        |   |  | Equity              |           
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  |                     |           
|Balance at December
31, 1999                              |  | $           | (58,106,460 | ) |            | $ |           |          |  | $ |              |   |  | $                   | (1,555,423 | ) |  | $ | 5,155,014  |  
|Debt conversions
and interest                             |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 1,305,072  |  
|Common stock issued
under warrants                        |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 2,195,889  |  
|Net loss                                                  |  |             | (1,764,797  | ) |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | (1,764,797 | )
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  |                     |           
|Balance at December
31, 2000                              |  |             | (59,871,257 | ) |            |   |           |          |  |   |              |   |  |                     | (1,555,423 | ) |  |   | 6,891,178  |  
|Debt conversions
and interest                             |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 323,814    |  
|Sale of common
stock and warrants                         |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 600,000    |  
|Officers loan and
interest                               |  |             |            |   |            |   | (1,254,521 | )        |  |   |              |   |  |                     |           |   |  |   | (1,254,521 | )
|Foreign currency
translation
realized in NAFTA
settlement |  |             |            |   |            |   |           |          |  |   |              |   |  |                     | 1,555,423  |   |  |   | 1,555,423  |  
|Net income                                                |  |             | 5,575,708   |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 5,575,708  |  
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  |                     |           
|Balance at December
31, 2001                              |  |             | (54,295,549 | ) |            |   | (1,254,521 | )        |  |   |              |   |  |                     |           |   |  |   | 13,691,602 |  
|Common stock issued
related to
restructuring              |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 580,820    |  
|Stock option
compensation
related to
restructuring        |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 348,600    |  
|Purchase of
treasury stock                                |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | (222,159   | )
|Issuance of common
stock upon exercise
of stock warrants  |  |             |            |   |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | 37,500     |  
|Allowance on
officers
receivable                         |  |             |            |   |            |   | 387,000    |          |  |   |              |   |  |                     |           |   |  |   | 387,000    |  
|Interest on
officers
receivable                          |  |             |            |   |            |   | (116,917   | )        |  |   |              |   |  |                     |           |   |  |   | (116,917   | )
|Unrealized gain on
available-for-sale
securities          |  |             |            |   |            |   |           |          |  |   |              |   |  |                     | 147,613    |   |  |   | 147,613    |  
|Distribution of
Surg II, Inc.
common stock as
dividend    |  |             | (3,085,753  | ) |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | (3,085,753 | )
|Value of stock
options issued of
unrelated entity         |  |             |            |   |            |   |           |          |  |   | (66,065       | ) |  |                     |           |   |  |   | 26,596     |  
|Net loss                                                  |  |             | (5,286,374  | ) |            |   |           |          |  |   |              |   |  |                     |           |   |  |   | (5,286,374 | )
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  |                     |           
|Balance at December
31, 2002                              |  | $           | (62,667,676 | ) |            | $ | (984,438   | )        |  | $ | (66,065       | ) |  | $                   | 147,613    |   |  | $ | 6,508,528  |  
|                                                          |  |             |             |   |            |   |            |          |  |   |               |   |  |                     |           

See Notes to Consolidated Financial Statements

F-5



---



##### Table of Contents






ENTRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |            |           |            |           |         |            |            |  
|------------------------------------------------ | ------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------ | -------- | ----------------------- | ---------- | ---------- | ---------- | --------- | ---------- | --------- | ------- | ---------- | ---------- | -
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          | Year Ended December 31, |           
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |           
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          | 2002                    |            |            | 2001       |           |            | 2000      |        
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |            |           |            |           |        
|Cash flows from operating activities:            |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |            |           |            |          
|Net income (loss)                                |                                                                                      | $                                                                                  | (5,286,374                                                                  | )                                                      |          | $                       | 5,575,708  |            |            | $         | (1,764,797 | )        
|                                                 | Adjustments to reconcile net income (loss) to net
cash used
in operating activities: |                                                                                    |                                                                             |                                                        |          |                         |            |            |            |           |            |           |        
|                                                 |                                                                                      | Elimination of Surg II, Inc. loss due to
deconsolidation, net of minority interest |                                                                             |                                                        | 23,681   |                         |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | (Gain) loss from discontinued operations                                           |                                                                             |                                                        |         |                         |            |            | (7,078,726 | )         |            |           | 63,187  |           
|                                                 |                                                                                      | Depreciation and amortization                                                      |                                                                             |                                                        | 161,256  |                         |            |            | 128,580    |           |            |           | 106,657 |           
|                                                 |                                                                                      | Loss on disposal of property, plant and
equipment                                  |                                                                             |                                                        | 18,117   |                         |            |            | 8,933      |           |            |           | 13,878  |           
|                                                 |                                                                                      | Compensation related to stock options issued of
unrelated entity                   |                                                                             |                                                        | 26,596   |                         |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Gain on sale of available-for-sale securities                                      |                                                                             |                                                        | (57,056  | )                       |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Provision for losses on accounts receivable                                        |                                                                             |                                                        | 4,000    |                         |            |            | 7,500      |           |            |           |        |           
|                                                 |                                                                                      | Provision for losses on note receivable, sale
of Mexican assets                    |                                                                             |                                                        |         |                         |            |            | 779,402    |           |            |           |        |           
|                                                 |                                                                                      | Forgiveness of related party receivable related
to restructuring                   |                                                                             |                                                        | 537,794  |                         |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Stock option compensation related to
restructuring                                 |                                                                             |                                                        | 348,600  |                         |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Common stock issued related to restructuring                                       |                                                                             |                                                        | 580,820  |                         |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Allowance on officers receivable                                                  |                                                                             |                                                        | 387,000  |                         |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Interest income recorded on officers receivable                                   |                                                                             |                                                        | (116,917 | )                       |            |            |           |           |            |           |        |           
|                                                 |                                                                                      | Issuance of stock for services and interest                                        |                                                                             |                                                        |         |                         |            |            | 13,813     |           |            |           |        |           
|                                                 |                                                                                      | Issuance of stock for debt conversions and
interest                                |                                                                             |                                                        |         |                         |            |            |           |           |            |           | 2,035   |           
|                                                 |                                                                                      | Changes in operating assets and liabilities:                                       |                                                                             |                                                        |          |                         |            |            |            |           |            |           |         |           
|                                                 |                                                                                      |                                                                                    | Restricted cash                                                             |                                                        |          | (2,110,870              | )          |            |            |          |            |           |         |           |           
|                                                 |                                                                                      |                                                                                    | Accounts receivable                                                         |                                                        |          | 209,762                 |            |            |            | 2,105,186 |            |           |         | (2,320,984 | )         
|                                                 |                                                                                      |                                                                                    | Costs and estimated earnings in excess of
billings on uncompleted contracts |                                                        |          | (371,618                | )          |            |            | (71,681   | )          |           |         | 65,071     |           
|                                                 |                                                                                      |                                                                                    | Inventories                                                                 |                                                        |          | 2,397                   |            |            |            | (45,795   | )          |           |         | 47,703     |           
|                                                 |                                                                                      |                                                                                    | Prepaid expenses and other current assets                                   |                                                        |          | 132,959                 |            |            |            | (225,400  | )          |           |         | (11,856    | )         
|                                                 |                                                                                      |                                                                                    | Other receivables                                                           |                                                        |          | (429,007                | )          |            |            |          |            |           |         |           |           
|                                                 |                                                                                      |                                                                                    | Receivables from related parties                                            |                                                        |          |                        |            |            |            | 182,204   |            |           |         | (73,199    | )         
|                                                 |                                                                                      |                                                                                    | Other assets                                                                |                                                        |          | 102,913                 |            |            |            | (135,687  | )          |           |         | (2,679     | )         
|                                                 |                                                                                      |                                                                                    | Accounts payable and accrued expenses                                       |                                                        |          | (1,056,819              | )          |            |            | (89,344   | )          |           |         | 1,491,275  |           
|                                                 |                                                                                      |                                                                                    | Billings in excess of costs and estimated
earnings on uncompleted contracts |                                                        |          | (45,762                 | )          |            |            | 32,390    |            |           |         | 26,724     |           
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|                                                 |                                                                                      |                                                                                    |                                                                             | Net cash provided by (used in)
continuing operations   |          |                         | (6,938,528 | )          |            |           | 1,187,083  |           |         |            | (2,356,985 | )
|                                                 |                                                                                      |                                                                                    |                                                                             | Net cash provided by (used in)
discontinued operations |          |                         |           |            |            |           | 13,449,766 |           |         |            | (402,927   | )
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|                                                 |                                                                                      |                                                                                    |                                                                             | Net cash provided by (used in)
operating activities    |          |                         | (6,938,528 | )          |            |           | 14,636,849 |           |         |            | (2,759,912 | )
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|Cash flows from investing activities:            |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |            |           |            |          
|                                                 | Capital expenditures                                                                 |                                                                                    |                                                                             | (2,257,549                                             | )        |                         |            | (231,169   | )          |           |            | (99,263   | )      
|                                                 | Purchase of available-for-sale securities                                            |                                                                                    |                                                                             | (766,880                                               | )        |                         |            |           |            |           |            |          |        
|                                                 | Sale of available-for-sale securities                                                |                                                                                    |                                                                             | 569,568                                                |          |                         |            |           |            |           |            |          |        
|                                                 | Distribution of Surg II, Inc. common stock                                           |                                                                                    |                                                                             | (3,300,000                                             | )        |                         |            |           |            |           |            |          |        
|                                                 | Advances on note receivable                                                          |                                                                                    |                                                                             | (1,000,000                                             | )        |                         |            |           |            |           |            |          |        
|                                                 | Proceeds from sale of assets                                                         |                                                                                    |                                                                             | 32,013                                                 |          |                         |            | 1,500      |            |           |            |          |        
|                                                 | Investment, at cost                                                                  |                                                                                    |                                                                             |                                                       |          |                         |            | (1,000,000 | )          |           |            |          |        
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|                                                 |                                                                                      |                                                                                    |                                                                             | Net cash used in investing activities                  |          |                         | (6,722,848 | )          |            |           | (1,229,669 | )         |         |            | (99,263    | )
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|Cash flows from financing activities:            |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |            |           |            |          
|                                                 | Proceeds from long-term debt                                                         |                                                                                    |                                                                             | 189,879                                                |          |                         |            | 202,438    |            |           |            | 300,877   |        
|                                                 | Proceeds from mortgage payable                                                       |                                                                                    |                                                                             | 1,535,000                                              |          |                         |            |           |            |           |            |          |        
|                                                 | Proceeds from note payable to bank                                                   |                                                                                    |                                                                             |                                                       |          |                         |            | 1,000,000  |            |           |            |          |        
|                                                 | Borrowing by an officer/shareholder                                                  |                                                                                    |                                                                             |                                                       |          |                         |            | (1,254,521 | )          |           |            |          |        
|                                                 | Payments on long-term debt                                                           |                                                                                    |                                                                             | (122,932                                               | )        |                         |            | (1,176,131 | )          |           |            | (52,422   | )      
|                                                 | Payments on mortgage payable                                                         |                                                                                    |                                                                             | (40,841                                                | )        |                         |            |           |            |           |            |          |        
|                                                 | Payments on note payable to bank                                                     |                                                                                    |                                                                             | (3,998                                                 | )        |                         |            |           |            |           |            |          |        
|                                                 | Proceeds from sale of stock and warrants                                             |                                                                                    |                                                                             |                                                       |          |                         |            | 600,000    |            |           |            |          |        
|                                                 | Purchase of treasury stock                                                           |                                                                                    |                                                                             | (222,159                                               | )        |                         |            |           |            |           |            |          |        
|                                                 | Proceeds from exercise of warrants                                                   |                                                                                    |                                                                             | 37,500                                                 |          |                         |            |           |            |           |            | 2,195,889 |        
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|                                                 |                                                                                      |                                                                                    |                                                                             | Net cash provided by (used in)
financing activities    |          |                         | 1,372,449  |            |            |           | (628,214   | )         |         |            | 2,444,344  |  
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|Increase (decrease) in cash and cash equivalents |                                                                                      |                                                                                    | (12,288,927                                                                 | )                                                      |          |                         | 12,778,966 |            |            |           | (414,831   | )        
|Cash and cash equivalents at beginning of period |                                                                                      |                                                                                    | 13,133,311                                                                  |                                                        |          |                         | 354,345    |            |            |           | 769,176    |          
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           
|Cash and cash equivalents at end of period       |                                                                                      | $                                                                                  | 844,384                                                                     |                                                        |          | $                       | 13,133,311 |            |            | $         | 354,345    |          
|                                                 |                                                                                      |                                                                                    |                                                                             |                                                        |          |                         |            |            |           

See Notes to Consolidated Financial Statements

F-6



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##### Table of Contents



ENTRX CORPORATION AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES



| |  | Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Entrx Corporation, formerly Metalclad Corporation (the Company) is engaged
in insulation services, including asbestos abatement and material sales, to
customers primarily in California (the Insulation Business). Until 1999,
the Company was engaged in the development of hazardous and non-hazardous
industrial waste treatment and storage facilities, as well as the collection
and recycling of industrial waste for disposition to landfills or as
alternative fuels for cement kilns in Mexico (the Mexican Business).                                                                                                                                                                                                                                                 
|
| |  | In 1997, the Company filed a claim against the United Mexican States under
the North American Free Trade Agreement (NAFTA) to recover the value of
its investment in a completed, but unopened, treatment, storage and disposal
facility in San Luis Potosi. During the fourth quarter of 1998, the Company
determined, that due to political opposition in Mexico, its Mexican
operations would not be successful and committed to a plan to discontinue
its Mexican operations to minimize future losses and halted any further
investment in Mexico. The Company settled its claims against the Mexican
Government in October 2001 for $16,002,000. This settlement completed the
Companys activities in Mexico and essentially closed out all discontinued
operations in Mexico.
|
| |  | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in
consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The accompanying consolidated financial statements include the accounts of
Surg II, Inc. from May 30, 2002, the date on which the Company first owned
over 50% of the voting stock of Surg II, Inc., to October 22, 2002, the date
on which the Company owned less than 50% of the voting stock of Surg II,
Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. The carrying amount
approximates fair value because of the short maturity of those instruments.
The Company deposits its cash in high credit quality financial institutions.
The balances, at times, may exceed federally insured limits.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Available-for-Sale Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Investments held by the Company are classified as available-for-sale
securities. Available-for-sale securities are reported at fair value with
all unrealized gains or losses included in other comprehensive income. The
fair value of the securities was determined by quoted market prices of the
underlying security. Proceeds of $569,568 were received and a gain on sale
of available-for-sale securities of $57,056 was recorded on the consolidated
statements of operations for the year ended December 31, 2002. For purposes
of determining gross realized gains, the cost of available-for-sale
securities is based on specific identification.                                                                                                                           
|
| |  | Restricted Cash                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | At December 31, 2002, restricted cash of $2,110,870 consists of balances
legally restricted as to withdrawal and comprise a certificate of deposit
collateralizing a letter of credit issued by Community Bank for the benefit
of a customer of the Companys insulation subsidiary. The letter of credit
is in lieu of a performance and payment bond required by the contract with
the customer and is expected to be released on or before July 1, 2003.                                                                                                                                                                                                                                                                                                                            

F-7



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##### Table of Contents





| |  | Accounts Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company reviews customers credit history before extending unsecured
credit and establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers and other information.
Invoices are generally issued with Net 30 day terms. Accounts receivable
over 30 days are considered past due. The Company does not accrue interest
on past due accounts receivable. The Company writes off accounts receivable
when they are deemed uncollectible.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The carrying amounts for all financial instruments approximates fair value.
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value because of
the short maturity of these instruments. The fair value of long-term debt
and mortgage payable approximates the carrying amounts based upon the
Companys expected borrowing rate for debt with similar remaining maturities
and comparable risk.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Inventories, which consist principally of insulation products and related
materials, are stated at the lower of cost (determined on the first-in,
first-out method) or market. Inventories include a reserve for obsolescence
of approximately $58,400 and $52,100 at December 31, 2002 and 2001,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Depreciation and Amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Property, plant and equipment are stated at cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of related assets which range from four to five years for
machinery, equipment and leasehold improvements and thirty years for the
building. Maintenance, repairs and minor renewals are expensed when
incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Advertising Cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Advertising costs are expensed as incurred. Advertising costs totaled
approximately $2,400 and $1,400 for the years ended December 31, 2002 and
2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Fixed price insulation installation and asbestos abatement contracts are
accounted for by the percentage-of-completion method wherein costs and
estimated earnings are included in revenues as the work is performed. If a
loss on a fixed price contract is indicated, the entire amount of the
estimated loss is accrued when known. Time and material contracts are
accounted for under a cost plus fee basis. Retentions by customers under
contract terms are due at contract completion.                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Income/Loss Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The Company computes income (loss) per share in accordance with Statement of
Financial Accounting Standards (SFAS) 128, Earnings Per Share. This
statement requires the presentation of both basic and diluted net income
(loss) per share for financial statement purposes. Basic net income (loss)
per share is computed by dividing the net income (loss) available to common
shareholders by the weighted average number of common shares outstanding.
Diluted net income (loss) per share includes the effect of the potential
shares outstanding, including dilutive stock options, warrants and
convertible debt using the treasury stock method. Options and warrants
totaling 3,207,333 were excluded from the computation of diluted earnings
per share for the year ended December 31, 2002, as their effect was
antidilutive. Following is a reconciliation of basic and diluted net income
(loss) per share:

F-8



---



##### Table of Contents



|                                      |                                     |                                     |            |            |           |   |           |           |           |      |            |            |           | 
|------------------------------------- | ----------------------------------- | ----------------------------------- | ---------- | ---------- | --------- | - | --------- | --------- | --------- | ---- | ---------- | ---------- | --------- | 
|                                      |                                     |                                     |            | 2002       |           |   | 2001      |           |           | 2000 |           
|                                      |                                     |                                     |            |            |           |   |           |           |           |      |           
|Net income (loss) per share  basic   |                                     |                                     |            |            |           |   |           |           |           |      |            |           
|                                      | Net income (loss)                   |                                     | $          | (5,286,374 | )         |   | $         | 5,575,708 |           |      | $          | (1,764,797 | )        
|                                      | Weighted average shares outstanding |                                     |            | 7,608,823  |           |   |           | 7,200,490 |           |      |            | 5,470,002  |          
|                                      |                                     |                                     |            |            |           |   |           |           |          
|Net income (loss) per share  basic   |                                     | $                                   | (.69       | )          |           | $ | .77       |           |           | $    | (.32       | )         
|                                      |                                     |                                     |            |            |           |   |           |           |          
|Net income (loss) per share  diluted |                                     |                                     |            |            |           |   |           |           |           |      |            |           
|Net income (loss)                     |                                     | $                                   | (5,286,374 | )          |           | $ | 5,575,708 |           |           | $    | (1,764,797 | )         
|                                      | Weighted average shares outstanding |                                     |            | 7,608,823  |           |   |           | 7,200,490 |           |      |            | 5,470,002  |          
|                                      | Effect of diluted securities        |                                     |            |           |           |   |           | 61,078    |           |      |            |           |          
|                                      |                                     |                                     |            |            |           |   |           |           |          
|                                      |                                     | Weighted average shares outstanding |            |            | 7,608,823 |   |           |           | 7,261,568 |      |            |            | 5,470,002 | 
|                                      |                                     |                                     |            |            |           |   |           |           |          
|Net income (loss) per share  diluted |                                     | $                                   | (.69       | )          |           | $ | .77       |           |           | $    | (.32       | )         
|                                      |                                     |                                     |            |            |           |   |           |           |          



| |  | Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In accordance with Accounting Principles Board (APB) Opinion No. 25 and
related interpretations, the Company uses the intrinsic value-based method
for measuring stock-based compensation cost which measures compensation cost
as the excess, if any, of the quoted market price of the Companys common
stock at the grant date over the amount the employee must pay for the stock.
The Companys general policy is to grant stock options and warrants at fair
value at the date of grant. Options and warrants issued to nonemployees are
recorded at fair value, as required by SFAS No. 123 Accounting for Stock
Based Compensation (Statement 123), using the Black-Scholes pricing model.
|
| |  | The Company applies APB No. 25 and related interpretations in accounting for
its stock options and warrants. Accordingly, $929,420 of compensation cost
has been recognized in the accompanying consolidated statements of
operations for the year ended December 31, 2002. Had compensation costs for
the Companys stock options and warrants been determined based on the fair
value at the grant dates consistent with the method of SFAS No. 123, the
Companys net income (loss) and income (loss) per share would have been
changed to the approximate pro forma amounts indicated below:                                                                                                    

|                                    |             |  |                         |            |   |      |   |           |      |  |   |            |  
|----------------------------------- | ----------- |  | ----------------------- | ---------- | - | ---- | - | --------- | ---- |  | - | ---------- | -
|                                    |             |  | Year Ended December 31, |           
|                                    |             |  |                         |           
|                                    |             |  | 2002                    |            |   | 2001 |   |           | 2000 | 
|                                    |             |  |                         |            |   |      |   |           |      | 
|Net income (loss):                  |             |  |                         |            |   |      |   |           |      |  |   |           
|                                    | As reported |  | $                       | (5,286,374 | ) |      | $ | 5,575,708 |      |  | $ | (1,765,000 | )
|                                    | Pro forma   |  |                         | (5,589,177 | ) |      |   | 4,917,935 |      |  |   | (2,571,000 | )
|Basic net income (loss) per share   |             |  |                         |            |   |      |   |           |      |  |   |           
|                                    | As reported |  | $                       | (0.69      | ) |      | $ | 0.77      |      |  | $ | (0.32      | )
|                                    | Pro forma   |  |                         | (0.73      | ) |      |   | 0.68      |      |  |   | (0.47      | )
|Diluted net income (loss) per share |             |  |                         |            |   |      |   |           |      |  |   |           
|                                    | As reported |  | $                       | (0.69      | ) |      | $ | 0.77      |      |  | $ | (0.32      | )
|                                    | Pro forma   |  |                         | (0.73      | ) |      |   | 0.68      |      |  |   | (0.47      | )
|Stock-based compensation            |             |  |                         |            |   |      |   |           |      |  |   |           
|                                    | As reported |  | $                       | 929,420    |   |      | $ |          |      |  | $ |           |  
|                                    | Pro forma   |  |                         | 302,803    |   |      |   | 657,773   |      |  |   | 806,000    |  

F-9



---



##### Table of Contents





| |  | The following significant assumptions were utilized to calculate the fair
value information presented utilizing the Black-Scholes pricing model:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|                                               |  |                         |      |           |      |           |      |      |  |   |      |  
|---------------------------------------------- |  | ----------------------- | ---- | --------- | ---- | --------- | ---- | ---- |  | - | ---- | -
|                                               |  | Year Ended December 31, |     
|                                               |  |                         |     
|                                               |  | 2002                    |      |           | 2001 |           |      | 2000 | 
|                                               |  |                         |      |           |      |           |      |      | 
|Risk Free interest rate                        |  |                         | 3.63 | %         |      |           | 3.00 | %    |  |   | 5.95 | %
|Expected life                                  |  | 3.5 years               |      | 3.0 years |      | 5.0 years
|Expected volatility                            |  |                         | 156  | %         |      |           | 147  | %    |  |   | 132  | %
|Expected dividends                             |  |                         |     |           |      |           |     |      |  |   |     |  
|Weighted average fair value
of options granted |  | $                       | 1.56 |           |      | $         | 1.26 |      |  | $ | 1.49 |  



| |  | Concentration of Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Financial instruments that potentially subject the Company to credit risk
consist principally of cash and contract receivables. Contract receivables
are concentrated primarily with utility companies located in Southern
California. Historically, the Companys credit losses have been
insignificant. The Company places its cash with major financial
institutions. At December 31, 2002 and 2001, and throughout the years, the
Company had bank deposits in excess of federally insured limits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Deferred taxes are provided using the asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carry forwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.                                                                                                                                                                                                                                                 
|
| |  | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | SFAS 130, Reporting Comprehensive Income establishes rules for the
reporting of comprehensive income and its components. Comprehensive income
consists of net income, unrealized gains on available-for-sale securities
and foreign currency translation adjustments and is presented in the
Consolidated Statements of Shareholders Equity. During the year ended
December 31, 2002, the Company recorded other comprehensive income of
$147,613 for unrealized gains on available-for-sale securities. The Company
previously recorded other comprehensive income (loss) on its Mexican
subsidiaries for foreign currency translation gains (losses). During the
year ended December 31, 2001, as a result of the NAFTA settlement and the
write-off of the remaining Mexican assets from discontinued operations, the
Company realized $1,555,423 of foreign currency translation losses. The
amount is included in the net gain from discontinued operations in 2001.
|
| |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, effective for fiscal years beginning after May 15,
2002. The Company believes the adoption of SFAS No. 145 will not have a
material effect on the Companys consolidated financial position or results
of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires the recognition of
a liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan.
In addition, SFAS No. 146 states the liability
should be initially measured at fair value. The requirements of SFAS No.
146 are effective                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-10



---



##### Table of Contents





| |  | for exit or disposal activities that are initiated after
December 31, 2002. The Company believes the adoption of SFAS No. 146 will
not have a material effect on the Companys consolidated financial position
or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 is effective October 1, 2002. The
adoption of SFAS No. 147 did not have a material effect on the Companys
consolidated financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 is an amendment to
SFAS No. 123 providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and also provides additional disclosures about the method of
accounting for stock-based employee compensation. Amendments are effective
for financial statements for fiscal years ending after December 15, 2002 and
for the interim periods beginning after December 15, 2002. The Company
adopted the annual disclosure provision of SFAS No. 148 in 2002. The
Company has currently chosen to not adopt the voluntary change to the fair
value based method of accounting for stock-based employee compensation,
pursuant to SFAS No. 148, which, if adopted, could have a material effect on
the Companys consolidated financial position and results of operations.
|
| |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Accounting for the Impairment of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Company reviews long-lived assets, including property and intangible
assets, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
An impairment loss would be recognized when the estimated future cash flows
from the use of the asset are less than the carrying amount of that asset.
To date, there have been no such losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

NOTE 2  DISCONTINUED OPERATIONS



| |  | In 1991, the Company embarked on a strategy to develop an integrated
industrial waste management business in Mexico. After seven years of
developing this business, the Company determined that its efforts would not
be successful due to political opposition in Mexico. Consequently, in the
fourth quarter of 1998, Management committed to a plan to sell its Mexican
operations to a third party.                                                                                                                                                                                                                                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys discontinued operations contained two components: 1) ongoing
operations and development and 2) the landfill assets associated with its
NAFTA claim. In the fourth quarter of 1999, the Company completed a sale of
its ongoing operations and development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | For the year ended December 31, 2000, the Company incurred costs of $91,000
which were charged against the December 31, 1999 accrual. Additionally,
$63,000 in fees for continuing costs of the NAFTA proceedings were charged
to discontinued operations in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In October 2001, the Company settled its claim against the United Mexican
States for $16,002,433. After writing off all assets associated with the
settlement of the claim and recognizing expenses related to the settlement,
the Company realized a net gain of $7,079,000. The gain is the $16,002,433
settlement amount net of legal fees of $1,171,991, NAFTA related bonuses of
$840,000, the write-off of all assets associated with the settlement of the
Companys claim of $5,356,293 and a foreign currency translation write-off
of $1,555,423. No future costs are anticipated, however, if any arise, they
will be charged to operations as incurred. This completed the Companys
activities in Mexico and essentially closed out all discontinued operations
in Mexico.

F-11



---



##### Table of Contents





| |  | The consolidated financial statements for prior periods have been restated
to reflect the accounting for discontinued operations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |  | Selected financial data from discontinued operations are as follows:                                                             

|                                           |  |                         |   |  |      |   |           |      |  |   |         |  
|------------------------------------------ |  | ----------------------- | - |  | ---- | - | --------- | ---- |  | - | ------- | -
|                                           |  | Year Ended December 31, |  
|                                           |  |                         |  
|                                           |  | 2002                    |   |  | 2001 |   |           | 2000 | 
|                                           |  |                         |   |  |      |   |           |      | 
|Net sales                                  |  | $                       |  |  |      | $ |          |      |  | $ |        |  
|Operating loss                             |  |                         |  |  |      |   |          |      |  |   |        |  
|Interest expense                           |  |                         |  |  |      |   |          |      |  |   |        |  
|Income (loss) from discontinued operations |  |                         |  |  |      |   | 7,078,726 |      |  |   | (63,187 | )

NOTE 3  ACQUISITIONS



| |  | On May 29, 2002, the Company acquired 145,000,000 shares of Surg II, Inc.
(Surg II) common stock, constituting approximately 90% of the outstanding
shares of Surg II for $3,000,000 invested into Surg II, and on September 25,
2002 acquired an additional 14,285,714 shares by investing an additional
$300,000 into Surg II. Goodwill from these transactions was $387,994, which
is not deductible for tax purposes. Prior to the acquisition, Surg II had
sold all of its assets and discontinued its former business of manufacturing
and marketing medical products.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The 159,285,714 shares of no par value common stock of Surg II owned by the
Company became 3,982,142 shares of $0.01 par value common stock as of the
close of business on October 4, 2002, as the result of a one for 40 reverse
stock split of Surg IIs common stock.                                                                                                                                                                                                                                                                                                      
|
| |  | On October 22, 2002, the Company distributed 3,791,576 shares of Surg II to
its shareholders as a dividend. Each shareholder of record as of October
11, 2002 received one share of Surg II, Inc. common stock for every two
shares of Entrx Corporation common stock held. The Company still owns
190,566 shares of Surg II common stock.                                                                                                                                                                                                                                    
|
| |  | The consolidated balance sheet for December 31, 2002 would remain the same
since the acquisition and dividend of Surg II both occurred during 2002.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The results of operations on an unaudited pro forma basis for the year ended
December 31, 2002 are not presented separately as the results do not differ
significantly from historical amounts presented herein.                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Information for the periods ended December 31, 2001 and 2000 would remain
the same since the acquisition and dividend of Surg II both occurred during
2002.                                                                                                                                                                                                                                                                                                                                                                                                                   

NOTE 4  RESTRUCTURING



| |  | In connection with their resignations and corporate restructuring, and in
lieu of compensation which would otherwise be due under change of control
provisions contained in previously executed and adopted employment
contracts, which were amended and restated as of January 1, 2002, the
Company issued the Companys former Chief Executive Officer 140,000 shares
of the Companys common stock, forgave a loan due from the officer in the
amount of $543,000 in exchange for future consulting services and paid the
officer $832,000 in cash. In addition the Company issued the Companys
former Chief Financial Officer 86,000 shares of the Companys common stock
and paid the officer $637,000 in cash. In addition, all outstanding
unvested stock options held by the prior Board of Directors, including the
former Chief Executive and Financial Officers, were immediately vested and
became exercisable. The former Chief Executive Officer and Chief Financial
Officer each agreed to act as consultants to the Company under two-year and
three-month consulting agreements, respectively. In addition to the payment
discussed above, the former Chief Financial Officers compensation for
consulting was $5,000 per month.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12



---



##### Table of Contents





| |  | In March 2002, the Company reimbursed Mr. Wayne Mills, the Companys Chief
Executive Officer, $100,000 for legal fees expended by him to effect this
change in management.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the year ended December 31, 2002, the Company recognized $3,332,726 of
expense related to the change of management, including insurance premiums,
legal fees, severance pay and relocation of the Companys headquarters. The
cash payments related to these expenses were approximately $2,008,000. The
non-cash charges primarily relate to the forgiveness of the loan due from the former Chief Executive Officer, the
issuance of common stock to the two former officers, the expense pursuant to
APB No. 25 and related interpretations related to the accelerated vesting of
stock options for the prior directors.

NOTE 5  ACCOUNTS RECEIVABLE



| |  | Accounts receivable consisted of the following at December 31:
| |  | --------------------------------------------------------------

|                                      |                        |   |           |         |  |      |           |           | 
|------------------------------------- | ---------------------- | - | --------- | ------- |  | ---- | --------- | --------- | 
|                                      |                        |   | 2002      |         |  | 2001 |          
|                                      |                        |   |           |         |  |      |          
|Billed                                |                        |   |           |         |  |      |           |          
|                                      | Completed contracts    |   | $         | 386,804 |  |      | $         | 445,834   | 
|                                      | Contracts in process   |   |           | 397,410 |  |      |           | 358,969   | 
|                                      | Time and material work |   |           | 675,833 |  |      |           | 1,039,057 | 
|                                      | Material sales         |   |           | 52,381  |  |      |           | 6,782     | 
|Unbilled retainage                    |                        |   | 188,600   |         |  |      | 60,148    |          
|                                      |                        |   |           |         |  |     
|                                      |                        |   | 1,701,028 |         |  |      | 1,910,790 |          
|Less: Allowance for doubtful accounts |                        |   | (61,500   | )       |  |      | (57,500   | )        
|                                      |                        |   |           |         |  |     
|                                      |                        | $ | 1,639,528 |         |  | $    | 1,853,290 |          
|                                      |                        |   |           |         |  |     

NOTE 6  COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS



| |  | Costs and estimated earnings on uncompleted contracts consisted of the
following at December 31:
| |  | ------------------------------------------------------------------------------------------------

|                                        |  |      |            |   |      |   |            |  
|--------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                        |  | 2002 |            |   | 2001 |  
|                                        |  |      |            |   |      |  
|Costs incurred on uncompleted contracts |  | $    | 2,137,492  |   |      | $ | 1,186,345  |  
|Estimated earnings                      |  |      | 348,588    |   |      |   | 292,647    |  
|                                        |  |      |            |   |      |  
|                                        |  |      | 2,486,080  |   |      |   | 1,478,992  |  
|Less billings to date                   |  |      | (1,973,213 | ) |      |   | (1,383,505 | )
|                                        |  |      |            |   |      |  
|                                        |  | $    | 512,867    |   |      | $ | 95,487     |  
|                                        |  |      |            |   |      |  



| |  | The above information is presented in the balance sheet as follows:
| |  | -------------------------------------------------------------------

|                                                                            |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                            |  | 2002 |         |   | 2001 |  
|                                                                            |  |      |         |   |      |  
|Costs and estimated earnings in excess of
billings on uncompleted contracts |  | $    | 526,219 |   |      | $ | 154,601 |  
|Billings in excess of costs and estimated
earnings on uncompleted contracts |  |      | (13,352 | ) |      |   | (59,114 | )
|                                                                            |  |      |         |   |      |  
|                                                                            |  | $    | 512,867 |   |      | $ | 95,487  |  
|                                                                            |  |      |         |   |      |  

NOTE 7  NOTE RECEIVABLE



| |  | On November 4, 2002 the Company entered an agreement whereby it will lend up
to $2.5 million to Zamba Corporation (Zamba) in the form of a collateralized
convertible note. The Company had advanced $1,000,000 on the note as of
December 31, 2002. The loan is collateralized with shares of NextNet
Wireless, Inc. (NextNet Wireless) stock owned by Zamba. The loan is not
repayable in cash, but at the Companys option, may be repaid either by
conversion at any time into shares of Zambas NextNet Wireless Series A
Preferred stock, or if and when fully funded, by conversion into 25% of
Zambas common stock outstanding prior to the conversion. Additionally,
depending upon the level of funding and other factors, the Company will have
the option to purchase
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | up to an additional 750,000 common equivalent shares
of NextNet Wireless stock from Zamba. The note matures on March 31, 2003.
Mr. Wayne Mills, the CEO of the Company, owns approximately 5.1% of the
outstanding common stock of Zamba and approximately 2.5% of NextNet
Wireless. (See Note 23)
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 8  INVESTMENTS IN UNCONSOLIDATED AFFILIATES



| |  | In 1989, the Company entered into a joint venture with a minority service
firm (Curtom-Metalclad) to perform industrial insulation and industrial
asbestos abatement services similar to those performed by the Company. When
contracts are obtained by the joint venture, the Company performs the work
specified in the contract as a subcontractor to the joint venture. Since
the Company performs substantially all the work obtained by the joint
venture and is determined to control the joint venture, all revenues and
expenses of the joint venture have been recorded by the Company in the
consolidated statements of operations. Curtom-Metalclads operations and
financial position are not material to the Company taken as a whole.
Additionally, the assets and liabilities held by the joint venture are
insignificant.                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 2001, the Company purchased 56,338 shares of Series C
Convertible Preferred Stock of Catalytic Solutions, Inc. for $1,000,000.
Catalytic Solutions is a privately held materials science technology company
focused on applying its technology to improve the performance and reduce the
cost of automotive catalytic converters. Each preferred share may be
converted into one share of common stock at any time by the Company, subject
to customary adjustments for stock splits, stock combinations, stock
dividends, reclassifications and the like. All preferred shares will
automatically convert into fully paid and nonassessable shares of common
stock (1) if Catalytic Solutions closes a firmly underwritten public
offering of shares of common stock with aggregate net proceeds of at least
$20 million and a per share public offering price of at least 1.5 times the
per share purchase price of the preferred shares or (2) upon the consent or
agreement of the holders of a majority of the outstanding shares of Series C
Preferred Stock.

NOTE 9  PROPERTY, PLANT AND EQUIPMENT



| |  | Property, plant and equipment consists of the following:
| |  | --------------------------------------------------------

|                                               |  |              |           |   |      |   |           |  
|---------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                               |  | December 31, |          
|                                               |  |              |          
|                                               |  | 2002         |           |   | 2001 |  
|                                               |  |              |           |   |      |  
|Building and land                              |  | $            | 2,047,364 |   |      | $ |          |  
|Machinery and equipment                        |  |              | 341,033   |   |      |   | 569,743   |  
|Automotive equipment                           |  |              | 614,467   |   |      |   | 522,552   |  
|Building improvements                          |  |              | 16,181    |   |      |   | 3,039     |  
|                                               |  |              |           |   |      |  
|                                               |  |              | 3,019,045 |   |      |   | 1,095,334 |  
|Less accumulated depreciation
and amortization |  |              | (544,230  | ) |      |   | (666,682  | )
|                                               |  |              |           |   |      |  
|                                               |  | $            | 2,474,815 |   |      | $ | 428,652   |  
|                                               |  |              |           |   |      |  



| |  | Depreciation and amortization expense for the years ended December 31, 2002,
2001 and 2000 was $161,256, $128,580 and $106,657, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

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NOTE 10  ACCRUED EXPENSES



| |  | Accrued expenses consist of the following:
| |  | ------------------------------------------

|                          |  |              |         |  |      |   |           | 
|------------------------- |  | ------------ | ------- |  | ---- | - | --------- | 
|                          |  | December 31, |        
|                          |  |              |        
|                          |  | 2002         |         |  | 2001 |  
|                          |  |              |         |  |      |  
|Accrued interest          |  | $            | 10,173  |  |      | $ | 4,382     | 
|Wages, bonuses and taxes  |  |              | 71,419  |  |      |   | 293,548   | 
|Union dues                |  |              | 142,367 |  |      |   | 99,521    | 
|Accounting and legal fees |  |              | 60,000  |  |      |   | 1,287,940 | 
|Insurance                 |  |              | 195,420 |  |      |   | 340,279   | 
|Other                     |  |              | 170,179 |  |      |   | 38,656    | 
|                          |  |              |         |  |      |  
|                          |  | $            | 649,558 |  |      | $ | 2,064,326 | 
|                          |  |              |         |  |      |  

NOTE 11  CONVERTIBLE DEBT



| |  | Convertible Zero Coupon Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In December 1997, the Company issued $2,200,000 of Five-Year Zero Coupon
Notes, due December 31, 2002, netting the Company $1,500,000. The effective
interest rate of these notes was 9.33%. The Company was amortizing the
difference between the value at maturity and the purchase price over five
years. Additionally, the notes were redeemable at the option of the holder,
or the Company, any time after March 31, 2000. These notes were secured by
100% of the stock of Metalclad Insulation Corporation (MIC). In February
1998, the conditions triggering convertibility of the notes and the issuance
of warrants were met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | On July 30, 1999 the Company entered into an amendment of the terms of its
Five-Year Zero Coupon Notes with the holder. The amendment included the
conversion of accrued interest through July 30, 1999 into principal notes,
the interest rate was adjusted from 9.3% to 12% effective July 31, 1999, the
convertibility of the notes and the holders redemption option on the notes
was extended until the earlier of March 31, 2000 or completion of the NAFTA
proceedings and the conversion rate per share was the lesser of 70% of the
average market price per share or $2.50 per share. In no event, however,
could the holder convert its principal into common shares such that it would
result in the holder obtaining shares that would exceed 19.99% of the
outstanding common stock of the Company. Should the holder exercise its
right to convert the notes, all accrued interest would be forfeited. As
part of this amendment, the note holder agreed to purchase $250,000 in
additional notes. During the twelve months ended December 31, 2000 the note
holder exercised its rights and converted $1,092,000 of note principal, into
795,910 shares at an average price of $1.37. As a result of these
conversions the note holder forfeited accrued interest in the amount of
$161,000. As of December 31, 2000 the note holder reached the maximum
allowable conversion option of the notes.
|
| |  | During the quarter ended March 31, 2001, the Company and the holder of its
Five-Year Zero Coupon Notes reached agreement under the terms of the notes,
to apply the maximum interest rate of 15% (default rate) to the outstanding
notes, effective February 1, 2001. This was in lieu of any formal review or
redemption options available to the holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | On July 16, 2001, the noteholders were paid in full all principal and
interest due, totaling $1,098,000, and the notes were cancelled. These
notes bore interest at the rate of 15%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Convertible Subordinated Debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | During the third quarter of 1999, the Company issued $360,000 in three-year
10% convertible subordinated debentures due in August and September 2002.
The debentures were convertible into shares of the Companys common stock at
$2.50 per share or 75% of the current market price per share, whichever was
lower. The Company had the option to redeem all or portions of this
debenture at 125% of the principal amount of the redemption. The debenture
also allowed for a mandatory redemption in the event of an award in the
NAFTA arbitration or, in certain cases, if the Company obtained additional
equity investment. The mandatory redemption was also at 125% of the
then-outstanding principal balance. These debentures were due in August and
September,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |  | 2002. In the fourth quarter of 2000, $52,035 of debenture
principal and interest was converted into 47,752 shares at an average price
of $1.09 per share. During the second quarter of 2001, the Company
converted the remaining $323,814 of convertible subordinated debentures,
principal and interest, into 266,901 shares at an average price of $1.21 per
share.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12  BANK CREDIT FACILITY, NOTE PAYABLE



| |  | On September 11, 2001, the Company obtained an accounts receivable revolving
line of credit. Borrowings under the agreement are limited to the lower of
$1,000,000 or the Companys borrowing base, which consists of a specified
percentage of certain accounts receivable. Borrowings under the agreement
are collateralized by substantially all of the assets of the Companys
insulation subsidiary and guaranteed by the Company. The loan matures on
May 1, 2003 with an interest rate based on the banks reference rate plus
..25%.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, 2002, the interest rate was 4.5% and $996,002 was
outstanding on the credit agreement with available borrowings of $3,998.
The loan terms stipulate that the Companys insulation subsidiary maintain
compliance with certain financial covenants and ratios. As of December 31,
2002, the Company was in compliance with these covenants.                                                                                                                                                                               

NOTE 13  LONG-TERM DEBT



| |  | Long-term debt consists of various notes payable to a finance company for
vehicles used in the ordinary course of the Companys insulation business.
The notes are secured by the vehicles and bear interest at rates ranging
from 0% to 8.99% for periods of 36 to 60 months with the last payment due in
2007. Principal maturities over the next five years are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |        |      |          |         |         | 
|-------------------- | ------ | ---- | -------- | ------- | ------- | 
|Year ending          |        |      |          |        
|December 31,         |        |      |          |        
|                     |        |      |          |        
|                     |        | 2003 |          | $       | 100,328 | 
|                     |        | 2004 |          |         | 97,759  | 
|                     |        | 2005 |          |         | 80,789  | 
|                     |        | 2006 |          |         | 24,485  | 
|                     |        | 2007 |          |         | 5,027   | 
|                     |        |      |          |         |        
|                     | Totals |      |          | 308,388 |        
|Less current portion |        |      | (100,328 | )      
|                     |        |      |          |         |        
|Long-term portion    |        | $    | 208,060  |        
|                     |        |      |          |         |        

NOTE 14  MORTGAGE PAYABLE



| |  | In May 2002, the Company purchased the facilities in Anaheim, California,
housing the industrial insulation services operations. The purchase price
was $2,047,000. The Company obtained a $1,535,000 mortgage on the building
from Community Bank that matures on May 1, 2017 and bears interest at a
floating rate based upon the banks reference rate plus .25% (4.5% at
December 31, 2002). At December 31, 2002, the remaining balance on the
mortgage was $1,494,159. The mortgage is secured by the building.
Principal maturities on the mortgage are as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|             |  |                      |        |      |           |           |        | 
|------------ |  | -------------------- | ------ | ---- | --------- | --------- | ------ | 
|Year ending  |  |                      |        |     
|December 31, |  |                      |        |     
|             |  |                      |        |     
|             |  |                      |        | 2003 |           | $         | 75,740 | 
|             |  |                      |        | 2004 |           |           | 79,415 | 
|             |  |                      |        | 2005 |           |           | 83,063 | 
|             |  |                      |        | 2006 |           |           | 86,879 | 
|             |  |                      |        | 2007 |           |           | 90,870 | 
|             |  | Thereafter           |        |      | 1,078,192 |          
|             |  |                      |        |      |           |           |       
|             |  |                      | Totals |      |           | 1,494,159 |       
|             |  | Less current portion |        |      | (75,740   | )        
|             |  |                      |        |      |           |           |       
|             |  | Long-term portion    |        | $    | 1,418,419 |          
|             |  |                      |        |      |           |           |       

NOTE 15  INCOME TAXES



| |  | There is no current provision for (benefit from) income taxes for the
periods presented due to losses incurred prior to 2002 and the availability
of net operating loss carry forwards in the current year. A deferred tax
provision also has not been recorded, as the Company was unable to recognize
certain loss carry forwards in years prior to 2002 and it is uncertain
whether the Company will produce sufficient taxable income in the future to
recognize the benefits of any deferred tax assets.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The major deferred tax items are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                    |                                                              |   |              |           |   |      |            |           | 
|------------------- | ------------------------------------------------------------ | - | ------------ | --------- | - | ---- | ---------- | --------- | 
|                    |                                                              |   | December 31, |          
|                    |                                                              |   |              |          
|                    |                                                              |   | 2002         |           |   | 2001 |           
|                    |                                                              |   |              |           |   |      |           
|Assets:             |                                                              |   |              |           |   |      |            |          
|                    | Allowances established against
realization of certain assets |   | $            | 405,000   |   |      | $          | 377,000   | 
|                    | Net operating loss carryforwards                             |   |              | 9,879,000 |   |      |            | 4,800,000 | 
|Liabilities:        |                                                              |   |              |           |   |      |            |          
|                    | Accrued liabilities and other                                |   |              | (27,000   | ) |      |            |          | 
|                    |                                                              |   |              |           |   |      |           
|                    |                                                              |   | 10,257,000   |           |   |      | 5,177,000  |          
|Valuation allowance |                                                              |   | (10,257,000  | )         |   |      | (5,177,000 | )        
|                    |                                                              |   |              |           |   |      |           
|                    |                                                              | $ |             |           |   | $    |           |          
|                    |                                                              |   |              |           |   |      |           



| |  | Income tax computed at the U.S. federal statutory rate reconciled to the
effective tax rate is as follows for the years ended December 31:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------

|                                    |  |      |       |   |      |  |       |  
|----------------------------------- |  | ---- | ----- | - | ---- |  | ----- | -
|                                    |  | 2002 |       |   | 2001 | 
|                                    |  |      |       |   |      | 
|Federal statutory tax rate benefits |  |      | -35.0 | % |      |  | 35.0  | %
|State tax, net of federal benefit   |  |      | -5.0  | % |      |  | 5.0   | %
|Change in valuation allowance       |  |      | 39.5  | % |      |  | -40.5 | %
|Permanent differences               |  |      | 0.5   | % |      |  | 0.5   | %
|                                    |  |      |       |   |      | 
|Effective tax rate                  |  |      | 0.0   | % |      |  | 0.0   | %
|                                    |  |      |       |   |      | 



| |  | The difference between the actual income tax benefit and the tax benefit
computed by applying the statutory Federal income tax rate to the net loss
before income taxes is attributable to the recognition of net operating loss
and capital loss carryforwards for the year ended December 31, 2001.                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002, the Company has available for U.S. federal income tax
purposes net operating loss carryforwards of approximately $24,600,000.
These carryforwards expire in the years 2010 through 2022. The ultimate
utilization of the net operating loss carryforwards may be limited in the
future due to changes in the ownership of the Company. This limitation, if
applicable, has not been determined by the Company. The

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| |  | Company also has
Mexican net operating loss carryforwards of approximately $4,000,000 which
may be available to offset future taxable income. The Mexican losses are
subject to a ten-year tax carryforward period and expire in the years 2004
through 2011.                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The realization of the Companys deferred tax assets is dependent upon the
Companys ability to generate taxable income in the future. The Company has
recorded a 100% valuation allowance against all of the deferred tax assets
due to the uncertainty regarding their realizability.

NOTE 16  SHAREHOLDERS EQUITY



| |  | Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On August 18, 1992, the Company adopted an omnibus stock option plan (the
1992 Plan) which authorized options to acquire 160,000 shares of the
Companys common stock. At December 31, 2002, there were options
outstanding under the 1992 Plan for 2,500 shares, and no shares available
for grant. These options will expire 10 years from the date of grant.
Under the terms of the plan, the Board of Directors may grant options and
other stock-based awards to key employees to purchase shares of the
Companys common stock. The options are exercisable at such times, in
installments or otherwise, as the Board of Directors may determine.                                                             
|
| |  | On March 24, 1993, the Company adopted an omnibus stock option plan (the
1993 Plan) which authorized options to acquire 100,000 shares of the
Companys common stock. The terms of the 1993 Plan are the same as the 1992
Plan. At December 31, 2002, there were options outstanding under the 1993
Plan for 10,300 shares, and 57,200 shares available for grant. These
options expire 10 years from the date of the grant. Under the terms of the
plan, the Board of Directors may grant options and other stock-based awards
to key employees to purchase shares of the Companys common stock. The
options are exercisable at such times, in installments or otherwise, as the
Board of Directors may determine.
|
| |  | On May 15, 1997, the Company adopted an omnibus stock option plan (the 1997
Plan) which authorized options to acquire 600,000 shares of the Companys
common stock. At December 31, 2002, there were 450,000 options outstanding
under this plan and 150,000 options available for grant. These options
expire 10 years from the date of the grant. Under the terms of the plan,
the Board of Directors may grant options and other stock-based awards to key
employees to purchase shares of the Companys common stock. The options are
exercisable at such times, in installments or otherwise, as the Board of
Directors may determine.                                                                         
|
| |  | On November 20, 2001, the Company adopted an omnibus stock option plan (the
2000 Plan) which authorized options to acquire 2,000,000 shares of the
Companys stock. At December 31, 2002, there were options outstanding under
the 2000 plan for 1,470,000 shares and 530,000 shares available for grant.
These options expire 10 years from date of grant. The terms of the 2000
Plan are the same as the 1997 Plan. Under the terms of the plan, the Board
of Directors may grant options and other stock-based awards to key employees
to purchase shares of the Companys common stock. The options are
exercisable at such times, in installments or otherwise, as the Board of
Directors may determine.       
|
| |  | At December 31, 2002, there were options, that were granted outside of the
stock option plans, outstanding to acquire 217,700 shares of the Companys
stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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##### Table of Contents





| |  | The following is a summary of options granted:
| |  | ----------------------------------------------

|                                             |                                        |           |           |                         |         |   |       |          |      |        |           |           |          |   |          |        |       |  |         |           |         |          |       |       |       | 
|-------------------------------------------- | -------------------------------------- | --------- | --------- | ----------------------- | ------- | - | ----- | -------- | ---- | ------ | --------- | --------- | -------- | - | -------- | ------ | ----- |  | ------- | --------- | ------- | -------- | ----- | ----- | ----- | 
|                                             |                                        |           |           | Year Ended December 31, |        
|                                             |                                        |           |           |                         |        
|                                             |                                        |           |           | 2002                    |         |   | 2001  |          |      | 2000   |          
|                                             |                                        |           |           |                         |         |   |       |          |      |        |          
|                                             |                                        |           |           |                         |         |   |       | Weighted |      |        |           |           |          |   | Weighted |        |       |  |         |           |         | Weighted |      
|                                             |                                        |           |           |                         |         |   |       | Average  |      |        |           |           |          |   | Average  |        |       |  |         |           |         | Average  |      
|                                             |                                        |           |           |                         |         |   |       | Exercise |      |        |           |           |          |   | Exercise |        |       |  |         |           |         | Exercise |      
|                                             |                                        |           |           | Shares                  |         |   | Price |          |      | Shares |           |           | Price    |   |          | Shares |       |  | Price   |          
|                                             |                                        |           |           |                         |         |   |       |          |      |        |           |           |          |   |          |        |       |  |         |          
|Options outstanding at
beginning of the year |                                        |           | 1,693,500 |                         |         | $ | 5.43  |          |      |        | 1,452,800 |           |          | $ | 8.92     |        |       |  | 954,800 |           |         | $        | 12.49 |      
|                                             |                                        | Granted   |           |                         | 500,000 |   |       |          | 2.24 |        |           |           | 520,000  |   |          |        | 2.00  |  |         |           | 540,000 |          |       |       | 3.00  | 
|                                             |                                        | Exercised |           |                         |        |   |       |          |     |        |           |           |         |   |          |        |      |  |         |           |        |          |       |       |      | 
|                                             |                                        | Canceled  |           |                         | (43,000 | ) |       |          | 8.51 |        |           |           | (279,300 | ) |          |        | 17.22 |  |         |           | (42,000 | )        |       |       | 13.84 | 
|                                             |                                        |           |           |                         |         |   |       |          |      |        |           |           |          |   |          |        |       |  |         |           |        
|                                             | Options outstanding at
end of the year |           |           | 2,150,500               |         |   | $     | 4.62     |      |        |           | 1,693,500 |          |   | $        | 5.43   |       |  |         | 1,452,800 |         |          | $     | 8.92  |      
|                                             |                                        |           |           |                         |         |   |       |          |      |        |           |           |          |   |          |        |       |  |         |           |        
|                                             | Options Exercisable                    |           |           | 1,699,254               |         |   | $     | 5.11     |      |        |           | 783,911   |          |   | $        | 8.53   |       |  |         | 874,312   |         |          | $     | 12.49 |      
|                                             |                                        |           |           |                         |         |   |       |          |      |        |           |           |          |   |          |        |       |  |         |           |        

|                    |                |                     |         |           |               |  |           |                |      |          |                |      |        |                |         |           |         |   |       |      |      | 
|------------------- | -------------- | ------------------- | ------- | --------- | ------------- |  | --------- | -------------- | ---- | -------- | -------------- | ---- | ------ | -------------- | ------- | --------- | ------- | - | ----- | ---- | ---- | 
|Options Outstanding |                | Options Exercisable |        
|                    |                |                     |        
|                    |                |                     |         |           |               |  |           | Weighted       |      |          |                |      |        |                |         |           |         |   |       |      |     
|                    |                |                     |         |           |               |  |           | average        |      |          |                |      |        |                |         |           |         |   |       |      |     
|                    |                |                     |         | Number    |               |  | remaining |                |      | Weighted |                |      | Number |                |         | Weighted  |        
|Range of exercise   |                | outstanding         |         |           | contractual   |  |           | average        |      |          | exercisable as |      |        | average        |        
|prices              |                | as of 12/31/02      |         |           | life in years |  |           | exercise price |      |          | of 12/31/02    |      |        | exercise price |        
|                    |                |                     |         |           |               |  |           |                |      |          |                |      |        |                |        
|                    | $1.20 - $2.00  |                     |         | 610,000   |               |  |           | 8.16           |      |          | $              | 1.87 |        |                |         | 510,000   |         |   | $     | 2.00 |     
|                    |                | $2.50               |         |           | 430,000       |  |           |                | 5.51 |          |                | $    | 2.50   |                |         |           | 96,767  |   |       | $    | 2.50 | 
|                    |                | $3.00               |         |           | 880,000       |  |           |                | 7.39 |          |                | $    | 3.00   |                |         |           | 876,667 |   |       | $    | 3.00 | 
|$12.50 - $45.00     |                |                     | 230,500 |           |               |  | 3.36      |                |      | $        | 22.08          |      |        |                | 215,820 |           |         | $ | 22.22 |     
|                    |                |                     |         |           |               |  |           |                |      |          |                |      |        |                |         |           |         |  
|                    | $1.20 - $45.00 |                     |         | 2,150,500 |               |  |           | 6.80           |      |          | $              | 4.62 |        |                |         | 1,699,254 |         |   | $     | 5.11 |     
|                    |                |                     |         |           |               |  |           |                |      |          |                |      |        |                |         |          



| |  | On November 7, 2002 the Company issued options to purchase a total of 75,000
shares of its available-for-sale securities holdings in Surg II, Inc. to
three members of the Companys Board of Directors. The options vested as to
25% immediately and as to an additional 25% on each of November 5, 2003,
2004 and 2005. Further, the options fully vest upon a change of control
of Surg II, Inc., which event occurred on February 14, 2003. The options
have an exercise price of $1.25 per share. The Company recorded compensation
cost of $26,596 for the year ended December 31, 2002 related to the options
granted and the remaining deferred compensation was $66,065 at December 31,
2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Stock Purchase Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In connection with various debt offerings, stock placements and services
provided, the Company has issued various stock purchase warrants. All such
warrants were issued at prices which approximated or exceeded fair market
value of the Companys common stock at the date of grant and are exercisable
at dates varying from one to five years. At December 31, 2002, the weighted
average exercise price per warrants outstanding was $2.42, expiring through
March 2006.                                                                                                                                                                                                                          

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| |  | Summarized information for stock purchase warrants is as follows:
| |  | -----------------------------------------------------------------

|                                          |           |  |           |          |   |                 |              |  | 
|----------------------------------------- | --------- |  | --------- | -------- | - | --------------- | ------------ |  | 
|                                          |           |  | Number of |          |   |                 |              | 
|                                          |           |  | Warrants  |          |   | Price per share |             
|                                          |           |  |           |          |   |                 |             
|Warrants outstanding at December 31, 2000 |           |  | 1,267,495 |          |   | $2.50-$12.50    |             
|                                          | Issued    |  |           | 600,000  |   |                 | $1.50        | 
|                                          | Expired   |  |           | (737,406 | ) |                 | $3.50-$12.50 | 
|                                          |           |  |           |          |   |                 |             
|Warrants outstanding at December 31, 2001 |           |  | 1,130,089 |          |   | $1.50-$4.80     |             
|                                          | Exercised |  |           | (25,000  | ) |                 | $1.50        | 
|                                          | Expired   |  |           | (48,256  | ) |                 | $3.50        | 
|                                          |           |  |           |          |   |                 |             
|Warrants outstanding at December 31, 2002 |           |  | 1,056,833 |          |   | $1.50-$4.80     |             
|                                          |           |  |           |          |   |                 |             



| |  | Common Stock                                                                                                                                                                                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended December 31, 2000, the Company issued 1,721,616
shares, with 877,954 being the result of warrant exercises and 843,662 being
the result of debt conversion.                                                                                                                              
|
| |  | During the year ended December 31, 2001, the Company issued 866,901 shares,
with 266,901 being the result of debt conversions and 600,000 as the result
of a private placement of units, each unit consisted of one share of common
stock and one common stock purchase warrant exercisable at $1.50 per share.
|
| |  | During the year ended December 31, 2002, the Company issued 226,000 shares
in connection with the resignations of two officers of the Company and
25,000 shares as the result of warrant exercises. The Company repurchased
194,800 shares as a result of a stock buyback program.                             

NOTE 17  EMPLOYEE BENEFIT PLANS



| |  | Effective January 1, 1990, the Company established a contributory profit
sharing and thrift plan for all salaried employees. Discretionary matching
contributions may be made by the Company based upon participant
contributions, within limits provided for in the plan. No Company
contributions were made in the years ended December 31, 2002, 2001 and 2000.                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Additionally, the Company participates in several multi-employer plans,
which provide defined benefits to union employees of its participating
companies. The Company makes contributions determined in accordance with
the provisions of negotiated labor contracts. The contributions were
$325,788, $376,922 and $372,606 for the years ended December 31, 2002, 2001
and 2000, respectively.

NOTE 18  SIGNIFICANT CUSTOMERS



| |  | Sales for the year ended December 31, 2002 to Curtom-Metalclad were
approximately $6,384,000, primarily representing work performed at Southern
California Edison Company (SCE) plants under the strategic alliance
program with Curtom-Metalclad. The Company had trade accounts receivable of
$521,000 from Curtom-Metalclad, primarily related to SCE, as of December 31,
2002. Additionally, the Company had sales of $1,967,000 and $1,571,000 to
Kiewit Industrial Company, and Equilon Enterprises LLC, respectively, during
2002. Accounts receivable from these two customers were $486,000 and
$76,000, respectively, as of December 31, 2002. Given the Companys client
base, the energy market problems in California could adversely affect the
Companys ability to collect the receivable from one of its major clients,
should they experience financial problems.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Sales for the year ended December 31, 2001 to Curtom-Metalclad were
approximately $7,132,000, primarily representing work performed at SCE
plants. The Company had trade accounts receivable of $621,000 from
Curtom-Metalclad as of December 31, 2001. Additionally, the Company had
sales of $1,910,000 and $1,540,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-20



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##### Table of Contents





| |  | to Equilon Enterprises LLC and AES
Corporation, respectively, during 2001. Accounts receivable from these two
customers were $63,000 and $412,000, respectively, as of December 31, 2001.                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Sales for the year ended December 31, 2000 to Curtom-Metalclad were
approximately $8,470,000 representing work at SCE plants. Additionally, the
Company had sales of $2,323,000 to ARCO and $1,049,000 to Equilon. As of
December 31, 2000 the Company had accounts receivables of $2,294,000 from
Curtom-Metalclad, $312,000 from ARCO and $84,000 from Equilon.

NOTE 19  COMMITMENTS AND CONTINGENCIES



| |  | Collective Bargaining Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Approximately 85% of the Companys employees are covered under collective
bargaining arrangements. Certain of these agreements expire in December
2003 and August 2004. The contract that expires in 2003 covers
approximately 2% of the Companys union employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company previously leased its facilities under non-cancelable operating
lease agreements which expired at various dates through 2002. In May 2002,
the Company purchased the facilities in Anaheim, California, housing the
industrial insulation services operations. In February 2002, the
headquarters of the Company was moved to Minneapolis, Minnesota. The
Company is leasing the Minneapolis facility on a month-to-month basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Total rent expense under operating leases was $145,418, $262,746 and
$248,677 for the years ended December 31, 2002, 2001, and 2000,
respectively. There are no future minimum non-cancelable lease commitments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Prior to 1975, the Company was engaged in the sale and installation of
asbestos related insulation materials, and has been the subject of numerous
claims of personal injury allegedly related to asbestos exposure. Many of
these claims are now being brought by the children and close relatives of
persons who have died, allegedly as a result of the direct or indirect
exposure to asbestos.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The number of asbestos related claims which have been initiated naming the
Company as a defendant have increased from 254 in 1999, 527 in 2000, 685 in
2001 and slightly decreased to 583 in 2002. The sympathies of juries, the
aggressiveness of the plaintiffs bar, and the declining defendant base as a
result of business failures, has also led to a trend of larger payments and
settlements per claim. There are currently in excess of 660 of such claims
pending.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | The Company in the past has believed that it has adequate insurance to cover
these claims; however, the terms of such insurance policies are complex and
the coverage for many types of claims is limited. If the current trend of
the increasing claim occurrence and amounts is not significantly reversed,
it will likely have a material adverse effect on the financial condition and
business of the Company in the future. Because of its insurance coverage,
the Company does not anticipate any adverse effect on the Companys
financial condition to develop for at least the next three to five years.
Beyond that, however, the effect of those claims is uncertain.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In October 1999, the Company completed the sale of its operating businesses
and its development project located in Aguascalientes, Mexico. The sale
specifically excluded those Mexican assets involved in the NAFTA claim.
Under the terms of the sale the Company received an initial cash payment of
$125,000 and recorded a receivable for $779,000. On November 13, 2000, the
Company filed a complaint in the Superior Court of California against a
former employee, the U.S. parent of the buyer and its representative for
breach of contract, fraud, collusion and other causes of action in
connection with this sale. This case is one where the Company has suffered
damages and continues to accrue damages and a monetary award is sought as
the remedy. An arbitration hearing was held in September, 2002 in Mexico
City, as requested by one of the defendants. This arbitration hearing was
solely to determine the validity of the assignment of the purchase and sale
agreement by the buyer to a company formed by a former employee. The
arbitrator has yet to give its ruling. Consequently, until this arbitration
is completed, all legal proceedings in Orange County have been stayed. Upon
completion of the arbitration, the Company believes

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| |  | it will be able to move
forward in the U.S. with its complaint. No assurances can be given on the
outcome. The Company has fully reserved its $779,000 note receivable, which
was recorded at the date of sale, but will continue to pursue its claims.                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Stock Repurchase Program                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In July 2002, the Board of Directors authorized a stock repurchase program
under which the Company is authorized to repurchase up to 1,000,000 common
shares of the Companys common stock. During the year ended December 31,
2002, the Company repurchased 194,800 shares for $222,159.                                                                                                                                                              
|
| |  | Letter of Credit                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | On October 1, 2002, Community Bank issued a $2,100,000 standby letter of
credit on behalf of the Company for the benefit of a customer of the
Companys insulation subsidiary. The letter of credit is fully secured by
the Companys certificate of deposit at Community Bank. The letter of
credit is in lieu of a performance and payment bond required by the contract
with the customer, and is expected to be released on or before July 1, 2003.
|
| |  | Other Matters                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Company had under contract uncompleted work at bid prices totaling
approximately $5,848,000 and $10,450,000 at December 31, 2002 and 2001,
respectively.                                                                                                                                                                                                                                                                                           

NOTE 20  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH INVESTING ACTIVITIES



| |  | Supplemental Disclosures of Cash Flow Information                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash paid for interest was $113,021, $279,131 and $92,393 for the years
ended December 31, 2002, 2001, and 2000, respectively.                                                           
|
| |  | Disclosure of Non-cash Investing and Financing Activity                                                                                                                                  
|
| |  | During the year ended December 31, 2001, the Company converted approximately
$324,000 of convertible subordinated debentures, principal and interest into
266,900 shares of common stock.
|
| |  | During the year ended December 31, 2000, the Company converted approximately
$1,305,000 of zero coupon notes payable into 844,000 shares of common stock.                                

NOTE 21  RELATED PARTY TRANSACTIONS



| |  | Receivables from related parties are comprised of the following :
| |  | -----------------------------------------------------------------

|                                                     |  |              |   |  |      |   |         | 
|---------------------------------------------------- |  | ------------ | - |  | ---- | - | ------- | 
|                                                     |  | December 31, |  
|                                                     |  |              |  
|                                                     |  | 2002         |   |  | 2001 |  
|                                                     |  |              |   |  |      |  
|Loans to executive officers, directors and employees |  | $            |  |  |      | $ | 529,184 | 
|Other                                                |  |              |  |  |      |   | 8,610   | 
|                                                     |  |              |   |  |      |  
|                                                     |  | $            |  |  |      | $ | 537,794 | 
|                                                     |  |              |   |  |      |  



| |  | The above loans to executive officers, directors and employees were
represented by promissory notes, due on demand and bore interest at 6%.                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During fiscal 1995 the Company loaned $740,000 to two officers of the
Company, Mr. Neveau and Mr. Kesler. In February 1996, the officers each
repaid $150,000 to the Company. In March 1996, the notes were amended to
modify the loan principal and to adjust the interest rates, effective March
1, to a variable rate based upon the

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| |  | Companys quarterly investment rate.
In December 2001, Mr. Neveaus note was written off and in February 2002,
Mr. Keslers note was amended to be forgiven over time, in consideration for
consulting services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November, 2000, the Board of Directors approved advances against legal
costs on behalf of Mr. Kesler, the Companys former CEO, in his pursuit of
certain personal legal matters related to his position in the Company. As
of December 31, 2000, Mr. Kesler owed the Company $57,000 related to these
advances, which may be recoverable from pending litigation. In December,
2001, the Company assumed these legal fees and all rights of recovery
against the defendants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | A former officer and director of the Company, who resigned in February 2002,
is a partner in a law firm which has received payments for legal fees of
approximately $42,888, $196,637 and $36,000 for the years ended December 31,
2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | On December 10, 2001 the Company issued a $1,250,000, 6%, non-recourse
secured note to Blake Capital Partners, LLC (Blake), an entity controlled
100% by Wayne Mills. On February 14, 2002 Mr. Mills became President and
CEO of the Company. The note is collateralized by 500,000 shares of the
Companys common stock and any dividends received on the 500,000 shares of
the Companys common stock (the Collateral), owned by Blake and Mr.
Mills. The principal and interest was due June 10, 2002. Blake had the
right to extend the maturity date of this note for a period of 90 days, and
on June 10, 2002 exercised that right. During the 90-day extension period
and beyond, simple interest shall be payable at 12% per annum. The note was
not repaid on the extended due date of September 8, 2002. As of
December 31, 2002, the market value of the common stock held as Collateral
was $863,000, $387,000 less than the face amount of the note. The Company
recorded a $387,000 allowance to record the face amount of the note at the
value of the underlying Collateral on December 31, 2002. The carrying value
will continue to fluctuate as the market value of the Collateral changes.
The principal amount of the note, together with accrued, unpaid interest,
may be prepaid at anytime without penalty. In this regard Blake may direct
the escrow agent to sell all or any part of the Collateral held in escrow
and to use the proceeds therefrom to reduce the principal balance of the
note or have the same held in escrow pending further instructions from
Blake. Blake may also instruct the Company through the agent, to cancel any
of the Collateral held in escrow at $2.50 per share, or at a higher price at
the Companys discretion, and to have that amount applied to the then
remaining principal balance of the note. The Company and the agent shall
immediately perform any of the foregoing requests. The principal balance
then due and owing under the note shall thereupon be reduced by an amount
equal to the number of Collateral shares cancelled multiplied by $2.50 per
share, or by such higher price, as applicable. The Company views any share
cancellations as a buy back of its stock. As such, the note has been
classified in the equity section on its financial statements. At December
31, 2002, the unsecured portion of this note receivable was $387,000.
|
| |  | A director and an officer of the Company are employed by a corporation which
has received payments for rent, and consulting services of approximately
$174,209 for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Company entered an agreement whereby it will lend up to $2.5 million to
Zamba Corporation in the form of a collateralized convertible note. Mr.
Wayne Mills, the CEO of the Company, owns approximately 5.1% of the
outstanding common stock of Zamba. (see Notes 7 and 23)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-23



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NOTE 22  SELECTED QUARTERLY DATA (Unaudited)



| |  | The following summarized unaudited quarterly financial data has been
prepared using the consolidated financial statements of Entrx Corporation:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|                                             |  |         |            |   |         |   |           |         |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | ------- | ---------- | - | ------- | - | --------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | First   |            |   | Second  |   |           | Third   |  |   | Fourth     |  
|                                             |  | Quarter |            |   | Quarter |   |           | Quarter |  |   | Quarter    |  
|                                             |  |         |            |   |         |   |           |         |  |   |            |  
|2002:                                        |  |         |            |   |         |   |           |         |  |   |            |   |  |   |            |  
|Total revenue                                |  | $       | 3,182,209  |   |         | $ | 4,270,827 |         |  | $ | 3,514,557  |   |  | $ | 4,052,978  |  
|Gross margin                                 |  |         | 333,167    |   |         |   | 534,317   |         |  |   | 476,944    |   |  |   | 517,661    |  
|Income (loss) from
continuing
operations     |  |         | (3,992,649 | ) |         |   | (566,637  | )       |  |   | (1,054,995 | ) |  |   | 327,907    |  
|Net income (loss)                            |  |         | (3,992,649 | ) |         |   | (566,637  | )       |  |   | (1,054,995 | ) |  |   | 327,907    |  
|Net income (loss)
per common share -
basic   |  | $       | (0.53      | ) |         | $ | (0.07     | )       |  | $ | (0.14      | ) |  | $ | 0.05       |  
|Net income (loss)
per common share -
diluted |  | $       | (0.53      | ) |         | $ | (0.07     | )       |  | $ | (0.14      | ) |  | $ | 0.05       |  
|2001:                                        |  |         |            |   |         |   |           |         |  |   |            |   |  |   |            |  
|Total revenue                                |  | $       | 5,617,404  |   |         | $ | 5,588,824 |         |  | $ | 3,313,995  |   |  | $ | 3,487,698  |  
|Gross margin                                 |  |         | 608,169    |   |         |   | 805,066   |         |  |   | 584,833    |   |  |   | 469,901    |  
|Income (loss) from
continuing
operations     |  |         | (141,052   | ) |         |   | 59,588    |         |  |   | 2,393      |   |  |   | (1,423,947 | )
|Income (loss) from
discontinued
operations   |  |         | (231,226   | ) |         |   | (40,582   | )       |  |   | (130,159   | ) |  |   | 7,480,693  |  
|Net income (loss)                            |  |         | (372,278   | ) |         |   | 19,006    |         |  |   | (127,766   | ) |  |   | 6,056,746  |  
|Net income (loss)
per common share -
basic   |  | $       | (0.06      | ) |         | $ | 0.00      |         |  | $ | (0.02      | ) |  | $ | 0.85       |  
|Net income (loss)
per common share -
diluted |  | $       | (0.06      | ) |         | $ | 0.00      |         |  | $ | (0.02      | ) |  | $ | 0.85       |  

NOTE 23  SUBSEQUENT EVENTS (Unaudited)



| |  | On January 13, 2003, the Company advanced $100,000 and on February 17, 2003,
advanced $650,000 on the loan agreement with Zamba Corporation. On February
17, 2003, the Company amended its agreement with Zamba Corporation whereby
the total amount the Company will lend to Zamba was reduced to $1,750,000,
the provision allowing the Company to convert the loan into Zambas common
stock was removed and the option the Company had to purchase an additional
750,000 shares of NextNet Wireless stock from Zamba was also removed.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On February 5, 2003, a Notice of Involuntary Lien was filed against the
Company with the County Recorder for Orange County California in the amount
of $104,046. This lien relates to a judgment against the Company for
attorney fees in the Companys NAFTA settlement. The Company has been
indemnified by a third party against any judgment and costs related to this
case and has contacted the third party seeking indemnification.                                                                                                
|
| |  | On February 14, 2003, the Company entered into a loan agreement with Venture
Bank to borrow $750,000. The loan bears interest at 6.5% and matures on
August 14, 2003. The loan is collateralized by a security interest in the
Companys certificate of deposit held by Community Bank and a personal
guarantee by the Companys Chief Executive Officer.                                                                                                                                                                                 

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##### Table of Contents






Independent Auditors Report on Supplementary Information

To Shareholders and Audit Committee
Entrx Corporation
Minneapolis, Minnesota

Our report on our audit of the basic consolidated financial statements of Entrx
Corporation for the year ended December 31, 2002 appears on page F-1. The
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The supplementary information on page
F-26 is represented for purposes of additional analysis and is not a required
part of the basic consolidated financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic consolidated financial statements
taken as a whole.



| | /s/ VIRCHOW, KRAUSE & COMPANY, LLP
| | ----------------------------------

Minneapolis, Minnesota
January 31, 2003

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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |           | 
|----------------------------- | ------------------------------------------- | --------- | ---------- | ------- | -------- | ---------- | - | -------- | ---------- |  | ---------- | - |  | ------ | - | ---------- |  |  | - | --------- | 
|                              |                                             |           |            |         |          |            |   |          |            |  | Additions  |   |  |        |   |            |  |  |   |          
|                              |                                             |           | Balance at |         |          | Charged to |   |          | Charged to |  |            |   |  |        |   | Balance at | 
|                              |                                             |           | Beginning  |         |          | Costs and  |   |          | Other      |  |            |   |  |        |   | End of     | 
|Description                   |                                             | of Period |            |         | Expenses |            |   | Accounts |            |  | Deductions |   |  | Period |  
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |  
|Year ended December 31, 2002  |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |          
|Deducted from asset accounts: |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |          
|                              | Allowance for doubtful accounts             |           | $          | 57,500  |          |            | $ | 4,000    |            |  | $          |  |  |        | $ |           |  |  | $ | 61,500    | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|                              | Allowance for excess and obsolete
inventory |           | $          | 52,124  |          |            | $ | 6,280    |            |  | $          |  |  |        | $ |           |  |  | $ | 58,404    | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|                              | Allowance on notes receivable               |           | $          | 779,402 |          |            | $ | 387,000  |            |  | $          |  |  |        | $ |           |  |  | $ | 1,166,402 | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|Year ended December 31, 2001  |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |          
|Deducted from asset accounts: |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |          
|                              | Allowance for doubtful accounts             |           | $          | 50,000  |          |            | $ | 7,500    |            |  | $          |  |  |        | $ |           |  |  | $ | 57,500    | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|                              | Allowance for excess and obsolete
inventory |           | $          | 5,000   |          |            | $ | 47,124   |            |  | $          |  |  |        | $ |           |  |  | $ | 52,124    | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|                              | Allowance on notes receivable               |           | $          |        |          |            | $ | 779,402  |            |  | $          |  |  |        | $ |           |  |  | $ | 779,402   | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|Year ended December 31, 2000  |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |          
|Deducted from asset accounts: |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  |  |   |          
|                              | Allowance for doubtful accounts             |           | $          | 20,000  |          |            | $ | 30,000   |            |  | $          |  |  |        | $ |           |  |  | $ | 50,000    | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|                              | Allowance for excess and obsolete
inventory |           | $          | 5,000   |          |            | $ |         |            |  | $          |  |  |        | $ |           |  |  | $ | 5,000     | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 
|                              | Allowance on notes receivable               |           | $          |        |          |            | $ |         |            |  | $          |  |  |        | $ |           |  |  | $ |          | 
|                              |                                             |           |            |         |          |            |   |          |            |  |            |   |  |        |   |            |  | 

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