SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   Form 10-KSB

(X)         ANNUAL  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
            EXCHANGE ACT OF 1934: For the Fiscal Year ended December 31, 1996

(   )       TRANSITION  REPORT UNDER SECTION 13 OR 15 (D) OF THE  SECURITIES ACT
            OF 1934 [ NO FEE REQUIRED ]: For the transition period from ________
            to _________.



                         Commission File Number 1-13012

                         H.E.R.C. PRODUCTS INCORPORATED
                 (Name of small business issuer in its charter)


State of Incorporation: Delaware  IRS Employer Identification Number: 86-0570800

                          2202 W. Lone Cactus Drive #15
                           Phoenix, Arizona 85027-2621
                    (Address of principal executive offices)

                                 (602) 492-0336
                (Issuer's telephone number, including area code)

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

                                                       Name of each exchange
Title of each class                                    on which registered
-------------------                                    -----------------------

Common Stock, $.01 par value                           Boston Stock Exchange

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

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year.   $2,600,642.

At March 20, 1997, the aggregate market value of shares of Common Stock based on
the closing price of $1.563, held by nonaffiliates was $9,371,625.

At March 18,  1997,  there  were  7,000,381  shares of Common  Stock  issued and
outstanding.

Documents Incorporated by Reference:  None
                                                                          Page 1
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PART I

Item 1. Description of Business

General

         H.E.R.C.  Products Incorporated ("Company") develops,  manufactures and
markets two principal  lines of products:  (i) consumer and industrial  products
incorporating the Company's proprietary chemical technology,  Eliminate(R) which
clean and control  scaling,  corrosion  and  biological  growth on surfaces  and
containers which are exposed to water, and (ii) biorational agriculture products
which are comprised of components existing in nature rather than components that
are artificially synthesized or man-made.

         The  Company's  Eliminate  technology  was  developed to respond to the
disadvantages  of  current  methods  of  treating  water  systems.  Many  of the
chemicals  used in treating  water systems are corrosive and can cause  scaling,
and it is often  difficult to achieve and maintain  the correct  combination  of
chemicals.  To the extent  that  chemicals  used in treating  water  systems are
toxic,  corrosive or  non-biodegradable,  they are  considered to be pollutants,
subjecting  the water systems to expensive  clean-up and  regulatory  compliance
costs.  Many water  systems also require  expensive  monitoring.  The  Company's
Eliminate-based  products, when added to water, dissolve and prevent scaling and
corrosion while  suppressing the environment  that supports  components of scale
and  corrosion  in  solution.  Even  in its  concentrated  form,  the  Eliminate
technology is non-fuming,  non-abrasive and non-flammable. Many of the Company's
Eliminate  products  are  also  certified  biodegradable.   The  Eliminate-based
products  for the  industrial  market  include Well  Klean(R) and Pipe  Klean(R)
(which  remove  encrustations  from water  pumping  and  distribution  systems),
Chlor*Rid(R) (which aids in the removal of chlorides, sulfates and other soluble
salts from  surfaces  prior to coating) and  Compounds  360,  260, 400, 200, 360
Startup,  Corr-Hib(TM)  Intermediate,  Corr-Hib(TM)  10-84 and Corr-Hib(TM) 5-45
(which are designed for use with the Eliminate  technology for the treatment and
cleaning of cooling and other water  treatment  systems).  These products (other
than Chlor*Rid, which is sold by Chlor*Rid International,  Inc., an unaffiliated
distributor) are sold directly by the Company.  The Company's  consumer products
include Eliminate Shower, Tub and Tile Cleaner,  Clean Sweep(R) (a swimming pool
cleaner),  Eliminate Evaporative Cooler Cleaner and Treatment (used to clean and
maintain  evaporative cooler systems) and Eliminate Toilet Bowl Cleaner, and are
sold  to the  consumer  market  by a  wholly-owned  subsidiary  of the  Company,
H.E.R.C. Consumer Products, Inc., an Arizona corporation ("HCPI").

         Through its  wholly-owned  subsidiary,  CCT  Corporation  ("CCT"),  the
Company develops, manufactures and markets biorational pest management and plant
growth products for the  agricultural  and  horticultural  markets.  The Company
believes that, in addition to expanding the Company's  product offerings through
the addition of CCT's product lines,  CCT's established  marketing  organization
enhances the Company's sales of its existing water systems  treatment  products,
although there can be no assurance of this.

         The Company was incorporated  under the laws of the State of Arizona in
December 1986 and was  reincorporated in the State of Delaware in February 1994.
The Company acquired all of the outstanding  capital stock of CCT on May 1, 1995
in a merger by which CCT became a  wholly-owned  subsidiary of the Company.  CCT
was incorporated under the laws of the State of Arizona in May 1981. Through its
subsidiary, HCPI, on July 1, 1996, the Company acquired the portion of its joint
venture,   H.E.R.C.   Consumer  Products  Company,  LLC  ("LLC"),   with  Conair
Corporation  ("Conair")  that it did  not  then  own,  so  that  the LLC  became
wholly-owed.  The  Company's  executive  offices,  warehouse  and  manufacturing
facility  for certain of its  Eliminate-based  products  are located in Phoenix,
Arizona and its telephone number is (602) 492-0336.  CCT's office and certain of
its warehousing  facilities are located  Carlsbad,  California and its telephone
number is (619) 929-9228.

Business Segments

         The  Company's  principal  business  segments are the  manufacture  and
distribution of its consumer  products and industrial water treatment  chemicals
and related  products and the  manufacture and  distribution of  environmentally
friendly  proprietary  agricultural  products.  Financial  information about the
Company's  business  segments  is  contained  in  Note  11 to  the  consolidated
financial statements.
                                                                          Page 2
<PAGE>
Market Overview

         Eliminate Based Products

         Water  is  critical  to  many   industries   and  uses,   ranging  from
agriculture,  pools, wells, waterlines,  heating and air-conditioning as well as
most industrial  production  processes.  Water is a chemically  active substance
and, any surface which is regularly  exposed to water is subject to corrosion by
oxidation (such as rust). Since water is rarely pure, water exposed surfaces are
also subject to scaling,  which is the deposit of water-borne minerals.  Scaling
or  corrosion  will  eventually  lead to the plugging or fouling of the surface,
pipe, pump,  bathroom fixture,  tiles,  pool, air conditioning  system, or other
water exposed  surface.  In addition,  surfaces  exposed to water are subject to
biological activity.

         Current  treatment methods of water  containment  systems (i.e.,  water
tanks,  piping,  wells,  etc.) include  replacement,  closing and  cleaning,  or
treating the water to reduce or cure the problem.  This latter method,  referred
to in the industry as water systems  treatment,  is preferred because it reduces
capital costs and system downtime.

         The Company  estimates  that in 1997 the annual  U.S.  market for water
systems  treatment  chemicals is in excess of $3.0  billion.  In  addition,  the
Company  estimates  that there are more than 250,000 miles of water mains in the
United  States  which may be in need of  rehabilitation  representing  an annual
market in excess of $2 billion in rehabilitation services and chemicals.

         Agricultural Products

         Biorational products for agriculture protect or enhance crop production
with little or no environmental  impact.  Products in this group are biological,
non-toxic,  natural and/or organic.  Although many of these types of products in
the past have had  quality  problems,  erratic  results  and a lack of  economic
support data, the industry is addressing  these issues with greater result.  The
Company believes that the demand for biorational  products will continue to grow
in numbers and sales,  although there can be no assurance of this.  Factors that
may  contribute  to this growth are concern  for worker  safety,  the decline in
available  conventional chemical pesticides because of their side effects and/or
consequences,  concern about chemical residue on agricultural  products,  in the
soil and in the  water  table  and  finally,  concern  about  chemical  drift to
non-target crops and to residential  housing which is expanding into traditional
farm lands.

         The  Company   estimates  that  in  1997  the  worldwide   markets  for
agricultural  insecticides  is in excess of $6.0  billion.  The market  share of
biorational agricultural products is a small portion of these worldwide markets,
but the Company  expects the market share to grow as the efficacy of biorational
products is shown and the concern grows about the impact on the  environment and
human life from conventional, chemically synthesized agricultural products.

The Eliminate Technology

         The Company  believes that water systems  treatment  methods  currently
offered by other  companies  have  several  disadvantages  compared  to products
incorporating the Company's Eliminate technology.  Many of the chemicals used in
water systems treatment  methods are corrosive and can cause scaling,  and it is
often difficult to achieve and maintain the correct combination of chemicals. To
the extent that chemicals used in water systems  treatment are toxic,  corrosive
or non-biodegradable, they are considered to be pollutants, subjecting the water
systems to expensive clean-up and regulatory compliance costs.
Many water systems also require expensive monitoring.

         The  Company's  Eliminate  technology  was  developed to respond to the
disadvantages of current water systems treatment  methods.  When added to water,
it  dissolves  and  prevents   scaling  and  corrosion  while   suppressing  the
environment  that supports  biological  growth which  results in more  efficient
water  utilization.  The Eliminate  chemistry keeps the dissolved  components of
scale  and  corrosion  in  solution  even at  highly  concentrated  levels.  The
Eliminate technology is non-fuming,  non-abrasive and non-flammable. Many of the
Company's  Eliminate  products are also  certified  biodegradable  by Scientific
Certification  Systems,  an independent  certifying  testing  laboratory ("Green
Cross").
                                                                          Page 3
<PAGE>
         A 1988  study of the  acute  oral  toxicity  of  Eliminate  in rats was
performed by SRI International, an independent testing laboratory, in compliance
with the  Environmental  Protection  Agency  Toxic  Substances  Control Act Good
Laboratory  Practice  Standards,  as set forth in 40 CFR Part 792.  No deaths or
clinical signs of toxicity occurred in male rats following  treatment with 5,000
milligrams  per kilogram of  Eliminate.  Based on the results of the study,  the
acute oral LD50 of Eliminate in male Spraque - Dawley rats is greater than 5,000
milligrams per kilogram.

Products

         Industrial Products

         The Company's  Industrial Products Group ("IPG") is actively engaged in
the  application of both the Eliminate  technology and additional  Herc licensed
technologies  to provide  unique  products  and services to the  industrial  and
municipal  water  systems  industry,  as well as the  high  performance  coating
industry. The Company's Well-Klean, Pipe-Klean, and additional licensed chemical
technologies  are used as core  products  in what are  typically  complex  water
systems operational enhancement,  and as tools to revitalize/rehabilitate  water
systems with diminished capacities. Other of the Company's chemicals are used to
maximize the performance of coatings when used as surface  preparation.  The IPG
Field  Services  Division  provides  turn-key  application  of all  of  the  IPG
technologies. The IPG's active markets are generally defined as:

CORE MARKETS
------------

Industrial & Municipal Water Distribution Rehabilitation

Industrial & Municipal Source Water Well Rehabilitation

Industrial Process Water Treatment Chemicals

Surface Preparation/Coating Enhancement Chemicals

EMERGING MARKETS
----------------

Fire Protection Pipe Line Chemical Cleaning/Passivation

Marine-Ship Board Pipe Line Chemical Cleaning

Industrial  Process Water Systems Fouled Surface Scale Removal Services (cooling
towers, high flux heat exchanger surfaces, etc.)

Chemicals used or offered to the above markets include:


         Well  Klean  and  Pipe  Klean.   Well  Klean  and  Pipe  Klean   remove
encrustation from pumps, screens,  pipes and distribution lines in water pumping
and distribution  systems. The Company's products have been tested and certified
to ANSI/NSF Standard 60 by National Sanitation Foundation  International ("NSF")
for use as well  cleaning  and pipe  cleaning  aids in drinking  water  systems.
Standard 60 was developed to establish  minimum  requirements for the control of
potential adverse human health effects from products added directly to water for
its  treatment.   The  Company  believes  that  these  products  offer  distinct
advantages over the acid washes which are generally used to clean water systems,
since the acid can cause  corrosion and can be deemed to be hazardous  waste for
disposal purposes. In addition,  these products provide significant cost savings
compared to other currently available solutions such as replacing a water system
or a portion of such system.  In 1996,  approximately  1% of the Company's total
revenues  were derived  from sales of Well Klean,  and  approximately  7% of the
Company's total revenues were derived from sales of Pipe Klean.

         Pipe-Koat. Pipe-Koat is a licensed coating technology used as a tool to
provide  non-structural,  post cleaning  protection  in potable and  non-potable
water  distribution  systems.  The Company  believes  that this  innovative
                                                                          Page 4
<PAGE>
NSF Standard 61 tested and certified lining material offers distinct  advantages
over the cement  mortar  lining  materials,  which have been shown to  adversely
affect water quality.  Pipe-Koat,  once applied will provide a permanent barrier
to internal pipeline corrosion.

         Chlor*Rid(R) Chlor*Rid is an organic biodegradable chemical blend which
aids in the  removal  of  chlorides,  sulfates  and most  other  soluble  salts.
Chlor*Rid  is used as a wash  solution  prior to the  application  of primers or
coatings to improve  adhesion on a variety of  surfaces,  including  ferrous and
nonferrous metals,  wood, plastics and others. In 1996,  approximately 1% of the
Company's total revenues were derived from sales of Chlor*Rid.

         Compounds: 360, 260, 400, 200, 360 Startup,  Corr-Hib(TM) Intermediate,
Corr-Hib(TM)  10-84 and  Corr-Hib(TM)  5-45.  Compounds  360, 260, 400, 200, 360
Startup,  Corr-Hib(TM)  Intermediate,  Corr-Hib(TM)  10-84 and Corr-Hib(TM) 5-45
(collectively  the "Process Water  Products") are specialty  formulations of the
Eliminate  technology used for continuous treatment of commercial and industrial
process water systems. Scaling and corrosion are particularly harmful to process
water systems  because they reduce  cooling  efficiency,  deteriorate  equipment
prematurely  and increase  energy  costs.  As with water  distribution  systems,
traditional  treatments  that are currently  used include  phosphates  and heavy
metals which result in poor  performance,  risk of damage,  excessive energy and
water  use and are  normally  considered  discharge  pollutants.  The  Company's
Process Water Products are intended to remove and prevent deposits,  and restore
operational   efficiency  while  decreasing  water  use.  The  products  contain
non-pollutant  ingredients,  and perform in a wide  variety of systems and water
qualities.  In 1996,  approximately  4% of the  Company's  total  revenues  were
derived from sales of the Company's Process Water Products.


         Consumer Products

         Eliminate Shower, Tub and Tile Cleaner.  Eliminate Shower, Tub and Tile
Cleaner is a cleaning  solution  designed to remove soap scum,  hard water spots
and body oils from shower doors and walls,  bathtubs and sinks. It is sprayed on
and rinsed off  approximately a half hour later. It is not necessary to scrub or
brush.  Eliminate  Shower,  Tub and Tile  Cleaner is Green  Cross  certified  as
biodegradable,  and it is the only such cleaner  containing a fragrance which is
certified  biodegradable  and was listed in the Safe Shoppers Bible published in
1995 and 1996,  the foreword  of which was  written  by Ralph  Nader.  Eliminate
Shower,  Tub and Tile  Cleaner is packaged  in four  sizes:  16, 20 and 32 ounce
spray bottles and one gallon refill bottles. In 1996,  approximately 34 % of the
Company's  total  revenues  were derived from sales of Eliminate  Shower Tub and
Tile Cleaner.

         Clean  Sweep(R).  Clean Sweep Pool  Cleaner is added to  swimming  pool
water to remove  scale and body oils,  dirt,  scum and algae which attach to the
scale.  After the Clean Sweep Pool  Cleaner  has  cleaned the pool,  Clean Sweep
Balance  Plus is added to return the pool  chemistry  to normal and Clean  Sweep
Pool Maintenance is added to keep the pool from  accumulating  stains and scale.
The pool does not have to be drained to use the Clean Sweep system.  Clean Sweep
is marketed as a more convenient and less expensive  method than the traditional
method of pool cleaning,  which involves  draining the pool and applying an acid
wash.

         Eliminate Evaporative Cooler Treatment.  Evaporative Cooler Cleaner and
Evaporative  Cooler Treatment are used to clean and maintain  evaporative cooler
systems which are used  primarily in arid and  semi-arid  regions of the western
and southwestern United States.

         Eliminate Toilet Bowl Cleaner.  Eliminate Toilet Bowl Cleaner functions
like  Eliminate  Shower,  Tub and Tile  Cleaner for use in toilet  bowls.  It is
effective as a cleaner for removing rust, hardwater deposits and waste buildups.

         Proposed  Consumer  Products.  In order to expand  its  product  lines,
channels  of  distribution  and  classes of trade,  the  Company  is  developing
additional products and is pursuing the acquisition and/or licensing of existing
product lines.
                                                                          Page 5
<PAGE>
         Agricultural Products

         CCT has six principal  pest  management  products.  Of these,  four are
certified for use in organic farming in certain jurisdictions,  while the others
are either  non-toxic or certified  biodegradable.  PYRELLIN(R) is not certified
for use in  organic  farming  in the State of  California  or for  shipments  of
organic  products into the State of  California.  To expand and  complement  its
current  product  line,  CCT  continues  to  evaluate  candidate  compounds  for
acquisition or licensing.

         COAX(R).  COAX is an insect feeding stimulant which, when combined with
biological  insecticides,  encourages insect pests to ingest more of the mixture
in a shorter  duration.  This addition of COAX results in increased  efficacy of
biological insecticides.  By screening out ultra violet light rays, COAX extends
the length of effective  control of biologicals,  making them more comparable to
conventional  pesticides.  COAX was developed by the United States Department of
Agriculture  (USDA)  and  initially  commercialized  by the  Proctor  and Gamble
Company. CCT purchased and now owns both the formula and trademark COAX(R). COAX
accounted for approximately 5 % of the Company's sales in 1996.

         STRESSGUARD.(R)  STRESSGUARD  forms a thin,  gas permeable  membrane on
plant foliage which  reduces water loss and protects  plants from  environmental
conditions that are stressful to them and that retard growth.  STRESSGUARD  also
can be used  with soft  pesticides  which  become  encapsulated  in the  coating
permitting  the increased and extended time of  effectiveness  against  insects.
Using STRESSGUARD in conjunction with pesticides  results in fewer  applications
and lower use rates  resulting  in savings to growers  and reduces the amount of
pesticide  introduced  into the  environment.  CCT owns the product  formula and
trademark for STRESSGUARD.

         CO*BACIL(R).  CO*BACIL was  developed by CCT,  together  with the USDA.
CO*BACIL,  available in one powder and two granular  formulations,  incorporates
the  biological  insecticide  Bacillus  thuringiensis  with CCT's insect feeding
stimulant,  COAX. CO*BACIL, now in market introduction,  is principally targeted
for the control of  lepidopterous  insect pests in corn,  vegetables,  trees and
vines.  CO*BACIL  has  been  demonstrated  to be more  effective  that  other Bt
products,  which do not contain COAX. CCT owns the product formula and trademark
for CO*BACIL.

         PYRELLIN(R).  PYRELLIN is a  botanical  insecticide  marketed  under an
agreement  with its  manufacturer,  the Webb Wright  Corporation.  The exclusive
marketing agreement applies to the United States and Mexico.  PYRELLIN accounted
for  $929,000  in sales for the year  ending  December  31,  1996,  representing
approximately  36% of the  Company's  sales.  One of the active  ingredients  in
PYRELLIN, rotenone, is currently under review by the United States Environmental
Protection Agency (EPA) and the California  Environmental Protection Agency (Cal
EPA).  The EPA has rendered  its decision in favor of rotenone,  and the Cal EPA
decision,  believed  to be  favorable,  is due.  Once  the  latter  decision  is
received, CCT will continue its negotiations to acquire or license PYRELLIN from
Webb Wright.  This would then require that CCT be responsible for generating the
information  required  for the  re-registration  of  rotenone,  estimated  to be
approximately  $160,000 - $200,000 over the next three to five years.  A portion
of these funds could be recouped  through the data  compensation  program at the
EPA.

         DENY(R).  There are two  product  forms for DENY,  one is a  biological
fungicide and the other a biological nematicide. Both products have applications
in  vegetables,  specialty  crops  such as  melons,  and  turf,  accounting  for
approximately  6% of the Company's 1996 sales.  DENY provides fungus disease and
nematode  damage  prevention  at  levels  competitive  with  current  commercial
products  with less  restrictions  and  hazards.  Under an  exclusive  marketing
agreement  with Stine  Microbial  Products,  CCT markets the DENY  products on a
worldwide basis. This marketing agreement expires on November 16, 2004.

         LINE-OUT(R).  LINE-OUT was developed by H.E.R.C.  for the  agricultural
sector to clean and maintain low flow irrigation  systems lines free of deposits
that restrict water flow.  LINE-OUT is marketed  exclusively by CCT. LINE-OUT is
also  effective as a soil  amendment  in  reclaiming  salty  soils.  LINE-OUT is
presently being applied on golf courses to improve water penetration through the
soil. It is non-corrosive  and certified  biodegradable by Green Cross. In 1996,
LINE-OUT accounted for approximately 2% of the Company's sales.
                                                                          Page 6
<PAGE>
         CCT also markets a line of pheromone mating disruption products for the
Thermo Trilogy Corporation.  Mating disruption products are useful in Integrated
Pest  Management  Programs to preserve  the natural  populations  of  beneficial
insects  (natural enemies of insect pests) and reduce the amount of conventional
pesticides applied.

Marketing and Distribution

         The Company  markets its products and services  using its marketing and
sales  staff,   exclusive   licensing   arrangements  with  independent  service
companies,  independent distributors and strategic relationships.  Prior to July
1996, the Company also marketed its consumer  products through the joint venture
with Conair.

         Industrial Products.

         The Company  believes that the market for its  industrial  products and
services is very broad.  In addition to the more than  250,000  miles of potable
water mains in the United States  operated by public and private water companies
and  municipalities  which  may be in need of  rehabilitation  and has  been the
primary focus of its marketing to date, there are extensive  private  waterlines
in hotels,  resorts,  factories,  refineries,  mines and other  industries  with
internal water distribution systems which need rehabilitation.  The Company uses
its internal  sales force to market its  revitalization/rehabilitation  products
and services  through  direct  presentations  to  municipalities  and industrial
companies with internal water distribution  systems at pipeline  engineering and
municipal   services   trade  shows.   It  also   advertises  in  related  trade
publications.  In addition, in 1996 the Company entered the fire protection pipe
line  cleaning/passivation  market and the marine-ship  board pipe line chemical
cleaning market.  As of March 21, 1997, the Company has cleaned the vacuum waste
water lines on board 9 United States Coast Guard Cutters.

         The Company  markets its  industrial  products and  services  mainly by
establishing  licensing and/or  distribution  agreements with regional and local
independent  contractors  and  direct  sales  depending  upon the  location  and
customer needs.  Under such a licensing  and/or  distribution  arrangement,  the
contractor  agrees to  purchase  the  Company's  products  in  exchange  for the
exclusive territorial marketing rights. The Company has licensed two entities in
key areas of the country to market the water system treatment products primarily
to the municipal and industrial  market for water systems treatment in the areas
of Eastern  New York,  Eastern  Pennsylvania,  New Jersey and Ohio.  The Company
distributes  Chlor*Rid  through Chlor*Rid  International,  Inc., an unaffiliated
distributor.

         The Company  markets  its  Process  Water  Products  through  strategic
relationships with established water system treatment companies.


         Consumer Products

         On July 1, 1996, the Company acquired the fifty percent interest of the
LLC owned by Conair. Prior to that date the Company and Conair equally owned the
LLC which was formed to produce and market the Company's consumer products.

         The Eliminate  Shower,  Tub and Tile Cleaner is sold by HCPI  primarily
through  large  hardware  and home  improvement  chains.  The pool  products are
distributed by HCPI to pool specialty stores and distributors, and marketed both
under the HCPI's name and on a private  label basis.  During  1996,  the Company
sold $783,812 of consumer products to one customer,  representing  approximately
88% of consumer products sales.

         Agricultural Products

         The Company's biorational  agricultural and horticultural  products are
marketed by CCT. CCT began its  operations in 1981 and has  established  markets
and long standing  relationships  among users of environmentally  sensitive pest
management  products.  CCT markets its  products  through  local,  regional  and
national distributors of agricultural products in all major fruit, vegetable and
specialty  crop growing areas in the United States as well as into the turf/golf
course market through key distribution channels.
                                                                          Page 7
<PAGE>
CCT  regularly  participates  in  industry  trade  shows and appears in selected
industry  publications.  CCT also  continues  to increase its emphasis on market
opportunities outside the United States.

         Advertising

         The Company  actively  advertises  and  publishes in selected  industry
publications  and initiates  direct mail pieces to discreet  groups of potential
consumers  of its various  products.  The Company  also uses an "800"  number in
connection  with its advertising and direct mail programs so that customer leads
may be followed up on under the coordination of the Company sales personnel. The
primary  emphasis of the advertising is to promote  awareness of the Company and
its various products.

Competition

         Industrial Products

         Waterwell  and  waterline  revitalization/rehabilitation  are  normally
performed by regional  contractors.  There are no major  companies that dominate
this  business.  The  largest  company  in the  waterwell  field is Layne,  Inc.
Chemicals used in cleaning  water systems have  generally been  non-proprietary,
readily available acids produced by such major chemical companies as DuPont, Dow
Chemical  Company,  Hill Brothers  Chemical Company and Vista Chemical  Company.
These companies are substantially  larger and have far more extensive  resources
than the Company.  To the extent that the Company seeks to sell its water system
pipeline rehabilitation technology directly to end users, it may be perceived as
competing with the regional contractors to which it will also seek to market its
pipe  rehabilitation  products and  technology.  While such companies are not as
large as the chemical  producers,  they are still  generally large and more well
established in the industry than the Company.

         With respect to Process Water  Products,  the Company does not directly
compete  with the major water  treatment  companies,  but is a supplier to those
companies by educating  them of the  advantages of the  Company's  Process Water
Products and technology.  Should the water treatment companies choose to compete
with the Company,  there could be an adverse effect on the Company's  activities
since  the  Company  does not have  the  resources  to  compete  for full  water
treatment contracts on a "stand-alone"  basis. Almost all of the water treatment
and water treatment  chemical  companies are  substantially  larger and have far
more extensive resources than the Company.

         In  addition,  the Company  expects  that the  companies  with which it
competes have the resources to develop and have developed,  are  developing,  or
may  develop  and  market  products  directly  competitive  with  the  Company's
technology.  Current  competitors  or new market  entrants  could produce new or
enhanced  products with features that render the Company's  products obsolete or
less marketable.  The Company's  ability to compete  successfully will depend on
the Company's  continuing  research and development of new and improved products
and on the Company's  ability to adapt to technological  changes and advances in
the water systems treatment industry.

         In the opinion of the Company's management,  the Company's products and
methods are superior to other water system treatment  chemicals because they are
easier  to  use,  less  expensive  and  are  less  harmful  to the  environment.
Additionally,  certain of the Company's products meet the NSF Standard 60 or are
Green Cross certified as biodegradable.  The Company competes principally on the
basis  of  these  qualities  and  by  securing   strategic   relationships  with
established  companies,  of which  there can be no  assurance.  The  Company has
patent  protection  for  certain  of its  technologies  and is seeking to expand
patent  protection  by making  new  applications  in  respect  of its  Eliminate
products and technology in order to provide a diverse product base.

         Consumer Products

         The markets for HCPI's products are highly  competitive.  HCPI competes
with numerous  well-established chemical and consumer products companies, all of
which possess  substantially greater financial,  marketing,  personnel and other
resources than HCPI and have established reputations. HCPI intends to expand its
product  lines (by  developing  new products and by acquiring  and/or  licensing
existing product lines),  channels of distribution and classes of trade in 1997.
In addition to hardware,  HCPI will pursue janitorial,  catalog,  commercial and
warehouse  club store sales.  Catalog  sales  through U.S.  Sales Corp and sales
through Bed,  Bath and Beyond  retail  outlets are new channels of  distribution
secured in January, 1997.
                                                                          Page 8
<PAGE>
         Agricultural Products

         The  biorational  products of CCT compete with other natural or organic
products as well as  conventional  pest control  chemical  products.  Within the
biorational agricultural product markets, CCT competes with smaller agrichemical
manufacturers such as Ecogen, Inc., Mycogen Corporation, Troy Biosciences, Inc.,
Custom Chemicides and Miller Chemical and Fertilizer  Corporation.  In addition,
there  are a number of sole  proprietorships  that also  compete  in these  same
markets. CCT also competes with major agrichemical  manufacturers such as Abbott
Laboratories  and Novartis (a new company that brings  together  Ciba and Sandoz
Agro) which also produce and market conventional agrichemicals.  These companies
are  substantially  larger and have far more extensive  resources than does CCT.
CCT  competes  based upon the fact that the  products  in its  entire  line have
little or no adverse  environmental  impact, some of which are certified for use
in  organic  food  production.  CCT  benefits  from  its  extensive  established
relationships in the agribusiness industry.


Manufacturing and Supply

         Certain of the Company's  industrial  products based upon the Eliminate
technology  are formulated  and packaged at its plant in Phoenix,  Arizona.  The
balance of these industrial  products and all of the Company's consumer products
are  manufactured  and packaged for it by third party  manufacturers  located in
Chandler, Arizona, Tucson, Arizona and Winterhaven,  Florida, using formulations
provided  by  the  Company.  The  CCT  biorational   agricultural  products  are
manufactured and packaged for it by third party manufacturers using formulations
provided by CCT.  The  Company  generally  does not  maintain  long-term  supply
agreements  with its suppliers  and  purchases  raw  materials and  agricultural
products  pursuant to purchase  orders or  short-term  contracts in the ordinary
course of  business.  The  Company  believes  that the raw  materials  and other
supplies  are  readily  available  from a variety of sources  and that there are
numerous companies available to formulate and package its products.

Patent and Trademark Protection

         The Company  has a patent for the use of its  Eliminate  technology  in
cleaning  potable water  distribution  systems.  The Company has several patents
covering  its  automated  control  system  for  using  the  Company's  Eliminate
technology for controlling scale and corrosion in process water applications and
several patents on its process for cleaning water distribution systems. On March
11, 1997 the Company received a joint patent with Chlor*Rid International, Inc.,
for the use of its Chlor*Rid  technology in removing chlorides from contaminated
surfaces.  The  Company  also  has  a  patent  for  its  multi-purpose  cleaning
formulation.  The Company has been  allowed a patent in respect of Clean  Sweep.
Additionally,  the Company has two United States patents  pending related to the
process for  cleaning  water  distribution  systems.  The Company  currently  is
executing a foreign patent  program on the Company's  basic United States patent
technology.  There can be no  assurance  that any  patents  applied  for will be
obtained.  Moreover,  there can be no assurance that any patents will afford the
Company  commercially  significant  protection  of its  technology  or that  the
Company  will have  adequate  resources  to enforce  its  patents.  The  Company
believes that it has  independently  developed its proprietary  technologies and
they do not infringe the proprietary rights of others.  Although the Company has
received no claims of infringement, it is possible that infringement of existing
or future patents or proprietary rights may occur.

         In the event that the Company's products infringe patent or proprietary
rights of others,  the Company may be required to modify its processes or obtain
a license.  There can be no assurance that the Company would be able to do so in
a timely manner,  upon acceptable terms and conditions or at all. The failure to
do so would have a material  adverse effect on the Company.  In addition,  there
can be no assurance that the Company will have the financial or other  resources
necessary  to  defend  a  patent  infringement  or  proprietary  rights  action.
Moreover,  if any of the Company's products infringe patents or propriety rights
of others,  the Company  under  certain  circumstances  could become  liable for
damages which could have a material adverse effect on the Company.

         The  Company's  registered  trademarks  are  Eliminate,   Clean  Sweep,
h.e.r.c.(R), Well Klean, Pipe Klean, STRESSGUARD, CO*BACIL, COAX, DENY, LINE-OUT
and  SPARK(R).  The  Company  also  has the  Eliminate  Man(C)  registered  as a
copyright.
                                                                          Page 9
<PAGE>
         The  Company  also  relies on  proprietary  know-how  and  confidential
information  and employs  various  methods to protect the  processes,  concepts,
ideas and documentation  associated with its technology.  However,  such methods
may not afford  complete  protection,  and there can be no assurance that others
will  not   independently   develop   such   processes,   concepts,   ideas  and
documentation.  Although  the  Company  requires  all of its  employees  to sign
confidentiality agreements,  there can be no assurance that such agreements will
be enforceable or will provide meaningful  protection to the Company.  There can
be no assurance  that the Company will be able to  adequately  protect its trade
secrets or that other  companies will not acquire  information  that the Company
considers to be  proprietary.  Moreover,  there can be no  assurance  that other
companies will not independently  develop know-how  comparable to or superior to
that of the Company.


Government Regulation

         Water  pollution  is  a  major  focus  of  federal,   state  and  local
environmental protection laws and regulations.  The discharge from water systems
treatment is subject to these laws and  regulations.  The water system treatment
chemicals  industry and the  Company's  operations  are subject to extensive and
significant  regulation by federal,  state and local  governmental  authorities.
Some  of  such  regulation  is  extensive  and may  from  time  to  time  have a
significant  impact on the Company's  operations.  Testing and  certification of
drinking  water  additives is performed by the NSF pursuant to Standard 60 which
is a  recognized  standard  used as  guidance  by the  federal  and  most  state
environmental protection  administrations and is being adopted as the regulatory
standard by many states.  The NSF has  indicated  that Pipe Klean and Well Klean
comply with the standards for chemicals  which can be used in cleaning  drinking
water  systems.  In  addition,  many of the  Company's  products are Green Cross
certified as  biodegradable.  Products are  biodegradable  if they can be broken
down into carbon  dioxide,  water and minerals  without  harmful  effects to the
environment.

         Some of the  Company's  products  require the use of a chemical that is
classified  under applicable laws as a corrosive  chemical and substance.  There
can be no  assurance  that the Company  will not incur  environmental  liability
arising out of the use of corrosive  substances.  To date,  the Company does not
believe that it has incurred any such  liability.  The Company does not maintain
insurance  to  compensate  it for any  liabilities  it may  incur  if it were to
violate  environmental  laws  or  regulations.  The  use  of  certain  chemicals
contained in the Company's  products is subject to frequently  changing federal,
state and local laws and substantial regulation under these laws by governmental
agencies,  including  the United States  Environmental  Protection  Agency,  the
Occupational Health and Safety Administration, various state agencies and county
and local authorities  acting in conjunction with federal and state authorities.
Among other things,  these regulatory bodies impose requirements to control air,
soil and water  pollution,  to protect  against  occupational  exposure  to such
chemicals, including health and safety risks, and to require notification of the
storage, use and release of certain corrosive chemicals and substances.

         The biorational  agricultural  products sold by CCT are registered with
the federal and most state environmental protection agencies. In most instances,
the federal  registration  is  undertaken  and  maintained  by the entities that
developed  or have  licensed  CCT to  manufacture  and  sell the  products.  CCT
maintains  licenses for the sale of each of its  agricultural  products in those
states where it sells the products.

         The Company  believes  that it is in  substantial  compliance  with all
material  federal,  state and local laws and regulations  governing its business
operations and has obtained all material  licenses,  authorizations,  approvals,
orders,  certificates  and permits  required for the  operation of its business.
There can be no assurance  that the Company in the future will be able to comply
with current or future government  regulations in every jurisdiction in which it
will conduct its business operations without substantial cost or interruption of
its  operations,  or  that  any  present  or  future  federal,  state  or  local
environmental  protection regulations may not restrict the Company's present and
possible  future  activities.  In the event that the Company is unable to comply
with such requirements,  the Company could be subject to substantial  sanctions,
including  restrictions  on its  business  operations,  monetary  liability  and
criminal  sanctions,  any of which could have a material adverse effect upon the
Company's business.

         Advertising relating to the Company's products is subject to the review
of the Federal Trade  Commission and state  agencies,  pursuant to their general
authority  to monitor  and  prevent  unfair or  deceptive  trade  practices.  In
addition,  the Consumer Products Safety Commission regulates the labeling of the
Company's products.
                                                                         Page 10
<PAGE>
Research and Development

         The Company  believes  that there are numerous  additional  products to
further  expand or augment its current  product lines that may be developed from
the  Eliminate  technology  or acquired.  The Company has not yet  developed any
other products  based on the Eliminate  technology and there can be no assurance
that such  products  can be  developed  or that,  if  developed,  they  would be
technologically  or commercially  successful.  The Company also anticipates that
there will be  opportunities to develop products in related fields which are not
necessarily  dependent  on the  Eliminate  technology.  The Company is currently
evaluating  a  number  of new  biorational  agricultural  products  that  may be
available for  acquisition  or licensing.  There can be no assurance that future
research,  development and evaluation  activities or expenditures by the Company
will result in commercially viable products.

         CCT participates in various cooperative  product  development  programs
sponsored by different entities  including the Biocontrol  Division of the USDA,
major university  extension agencies and manufacturers of newer technologies and
niche  products.  CCT  participates  at different  levels such as  conducting or
providing  research,  joint testing and providing  marketing  expertise which is
used to help design the product.  By combining its  resources  with those of the
USDA,  universities  and  manufacturers,  CCT is able to leverage the use of its
research  funds and review many active  research  products  taking  place in the
United States as well as to establish potential marketing  relationships for new
products.

Employees

         As of December 31, 1996, the Company had 31 employees, of whom five are
officers,  five  are  engaged  in  field  operations  and  production,  five  in
administration  and  twelve  in  marketing  and  sales.  None  of the  Company's
employees is represented  by labor unions or covered by a collective  bargaining
agreement. The Company believes that its relations with all of its employees are
satisfactory.

Seasonality

         Sales of the Company's agricultural products are seasonal. The greatest
dollar  volume of sales of  agricultural  products  occurs during the second and
third  quarters  of the  calendar  year.  Sales of the Pipe Klean and Well Klean
products are also seasonal in those parts of the United States in the snow belt.
Seasonal sales can result in uneven cash flow for the Company.  Uneven cash flow
may require the  Company to be  dependent  on cash flows from sales of its water
system  treatment  products  during  those  portions  of the year when  sales of
agricultural products experience slow down and may require the Company to obtain
and maintain  short-term  financing  arrangements.  In the event such  financing
arrangements  are not available or, once  acquired,  cease to be available,  the
Company's  operations  and financial  condition  could be  materially  adversely
affected.

Item 2.  Description of Property

         The  Company  leases  approximately  15,700  square  feet of office and
warehouse  facilities in Phoenix,  Arizona,  approximately  5,530 square feet of
office and warehouse facilities in Portsmouth,  Virginia and approximately 2,500
square feet of office and  warehouse  facilities  in Carlsbad,  California.  The
Phoenix  facilities  are leased  under an operating  lease  expiring on July 31,
2001. The lease provides for monthly payments  escalating from $8,796 to $10,053
over the term of the  lease.  The  Portsmouth  facilities  are  leased  under an
operating  lease expiring  December 31, 1998, with an option to extend the lease
for three (3)  additional  years to December  31, 2001.  The lease  provides for
monthly  payments  escalating  from $2,225 to $2,640 over the term of the lease,
including  the  extension  term.  The  Carlsbad  facilities  are leased under an
operating lease expiring on July 31, 1997 that provides for monthly  payments of
$1,655. CCT has the option of extending this lease for one year to July 31, 1998
at the same monthly rate.

Item 3.  Legal Proceedings

         The Company is not a party to any pending legal proceeding,  nor is its
property the subject of any pending legal proceeding.
                                                                         Page 11
<PAGE>
Item 4.  Submission of Matters to a Vote of the Security Holders

         There  were no matters  submitted  to a vote of the  security  holders,
through the solicitation of proxies or otherwise during the fourth quarter ended
December 31, 1996.

Part II

Item 5.  Market for Registrant's Common Stock and Related Stockholder Matters

Trading Markets

         The  Company's  Common  Stock has been  listed on the  Nasdaq  SmallCap
Market and on the Boston  Stock  Exchange  under the  symbols  "HERC" and "HER",
respectively.  The  Nasdaq  SmallCap  Market  is the  principal  market  for the
Company's Common Stock.

         The following table sets forth the high and low bid prices as quoted by
Nasdaq for the periods indicated.  Such quotations reflect  inter-dealer prices,
without  retail  mark-up,  mark-down  or  commission  and  may  not  necessarily
represent actual transactions.


     1995                                                 High Bid       Low Bid
     ----                                                 --------       -------
First Quarter                                             $3.063         $1.625
Second Quarter                                             4.125          2.625
Third                                                      4.375          1.875
Fourth Quarter                                             2.188          1.500


     1996                                                 High Bid       Low Bid
     ----                                                 --------       -------
First Quarter                                             $1.813         $0.625
Second Quarter                                             2.125          0.750
Third                                                      2.906          1.188
Fourth Quarter                                             3.125          1.500
(through February 29, 1997)

     1997                                                 High Bid       Low Bid
     ----                                                 --------       -------
First Quarter                                             $2.375         $1.438
(through February 29, 1997)

         On March 20, 1997 the last  reported  bid price for the Common Stock as
quoted by Nasdaq was $1.375.

Holders

         As of March 18, 1997,  the number of record holders of the Common Stock
of the Company was 72. According to Company estimates, there are more than 1,040
beneficial holders of the Common Stock..


Dividends

         To date,  the  Company  has not paid any cash  dividends  on its Common
Stock,  and it does not anticipate  paying any cash dividends in the foreseeable
future.  There are no  restrictions  that  limit the  Company's  ability  to pay
dividends on its Common Stock.
                                                                         Page 12
<PAGE>
Recent Sales or Grants of  Unregistered Securities

The following  relates to all  securities of the Company sold or granted  within
the last fiscal year which were not registered under the Securities Act of 1933.
<TABLE>
<CAPTION>
------------ ----------------- ------------------------ ------------------------ -------------- -----------------
                                                        Consideration received
                                                          and description of       Exemption        Terms of
  Date of        Title of              Number            underwriting or other       from           exercise
   grant         security                                 discounts to market    registration
                                                           price afforded to        claimed
                                                              purchasers
------------ ----------------- ------------------------ ------------------------ -------------- -----------------
<S>          <C>               <C>                      <C>                      <C>            <C>

                Options to                               Options granted - no       Section     Exercisable for
  1/96 -     purchase Common           575,000          consideration received       4(2)       a period
   12/96      Stock granted                                by Company until                     lasting six
               to employees                                    exercise                         years from date
              and directors                                                                     of grant at
                                                                                                exercise prices
                                                                                                ranging from
                                                                                                $1.50 to $2.38
------------ ----------------- ------------------------ ------------------------ -------------- -----------------

                  Units          Units consisting of                                Private        The Common
  4/3/96                         3,214,902 shares of          $2,732,650*          placement     Stock purchase
                                  Common Stock and                                pursuant to     warrants are
                               3,214,902 Common Stock                            Section 4(2)    exercisable at
                                  purchase warrants                                               $2.00, until
                                                                                                 April 3, 1999
------------ ----------------- ------------------------ ------------------------ -------------- -----------------

  4/3/96      Unit Purchase      Units consisting of                                Section      Exercisable at
                  Option          321,490 shares of              $100                4(2)         $.935 until
                                  Common Stock and                                                  4/3/2001
                                321,490 Common Stock
                                  purchase warrants
------------ ----------------- ------------------------ ------------------------ -------------- -----------------

               Warrants to                                Warrants granted as       Section      Exercisable at
  9/27/96    purchase Common           50,000              consideration for         4(2)         $2.75 until
              Stock granted                                financial public                        9/17/2001
              to The Equity                               relations services
                  Group
------------ ----------------- ------------------------ ------------------------ -------------- -----------------

               Warrants to                               Warrants granted - as      Section     Exercisable for
 11/19/96    purchase Common           200,000             consideration for         4(2)           a period
              Stock granted                               consulting services                     lasting four
                  to GKN                                                                           years from
             Securities Corp.                                                                     11/19/97 at
                                                                                                 exercise price
                                                                                                    of $2.50
------------ ----------------- ------------------------ ------------------------ -------------- -----------------

 12/10/96    Preferred Stock       170,000 shares             $1,700,000*           Private           N/A
                                                                                   placement
                                                                                  pursuant to
                                                                                 Section 4(2)
------------ ----------------- ------------------------ ------------------------ -------------- -----------------

               Warrants to                               Services as placement      Section     Exercisable for
 12/10/96    purchase Common           85,000                    agent               4(2)           a period
              Stock granted                                                                       lasting five
                to Perrin,                                                                      years from date
                 Holden &                                                                         of grant at
                Davenport                                                                        exercise price
                 Capital                                                                            of $3.00
               Corp.("PHD")
------------ ----------------- ------------------------ ------------------------ -------------- -----------------
</TABLE>
*See "Item 6,  Management's  Discussion and Analysis of Financial  Condition and
Results of Operations - Liquidity and Capital Resources" and Note 9 to Financial
Statements for a discussion of private  placements of Common Stock and Preferred
Stock during 1996.
                                                                         Page 13
<PAGE>
Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         When used in the Form 10-KSB and in future  filings by the Company with
the  Securities  and  Exchange  Commission,  the words or phrases  "will  likely
result", "the Company expects," "will continue," "is anticipated,"  "estimated,"
"project,"  or  "outlook"  or  similar  expressions  are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995. The Company  cautions readers not to place undue
reliance on any such forward-looking  statements, each of which speak only as of
the date made.  Such  statements are subject to certain risks and  uncertainties
that could cause actual results to differ  materially from  historical  earnings
and  those  presently  anticipated  or  projected.  Included  in the  risks  and
uncertainties  that may effect the Company are the following:  the possible need
for additional  capital to fund operations in the future; the current dependence
on  significant  customers;  the need to obtain  and  maintain  "environmentally
friendly" certification for its agricultural products; competition; the need for
continued  market  acceptance and the  requirement to expand sales in all of its
segments;  the seasonality of sales of certain of its products;  and the need to
contain  and  reduce  certain  expenses  associated  with  the  manufacture  and
distribution  of its  products.  The  Company has no  obligation  to release the
result of any revisions which may be made to any  forward-looking  statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.

Results of Operations

                             1996 Compared with 1995

         Sales for the year ended December 31, 1996 were $2,600,642  compared to
$1,349,786 in 1995, an increase of $1,250,856 or 93%.  Consolidation of H.E.R.C.
Consumer Products  operations into the financial  statements,  effective July 1,
1996, and inclusion of  agricultural  sales for the entire year 1996 (see Note 3
to  accompanying  financial  statements)  account for the increase,  offset by a
decline in industrial product sales.

         Consumer  product sales for the six months ended December 31, 1996 were
$893,754,  over 98% of which were Eliminate Shower, Tub and Tile Cleaner. 88% of
consumer  product sales were to one customer.  Full years sales in 1996 and 1995
were $1,655,000 and $1,380,573 respectively with wider distribution of Eliminate
Shower, Tub and Tile Cleaner accounting for the increase.

         Agricultural  products contributed  $1,377,085 to consolidated sales in
1996  compared to $736,966 for the eight months  ended  December 31, 1995.  Full
year agricultural sales in 1995 were $1,979,852. PYRELLIN revenues declined from
$1,352,200  for the full  year  1995 to  $929,150  in 1996 as a result  of (a) a
promotion  program  in late 1995  whereby  customers  bought  ahead and  carried
inventory into 1996 and (b) the loss in California of organic  certification  of
the product for use by organic farmers.  To date, the certification has not been
restored.  Sales of all  agricultural  products  in 1996  were  generally  lower
because  of  weather  conditions,   but  DENY  sales  were  up  20%  as  product
introduction continued. The Company anticipates that DENY sales will increase in
1997  in  response  to   registration   of  the  product  with  the   California
Environmental Protection Agency in the first half of 1997.

         Higher  industrial  product  sales  of  $612,820  in 1995  compared  to
$329,803  in  1996  are  largely  attributable  to  the  sale  of  three  mobile
recirculation  units in 1995.  There  were no such sales in 1996.  Revenue  from
other industrial chemical products was essentially flat from 1995 to 1996.

         Pro forma  consolidated  sales  (see Note 3 to  accompanying  financial
statements)  decreased  $611,357  from 1995 to 1996  because  of the  decline in
agricultural  and  industrial  products  offset by an  improvement  in  consumer
product revenues.

         Although  industrial  products  gross margin as a  percentage  of sales
declined in 1996, improved margin in the agricultural business and consolidation
of consumer products  operations for the final six months of 1996 contributed to
an increase in overall margin from 2% in 1995 to 23% in 1996.

         The decline in industrial  products  margin from a negative 10% in 1995
to a negative  18% in 1996 is largely a  function  of start up costs  associated
with the Company's  initial pipeline  rehabilitation  projects and write down of
certain equipment used in the water system treatment process. Lower raw material
cost for PYRELLIN in 1996 
                                                                         Page 14
<PAGE>
accounts for the improved  agricultural  margin of 36% in 1996 compared with 12%
in 1995.  Consumer  product  margin of 22% for the six months ended December 31,
1996 was  adversely  impacted by certain  one-time  product  and  freight  costs
associated with the movement of Conair inventory after the acquisition.

         Selling expenses increased from $849,812 in 1995 to $1,102,638 in 1996,
representing  an increase of 30%,  while  general  and  administrative  expenses
increased  from  $1,721,077  to  $1,923,020,  representing  an  increase of 12%.
Consolidation  of consumer  products  accounts  for  $282,303  of the  aggregate
increase in selling,  general and  administrative  expense  while the balance of
$172,466 is attributable to additional  personnel and related costs necessary to
support revenue growth and the Company's expanding operations and services.

         Interest   expense  is  consistent  from  year  to  year.  The  Company
anticipates that interest expense will be virtually eliminated in 1997 since the
related indebtedness has been retired with the proceeds from issuance of stock.

         The decrease in miscellaneous income is a function of (a) less interest
income as more cash was invested in the business and (b) elimination of research
and development  reimbursements after the Company acquired Conair's 50% share of
the LLC.


Liquidity and Capital Resources

         Cash and cash equivalents were $1,369,843 at December 31, 1996 compared
to $331,601 at December 31, 1995. Working capital was $1,926,213 at December 31,
1996 and $687,713 at December 31, 1995.  Increased cash and cash equivalents and
working capital, at year end, are a result of the private placement of Preferred
Stock in  December  1996  offset by the loss from  operations.  Net cash used in
operating  activities was $2,268,512 and $2,167,560 for the years ended December
31, 1996 and 1995 respectively.

         On April  3,  1996,  the  Company  sold  3,214,902  units in a  private
placement,  for gross proceeds of  approximately  $2,733,000 and net proceeds of
approximately  $2,277,000.  Each unit  consisted of one share of Common Stock of
the  Company  and one  warrant.  Each  warrant  entitles  the holder  thereof to
purchase  one share of Common  Stock for $2.00 until April 3, 1999.  The Company
may call the warrants for redemption at a price of $.01 per warrant, on not less
than 30 days prior written  notice,  if the last sales price of the Common Stock
has been at least  $5.00 per share on all 20 of the  trading  days ending on the
third day prior to the date on which notice of redemption is given.  The Company
has an  effective  registration  statement  under  the  Securities  Act of  1933
covering  the resale of the Common Stock issued in the offering and to be issued
upon exercise of the warrants by the holders.

         In December  1996 the Company  completed a private  equity  offering of
170,000 shares of Class A Preferred Stock ("Preferred Stock") for $1,700,000 and
received net proceeds of  $1,480,000.  The Preferred  Stock has a par and stated
value of $.01 and $10 respectively. 1,000,000 shares are authorized. The holders
of the  Preferred  Stock are entitled to receive  dividends of 10% of the stated
value per annum from the date of  issuance  through  the  "Conversion  Date," as
defined,  payable solely in shares of the Company's Common Stock. The holders of
the Preferred  Stock have the right to convert each share of Preferred Stock and
the accrued  amount of dividends  thereon,  through the  Conversion  Date,  into
shares of Common Stock  determined by dividing the aggregate of the stated value
of the Preferred Stock plus accrued dividends,  by the greater of (i) 75% of the
average  closing bid price of the common shares,  as defined,  or (ii) $.10. The
Preferred  Stock  will  automatically  convert  based on the  above  formula  on
December 17, 1999.  The Preferred  Stock does not carry any redemption or voting
rights. In the event of a liquidation, dissolution or winding up of the Company,
the  holders of the  Preferred  Stock will  participate  with the holders of the
Common Stock as if the Preferred Stock was fully converted  immediately prior to
the  event.  The  Company  has an  effective  registration  statement  under the
Securities  Act of 1933  covering  the resale of the Common  Stock  issued  upon
conversion of the Preferred Stock.

         As  of  March  26,  1997,  100,780  shares  of  the   Preferred   Stock
(approximately 59.3%) have been converted to Common Stock.

         The Company used the proceeds from securities sales in 1996 to purchase
Conair's  50% share of the LLC and is  continuing  to use such  proceeds  (a) to
purchase  industrial,  consumer and agricultural  product  inventory to meet its
anticipated  sales;  (b) to market its water system  treatment  product and make
capital  expenditures  to expand that 
                                                                         Page 15
<PAGE>
segment of its business; (c) to develop,  license and purchase the rights of new
industrial, consumer and biorational agricultural products; and, (d) for working
capital for general corporate purposes.

         Through  February  1997,  the  Company did not  generate  the cash flow
necessary to support its ongoing business.  However,  management  believes,  but
cannot  assure,  that  financial  results for the  balance of 1997 will  provide
sufficient  positive cash flow to fund ongoing  operations and required  capital
expenditures.  Should management  determine that the current operating plan will
not provide  positive cash flow, the Company may take actions,  particularly  in
the marketing and corporate areas,  until revenues and operating margins reach a
level to produce overall profitable results.

         In February  1997, the Company  arranged a $150,000  credit line with a
bank at the bank's prime  interest  rate which expires March 31, 1998. No amount
has been drawn  against the line.  If  financing in excess of the credit line is
required,  there is no assurance that such arrangements  could be concluded.  To
the extent that any future financing involves the sale of equity securities, the
interest of the Company's then stockholders could be substantially diluted.


Item 7.  Financial Statements

         See Index To Financial Statements on F-1 attached hereto.


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

         Not applicable.

Part III


Item 9.  Directors, Executive Officers, Promoters and Control Persons
<TABLE>
<CAPTION>
Name                             Age                     Position
----                             ---                     --------

<S>                              <C>                     <C>
S. Steven Carl                   39                      Chairman  of  the  Board,   Chief  Executive  Officer  and
                                                         Director of the Company

Shelby A. Carl                   69                      Chairman Emeritus and Director of the Company

Gary S. Glatter                  44                      President,   Chief   Operating   Officer,   Treasurer  and
                                                         Director of the Company

Dr. Jerome H. Ludwig             64                      Executive  Vice  President,  Secretary and Director of the
                                                         Company

John P. Johnson                  55                      Chief Financial Officer of the Company

Robert M. Leopold                71                      Director of the Company

Salvatore T. DiMascio            57                      Director of the Company
</TABLE>

         S. Steven  Carl was the  general  manager of CCT from 1987 to May 1992,
and President and Chief  Executive  Officer of CCT from May 1992 to August 1995.
Mr.  Carl has been the Chief  Executive  Officer  and a Director  of the Company
since August 1995 and  President of the Company from August 1995 to February 28,
1996.  Effective  February 28, 1996,  Mr. Carl became  Chairman of the Board and
resigned as President of the Company.
                                                                         Page 16
<PAGE>
         Shelby A. Carl was the Chief  Executive  Officer  of the  Company  from
February  1988 to August 1995 and has been Chairman  Emeritus  since August 1995
and a Director of the Company since February 1988. Prior to joining the Company,
Mr. Carl spent over 30 years in  agricultural  chemical  development  and sales.
Shelby A. Carl is S. Steven Carl's father.

         Gary S. Glatter has been Chief Operating  Officer and a Director of the
Company  since  January  1994,  Chief  Financial  Officer from August 1995 until
December 1996 and Treasurer of the Company  since August 1995.  Mr.  Glatter was
the President of the Company from January 1994 to August 1995 and was re-elected
President of the Company on February 28, 1996.  From 1989 to December  1993, Mr.
Glatter was President and Chief Executive Officer of Classic Properties, L.P., a
New York based real estate management,  sales, marketing and investment company.
From 1985 to 1989, Mr. Glatter was senior vice president for development at M.J.
Raynes  Incorporated  and  prior to that he was in  private  law  practice.  Mr.
Glatter is admitted to the Bar of the State of New York.

         Dr. Jerome H. Ludwig has been Executive Vice President, Secretary and a
Director of the Company since June 1993. For more than five years prior thereto,
he served as a scientific  consultant  to the Company and also was engaged as an
independent business broker. Dr. Ludwig has spent over 40 years in marketing and
product development in the chemical,  plastics and pharmaceutical industries and
holds 17 United States patents.

         John P. Johnson has been Chief  Financial  Officer of the Company since
January 1, 1997. Mr. Johnson has held numerous senior level financial  positions
with various  organizations,  including  the New York Stock  Exchange,  where he
retired as Chief Financial Officer - Vice President of Finance in 1990. Prior to
this, he was on the audit staff at Price  Waterhouse LLP in New York.  After his
retirement from the New York Stock Exchange in 1990, Mr. Johnson has acted as an
independent  financial  consultant.  His most recent appointments include Acting
Chief Financial Officer for Boyt Company,  a manufacturer of luggage and hunting
supplies,  and Interim  Treasurer  for Rodale  Press,  Inc., a book and magazine
publisher. Mr. Johnson is a Certified Public Accountant.

         Robert M. Leopold has been a Director of the Company since June 5, 1996
and has been the  President  of Huguenot  Associates,  a financial  and business
consulting firm, since 1977 and the Chairman of the Board of International Asset
Management  Group, Inc. since 1983. From June 1982 to December 1990, Mr. Leopold
held various  positions with  Insituform of North America,  Inc.  including Vice
Chairman (1982 - 1986), Chief Executive Officer (1986 - 1989),  Chairman (1986 -
1987) and Advisor to the Chairman (1989 - 1990). Mr. Leopold was also a Director
of  Insituform  Mid-America,  Inc.  Mr.  Leopold  currently is a Director of the
following public companies:  Infodata Systems,  Inc.,  Windsor Capital Corp. and
Dental Services of America.

         Salvatore  T.  DiMascio  has  been  a  Director  of the  Company  since
September  3, 1996.  Since June,  1994,  Mr.  DiMascio has been  Executive  Vice
President and Chief Financial  Officer of Anchor Gaming, a public company.  From
1986 - 1994, Mr. DiMascio was the President of DiMascio  Venture  Management,  a
management and investment consulting firm. Among other executive level positions
held during his 30 year career, Mr. DiMascio was Senior Vice President and Chief
Financial  Officer of Conair  Corporation.  In addition,  he has  experience  in
industrial  products  manufacturing,  distribution,  retailing and other service
industries.  Mr. DiMascio is currently a Director of U.S. Communications Inc., a
public company. Mr. DiMascio is a Certified Public Accountant.

         Directors  are  elected  to serve  until  the next  annual  meeting  of
stockholders of the Company or until their successors are elected and qualified.
Officers  serve at the  discretion  of the  Board of  Directors  subject  to any
contracts of employment.

         The Company has agreed with GKN Securities  corporation ("GKN") that at
such time as at least two members of the Board of Directors  are  "independent,"
the Board of  Directors  will  establish a  compensation  committee 
                                                                         Page 17
<PAGE>
of which the  majority  are the  independent  directors,  which  committee  must
approve all compensation and other employment arrangements.

         The Board of Directors  recently  established an Audit  Committee and a
Compensation Committee.

         The Audit  Committee,  currently  comprised  of Robert M.  Leopold  and
Salvatore T. DiMascio,  has been formed to: (i) recommend  annually to the Board
of Directors the  appointment of the independent  auditors of the Company;  (ii)
review with the  independent  auditors  the scope of the annual audit and review
their final report relating thereto;  (iii) review with the independent auditors
the accounting practices and policies of the Company;  (iv) review with internal
and  independent  auditors  overall  accounting and financial  controls;  (v) be
available to the independent auditors during the year for consultation; and (vi)
review related party  transactions by the Company on an ongoing basis and review
potential conflicts of interest situations where appropriate. To date, the Audit
Committee has held one meeting.

         The Compensation  Committee,  currently comprised of Robert M. Leopold,
Salvatore  T.  DiMascio and S. Steven  Carl,  has been formed to review  overall
executive compensation and review the Company's employee benefit plans. To date,
the Compensation Committee has held one meeting.

         The Company is  obligated  through May 1999,  if so  requested by Whale
Securities Co., L.P. ("Whale"),  the underwriter of its initial public offering,
to nominate and use its best efforts to elect Whale's  designee as a director of
the  Company  or, at Whale's  option,  as a  non-voting  adviser to the Board of
Directors. Whale has not exercised its right to designate such a person.

         The Company is obligated  through  April 2001,  if so requested by GKN,
the placement agent of its April 1996 private placement, to nominate and use its
best  efforts to elect GKN's  designee as a director of the Company or, at GKN's
option, as a non-voting adviser to the Board of Directors. GKN has not exercised
its right to designate such a person.


Compliance With Section 16 (a) of the Exchange Act

         Section  16(a) of the  Securities  Exchanges  Act of 1934,  as amended,
requires the Company's  directors and officers and persons who  beneficially own
more than ten percent of the Company's  Common Stock to file with the Securities
and Exchange Commission ("SEC"), the Nasdaq SmallCap Market and the Boston Stock
Exchange  initial  reports of  ownership  and reports of changes in ownership of
Common Stock in the Company.  Officers,  directors and greater-than-ten  percent
shareholders  are required by SEC  regulation to furnish the Company with copies
of all Section  16(a)  reports they filed.  To the  Company's  knowledge,  based
solely on review of the copies of such  reports  furnished  to the  Company  and
written  representation  that no other reports were required,  during the fiscal
year ended  December 31, 1996,  such  persons  complied  with all Section 16 (a)
filing requirements.


Item 10.   Executive Compensation

         Set forth in the following  table is  information as to the salary paid
or accrued to each  officer  and  director  receiving  compensation  of at least
$100,000, and the Chief Executive Officer,  (collectively,  the "Named Executive
Officers") for the three years ended December 31, 1996.

Name              Office                          Year              Compensation
----              ------                          ----              ------------

S. Steven Carl    Chairman of the Board,          1996              $115,500
                  Chief Executive Officer         1995              $ 74,690
                  and Director (1)

Gary S. Glatter   President,                      1996              $152,000
                  Chief Operating Officer         1995              $143,000
                  Treasurer & Director (2)        1994              $125,000
                                                                         Page 18
<PAGE>
------------------------

         (1) Mr. S. Steven Carl has served as the Chief Executive  Officer since
             August 1995.
         (2) Mr. Gary S. Glatter served as Chief  Financial  Officer from August
             1996 until December 31, 1996.


Employment Agreements

         The Company has an employment  agreement  with Mr. S. Steven Carl which
expires  May 1,  1999.  The  agreement  provides  for an annual  base  salary of
$124,000 per year, which increases to $135,000 per year,  commencing  January 1,
1998.  Mr. Carl is also  currently  entitled  to an annual  bonus equal to 1% of
revenues  from sales of CCT for the period  January 1, 1996 to December 31, 1998
and 0.33% of revenues  from sales of CCT from January 1, 1999 to April 30, 1999,
provided CCT is  profitable.  The agreement  also contains  confidentiality  and
non-compete provisions.

         The  Company has an  employment  agreement  with Mr.  Shelby Carl which
expires May 10, 1997. The agreement  provides for an $80,000 annual base salary,
with such  increases and bonuses as the Board of Directors  may  determine  from
time to time.  The  agreement  also  contains  confidentiality  and  non-compete
provisions.

         The Company has an employment  agreement with Mr. Glatter which expires
December 31, 1998. The agreement  provides for an annual base salary of $175,000
per year, which increases to $200,000 per year,  commencing October 1, 1997. Mr.
Glatter is also entitled to annual  bonuses  equal to 1% of the Company's  gross
revenues,  provided  the Company is  profitable.  The  agreement  also  contains
confidentiality and non-compete  provisions.  In September of 1994, the contract
was amended to provide that Mr.  Glatter may be  terminated  by the Company only
for cause,  thereby  terminating the Company's right to terminate Mr.  Glatter's
employment without cause, or for failure to generate adequate revenues.

         The Company has an employment  agreement  with Dr. Ludwig which expires
May 10, 1998.  The  agreement  provides for an annual base salary of $90,000 per
year,  with such  increases  and bonuses as the Board of Directors may determine
from time to time. The agreement also contains  confidentiality  and non-compete
provisions.

         CCT has an employment  agreement with Mr.  Gilbert C. Crowell, Jr., its
President and Chief Operating Officer,  which expires May 1, 1999. The agreement
provides  for an annual  base  salary of $95,000 per year,  which  increases  to
$100,000  per year,  commencing  January 1, 1998.  Mr.  Gilbert C.  Crowell  may
receive such bonuses as the Board of Directors may determine  from time to time.
The agreement also contains confidentiality and non-compete provisions.


Stock Option Plans

         In 1993,  the Board of Directors of the Company  adopted a Stock Option
Plan  ("1993  Plan")  pursuant  to which  350,000  shares of Common  Stock  were
reserved for issuance to key employees, including officers as stock options. Key
employees  are  persons in those  positions  within the Company  whose  efforts,
knowledge  and  expertise  are  integral  to the  operations  and success of the
Company. The 1993 Plan is administered by the Board of Directors,  but the Board
of Directors  may appoint a committee to act on its behalf.  Such options can be
incentive stock options ("ISOs") within the meaning of the Internal Revenue Code
of 1986, as amended, or non-incentive  stock options.  The exercise price of any
ISO cannot be less than 100% of the fair market  value per share of Common Stock
on the date of grant (110% of such fair market  value if the grantee  owns stock
possessing  more than 10% of the  combined  voting  power of all  classes of the
Company's stock). No options may be granted after the year 2003. As of March 18,
1997,  the Company  had issued  under the 1993 Plan  345,000 of these  incentive
stock options, exercisable at prices ranging from $1.88 to $5.00 per share.

         In 1996, the Board of Directors of the Company  adopted the 1996 Equity
Performance  Plan ("1996  Plan")  pursuant to which  1,000,000  shares of Common
Stock were  reserved  for issuance to key  employees,  officers,  directors  and
consultants of the Company and its  subsidiaries,  as both incentive options and
non-incentive options and other equity based awards. Holders of these awards are
persons  in those  positions  with the  Company  whose  efforts,  knowledge  and
expertise are integral to the  operations  and success of the Company.  The 1996
Plan is administered  by 
                                                                         Page 19
<PAGE>
the Board of  Directors,  but the Board of Directors  may appoint a committee to
act on its behalf.  Stock option  awards may be either  incentive  stock options
("ISOs") within the meaning of the Internal Revenue Code of 1986, as amended, or
options not qualifying as ISOs ("Non-qualified  Options"). The exercise price of
any ISO  cannot be less than 100% of the fair  market  value per share of Common
Stock on the last trading day before the date of grant (110% of such fair market
value if the grantee owns stock  possessing  more than 10% of the total combined
voting power of all classes of the  Company's  stock).  The exercise  price of a
Non-qualified  Option may be less than 100% of the fair market value on the last
trading  day  before the date of grant.  No ISOs may be  granted  after the year
2006. As of March 18, 1997 the Company had issued options under the 1996 Plan to
acquire 422,000 shares of Common Stock, exercisable at prices ranging from $1.75
to $2.38  per  share,  402,000  of which  were  ISO's and  20,000 of which  were
non-incentive options.

Other Options and Warrants

         In addition to the options  under the 1993 Plan and the 1996 Plan,  the
Company  currently  has  outstanding  the following  options and  warrants:  (i)
warrants to purchase  85,000 shares of Common Stock at $3.00 per share issued to
PHD in connection with its private  placement in December 1996, (ii) warrants to
purchase an  aggregate  of  3,214,902  shares of Common Stock at $2.00 per share
issued to  investors  in the April 1996  private  placement,  (iii) an option to
purchase  321,490 units,  each unit  consisting of one share of Common Stock and
one warrant to purchase one share of Commons Stock at $2.00 per share, issued to
GKN and its  designees in connection  with the private  placement in April 1996,
(iv)  warrants  issued to  original  insiders  and a  consultant  to purchase an
aggregate of 100,000 shares of Common Stock at $5.00 per share,  (v) warrants to
purchase  an  aggregate  of  130,000  shares of Common  Stock at $6.50 per share
issued to Whale, the underwriter of the Company's initial public offering,  (vi)
warrants  issued to original  bridge  financing  investors  and  consultants  to
purchase  546,500  shares of Common Stock at prices  ranging from $2.00 to $2.75
per share,  and (vii) other options issued to employees and a former director to
purchase  780,000  shares of Common Stock at prices  ranging from $1.50 to $4.00
per share.  All of the foregoing  securities  (exercisable  into an aggregate of
6,266,382  shares of Common Stock),  represent the right to acquire Common Stock
of the Company during various periods of time and at various prices.

The  following  charts set forth  certain  information  with  respect to options
granted to the Named Executive Officers:

Options/Shares Granted in Last Fiscal Year
<TABLE>
<CAPTION>

                                           % of Total Options
                           Options        Granted to Employees                          Date    Expiration
Named Executive           Granted           in Fiscal Year         Exercise Price      Vested       Date
----------------------------------------------------------------------------------------------------------
<S>                        <C>              <C>                        <C>              <C>         <C> 
S. Steven Carl
Chairman of the Board
and Chief Executive
Officer                    20,000           3.48%                      $1.75            1997        2002
                           20,000           3.48%                      $1.75            1998        2002
                           20,000           3.48%                      $1.75            1999        2002
                           20,000           3.48%                      $1.75            2000        2002
                           20,000           3.48%                      $1.75            2001        2002
</TABLE>
 Aggregate Year-End Option Values
<TABLE>
<CAPTION>
                               Number of Unexercised Options           Value of Unexercised in-the-money
                                     at Fiscal Year End                   Options at Fiscal Year End
                                     ------------------                   --------------------------
Named Executive                Exercisable  Unexercisable              Exercisable         Unexercisable
----------------------------------------------------------------------------------------------------------
<S>                              <C>          <C>                         <C>                  <C>  
Gary S. Glatter
President and
Chief Operating Officer          150,000      250,000                     0 (1)                0 (1)

S. Steven Carl
</TABLE>
                                                                         Page 20
<PAGE>
<TABLE>
<S>                              <C>          <C>                         <C>                  <C>  
Chairman of the Board
and Chief Executive Officer      12,500        137,500                    0 (1)                0 (1)
</TABLE>
(1) The market  value at December 31, 1996 of the Common  Stock  underlying  the
    options was $1.75 per share. The options are  exercisable at prices of $1.75
    or more.


Item 11.   Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth as of March 18, 1997 certain information
regarding the beneficial  ownership of shares of Common Stock by (i) each person
who is known by the Company to  beneficially  own 5% or more of the  outstanding
shares of Common  Stock;  (ii) each of the  Company's  directors;  and (iii) all
executive officers and directors of the Company as a group.


Owner                          Amount and Nature of    Percentage of Outstanding
                                    Beneficial             Common Stock Owned
                                   Ownership (1)              Beneficially

S. Steven Carl(2)(3)                  842,351                    11.4

Shelby A. Carl(2)(4)                  773,065                    10.7

Gary S. Glatter(2)(5)                 150,000                     2.1

Jerome H. Ludwig(2)(6)                131,664                     1.8

Robert M. Leopold(2)(7)                 1,000                      *

Salvatore T. DiMascio(2)(8)                 0                      *

All executive officers and directors 1,898,080                   24.2
as a group(9)(seven persons)

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

*        Less than 1.

(1)      A person is deemed to be the beneficial owner of securities that can be
         acquired  by such  person  within 60 days from March 18,  1997 upon the
         exercise  of  options  and  warrants  or  conversion   of   convertible
         securities.  Each beneficial owner's percentage ownership is determined
         by assuming that options,  warrants and convertible securities that are
         held by such  person  (but not held by any other  person)  and that are
         exercisable or convertible within 60 days from March 18, 1997 have been
         exercised or converted.  Except as otherwise indicated,  and subject to
         applicable  community  property and similar  laws,  each of the persons
         named has sole voting and  investment  power with respect to the shares
         shown as beneficially owned.

(2)      The address  for  Messrs.  S.  Steven  Carl,  Shelby A. Carl,  Glatter,
         Ludwig,  Johnson,  Leopold,  DiMascio  and  Gilbert  C.  Crowell is c/o
         H.E.R.C.  Products,  Incorporated,  2202  W.  Lone  Cactus  Drive  #15,
         Phoenix, Arizona.

(3)      Includes  377,942 shares issuable  pursuant to immediately  exercisable
         options and warrants. Excludes 125,000 shares issuable on options which
         become exercisable in the future.

(4)      Includes  (i)  206,183   shares   issuable   pursuant  to   immediately
         exercisable  options and warrants,  (ii) 288,533 shares owned of record
         by the Shelby A. Carl Trust, the trustee of which is Mr. Shelby A. Carl
         for the benefit of his wife,  Mrs.  Margaret  Carl,  (iii) 5,623 shares
         owned of record by Shelby A. Carl IRA for the benefit of Mr.  Shelby A.
         Carl and (iv) 29,412 shares owned of record and 29,412 shares  issuable
         upon exercise of  immediately  exercisable  warrants  owned by Margaret
         Carl Sep IRA for the benefit of Margaret  Carl,  the 
                                                                         Page 21
<PAGE>
         wife of Mr. Shelby A. Carl.  Excludes 20,000 shares issuable on options
         which become exercisable in the future.

(5)      Includes  150,000 shares issuable  pursuant to immediately  exercisable
         options.  Excludes  250,000  shares  issuable on options  which  become
         exercisable in the future.

(6)      Includes  130,083 shares issuable  pursuant to immediately  exercisable
         options and warrants.

(7)      Excludes 10,000 shares issuable on options which become  exercisable in
         the future.

(8)      Excludes 10,000 shares issuable on options which become  exercisable in
         the future.

(9)      Includes  shares  referred to as being  included in notes (3), (4), (5)
         and (6).  Excludes  shares  referred to as being excluded in notes (3),
         (4),  (5),  (7) and (8) and 15,000  shares  issuable  on options  which
         become exercisable in the future.


Item 12.   Certain Relationships and Related Transactions

         Messrs.  S. Steven Carl and Shelby A. Carl  purchased  an  aggregate of
382,353  units  for an  aggregate  purchase  price of  $325,000  in the  private
placement  consummated on April 3, 1996. These individuals paid for the units by
converting  indebtedness  for borrowed  funds owed by the Company to them in the
amounts of $300,000 and $25,000, respectively.

         On May 1, 1995,  the Company  acquired all of the  outstanding  capital
stock  of CCT in a  merger  transaction  by  which  CCT  became  a  wholly-owned
subsidiary  of the  Company  ("Merger").  Prior to the  Merger,  a family  trust
created by Shelby A. Carl, the former Chairman of the Board of the Company,  was
the majority  owner of CCT. S. Steven Carl,  the son of Shelby A. Carl,  was the
minority stockholder of CCT. Shelby A. Carl and S. Steven Carl were the Chairman
of the Board and President,  respectively, of CCT prior to the Merger. Effective
August, 1995, Gilbert C. Crowell, Jr. became the President of CCT. In connection
with the Merger,  the former  stockholders of CCT received 500,000 shares in the
aggregate of the Company's Common Stock in exchange for all of the stock of CCT.


Item 13.  Exhibits and Reports on form 8-K

(a) Exhibits
<TABLE>
<CAPTION>
Regulation S-B                                                                                   Sequential
Exhibit No:                         Exhibit                                                      Page Number
-----------                         -------                                                      -----------

<S>               <C>                                                                            <C>
(3) (1)           Certificate of Incorporation of the Company,
                  filed as Exhibit 3.1 to the Company's Registration
                  Statement.

(3) (2)           By-Laws of the Company, filed as Exhibit 3.2 to the
                   Company's Registration Statement.

(3) (3)           Certificate of Designations, Preferences and Other Rights
                  and Qualifications of  the Class A Preferred Stock, as amended,
                  filed as Exhibit 99.1 to Form 8-K dated December 17, 1996.

(4) (1)           Specimen of Common Stock certificate,
                  filed as Exhibit 4.1 to the Company's Registration Statement.

(4) (2)           Form of Underwriter's Warrant Agreement and Warrant
                  Certificate, filed as Exhibit 4.2 to the Company's Registration Statement.
</TABLE>
                                                                         Page 22
<PAGE>
<TABLE>
<S>               <C>                                                                            <C>
(4) (3)           Form of Subscription Agreement between the Company and
                  purchasers of the Series A Preferred  Stock,  filed as Exhibit
                  4.1 of Form 8-K dated December 17, 1996.

(4) (4)           Form of Warrant Agreement issued to Perrin, Holden &
                  Davenport Capital Corp. dated December 17, 1996, filed as
                  Exhibit 4.2 of Form 8-K dated December 17, 1996.

(4) (5)           Form of Agency Agreement between the Company and Perrin, Holden
                   & Davenport Capital Corp. dated as of November 15, 1996,
                  as amended,  filed as Exhibit  4.3 of Form 8-K dated  December 17, 1996.

(4) (6)           Form of Warrant Agreement between the Company and GKN Securities
                  Corp. dated November 19, 1996, filed as Exhibit 4.5 of Registration Statement
                   No. 333-19361.

(4) (7)           Form of Warrant and Registration Rights Agreement between the Company
                  and the Equity Group, dated September 27, 1996, filed as Exhibit 4.6 of
                   Registration Statement No. 333-19361.

(10) (3)          1993 Incentive Stock Option Plan, as amended, filed as Exhibit 10.3
                  to the Company's Registration Statement  No. 33-75166.

(10) (4)          Employment Agreement With Shelby Carl dated March 1994,
                  filed as Exhibit 10.4 to the Company's Registration Statement
                  No. 33-75166.

(10) (5)          Employment Agreement and Stock Option Agreement
                  dated January 1, 1994 with Gary S. Glatter, filed as
                  Exhibit 10.5 to the Company's Registration Statement
                  No. 33-75166.

(10) (6)          Amendment to Employment Agreement with Gary S. Glatter,
                  dated  September 23, 1994,  filed as Exhibit 10.6 to the Company's
                  Annual  Report  on form  10K-SB  for  the  fiscal  year  ended
                  December 31, 1994.

(10) (7)          Employment Agreement with Jerome Ludwig dated
                  March 24, 1994, filed as Exhibit 10.6 to the Company's Registration
                  Statement No. 33-75166.

(10) (8)          Agency Agreement between the Company and GKN Securities
                  Corporation dated March 4, 1996, filed as Exhibit 10.8 to the Company's
                  Annual Report on Form 10K-SB for the fiscal year ended December 31, 1995

(10) (9)          Form of Purchase Option issued to GKN Securities Corporation
                  and its' designees, filed as Exhibit 10.9 to the Company's Annual
                  Report on Form 10K-SB for the fiscal year ended December 31, 1995

(10) (10)         Form of Warrant Agreement issued to investors on April 3, 1996,
                  filed as Exhibit 10.10 to the Company's Annual Report on Form
                  10K-SB for the fiscal year ended December 31, 1995

(10) (11)         Form of  Subscription  Agreement  between the Company and
                  investors  dated April 3, 1996,  filed as Exhibit 10.11 to the Company's  
                                                                         Page 23
<PAGE>
                  Annual  Report on form  10K-SB for the fiscal  year
                  ended December 31, 1995

(10) (12)         Employment Agreement between CCT Corporation, a wholly-
                  owned subsidiary of the Company, and S. Steven Carl dated
                  May 1, 1995, filed as Exhibit 10.1 to the Company's Form 10-QSB
                  for the quarter ended March 31, 1995.

(10) (13)         Employment Agreement between CCT Corporation, a wholly-
                  owned subsidiary of the Company,   and Gilbert Crowell dated
                  May 1, 1995, filed as Exhibit 10.2 to the Company's Form 10-QSB
                  for the quarter ended March 31, 1995.

(10) (14)         1996 Performance Equity Plan, filed as an Exhibit to the Company's
                  Proxy Statement dated June 11, 1996.

(22)              Subsidiaries                                                                   41

(23)              Consent of  Independent Certified Public Accountants                           42

(27)              Financial Data Schedule                                                        43

(b) Reports on Form 8-K

None.
</TABLE>
                                                                         Page 24
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                                                                        Page No.
                   Index to Consolidated Financial Statements


Report of Independent Certified Public Accountants                           F-2
Financial Statements:
         Consolidated Balance Sheet
                  December 31, 1996                                          F-3
         Consolidated Statements of Operations
                  Years Ended December 31, 1996 and 1995                     F-4
         Consolidated Statements of Stockholders' Equity
                  Years Ended December 31, 1996 and 1995                     F-5
         Consolidated Statements of Cash Flows
                  Years Ended December 31, 1996 and 1995                     F-6

         Notes to Consolidated Financial Statements                          F-8






                                                                             F-1
<PAGE>
Report of Independent Certified Public Accountants



To the Board of Directors
H.E.R.C. Products Incorporated
Phoenix, Arizona

We have audited the accompanying consolidated balance sheet of H.E.R.C. Products
Incorporated  and  subsidiaries  as  of  December  31,  1996,  and  the  related
consolidated statements of operations,  stockholders' equity  and cash flows for
the years ended December 31, 1996 and 1995.  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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of H.E.R.C.  Products
Incorporated  and subsidiaries as of December 31, 1996, and the results of their
operations  and their cash flows for the years ended December 31, 1996 and 1995,
in conformity with generally accepted accounting principles.






                                           \s\   BDO Seidman, LLP



Chicago, Illinois
February 1, 1997
                                                                             F-2
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                December 31, 1996
<TABLE>
<S>                                                                                    <C>         
Assets
 Current Assets
     Cash and cash equivalents                                                         $  1,369,843
     Trade accounts receivable, net of allowance for
           doubtful accounts of $38,621                                                     417,534

     Inventories (Note 2)                                                                   616,813

     Other receivables                                                                       47,042

     Prepaid expenses                                                                        87,280
                                                                                       ------------
           Total Current Assets                                                           2,538,512
                                                                                       ------------
Property and Equipment (Note 5)
     Property and equipment                                                                 635,696

           Less accumulated depreciation                                                    139,342
                                                                                       ------------

           Net Property and Equipment                                                       496,354
                                                                                       ------------
Other Assets
     Patents, net of accumulated amortization of $65,205                                    197,285

     Patents pending                                                                        138,695

     Refundable deposits                                                                     18,337

     Other                                                                                   41,699

     Goodwill, net of accumulated amortization of $146,168 (Note 3)                       1,691,705
                                                                                       ------------
            Total Other Assets                                                            2,087,721
                                                                                       ------------
                                                                                       $  5,122,587
                                                                                       ============

Liabilities and Stockholders' Equity
Current Liabilities
     Accounts payable                                                                  $    347,858

     Accrued wages                                                                           44,047

     Other accrued expenses                                                                 220,394
                                                                                       ------------

            Total Current Liabilities                                                       612,299
                                                                                       ------------

Stockholders' Equity (Notes 3, 6, 8, 9 and 10)
     Convertible Preferred Stock, $10.00  stated value; authorized 1,000,000 shares;
            issued and outstanding 170,000 shares                                         1,480,000
     Common Stock, $0.01 par value; authorized 40,000,000 shares;
            issued and outstanding 6,356,487 shares                                          63,565

     Additional paid-in capital                                                          11,223,593
     Accumulated deficit                                                                 (8,256,870)
                                                                                       ------------
            Total Stockholders' Equity                                                    4,510,288
                                                                                       ------------
                                                                                       $  5,122,587
                                                                                       ============
</TABLE>
         See accompanying notes to consolidated financial statements         F-3
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                            Years Ended December 31,

                                                               1996           1995
                                                           -----------    -----------
<S>                                                        <C>            <C>        
Sales                                                      $ 2,600,642    $ 1,349,786
Cost of Sales                                                1,995,151      1,327,755
                                                           -----------    -----------
Gross Profit                                                   605,491         22,031
Selling Expenses                                             1,102,638        849,812
General and Administrative Expenses                          1,923,020      1,721,077
                                                           -----------    -----------
Operating loss                                              (2,420,167)    (2,548,858)
                                                           -----------    -----------
Other Income (Expense)
   Interest expense                                            (42,196)       (44,952)
   Miscellaneous                                                59,422        112,641
                                                           -----------    -----------
         Total other income                                     17,226         67,689
                                                           -----------    -----------
Loss before taxes on income                                 (2,402,941)    (2,481,169)
Taxes on Income (Note 4)                                          --              941
                                                           -----------    -----------
Loss Before Extraordinary Item                              (2,402,941)    (2,482,110)
Extraordinary Item (Note 6)                                    137,912           -- 
                                                           -----------    -----------
Net Loss                                                    (2,265,029)    (2,482,110)
Preferred Stock Dividend (Note 8)                              566,667           --
                                                           -----------    -----------
Net Loss Allocable to Common Stockholders                  $(2,831,696)   $(2,482,110)
                                                           ===========    ===========

Loss Per Common Share Before Extraordinary Item (Note 8)   $     (0.55)   $     (0.93)
Extraordinary Item Per Common Share                               0.02            --
                                                           -----------    -----------
Net Loss Per Common Share                                  $     (0.53)   $     (0.93)
                                                           ===========    ===========

Weighted Average Common Shares Outstanding                   5,364,420      2,667,544
                                                           ===========    ===========
</TABLE>
         See accompanying notes to consolidated financial statements         F-4
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
                                        Common Stock           Preferred Stock
                                                                                        Additional
                                                                                         Paid-in     Accumulated
                                  Shares        Amount        Shares        Amount       Capital       Deficit          Total
                                -----------   -----------   -----------   -----------   -----------   -----------    -----------
<S>                               <C>         <C>               <C>       <C>           <C>           <C>            <C>        
Balance,
January 1, 1995                   2,250,000   $    22,500          --            --     $ 5,686,791   $(2,943,064)   $ 2,766,227

Net loss                               --            --            --            --            --      (2,482,110)    (2,482,110)

Issuance of shares of
Common
Stock (Notes 3 and 9)               268,750         2,687          --            --         619,188          --          621,875

Acquisition of CCT
Corporation (Note 3)                409,691         4,097          --            --       1,506,640          --        1,510,737
                                -----------   -----------   -----------   -----------   -----------   -----------    -----------

Balance,
December 31, 1995                 2,928,441        29,284          --            --       7,812,619    (5,425,174)     2,416,729


Net loss                               --            --            --            --            --      (2,265,029)    (2,265,029)

Issuance of shares of
Common
Stock (Notes 3, 6 and 9)          3,428,046        34,281          --            --       2,767,234          --        2,801,515

Issuance of shares of
Preferred Stock (Note 9)               --            --         170,000   $ 1,480,000          --            --        1,480,000

Company expenses satisfied
by stockholders (Note 3)               --            --            --            --          29,073          --           29,073

Warrants issued to prepay
future years' expenses
(Note 9)                               --            --            --            --          48,000          --           48,000

Imputed dividend on
Preferred Stock (Note 8)               --            --            --            --         566,667      (566,667)          --
                                -----------   -----------   -----------   -----------   -----------   -----------    -----------


Balance,
December 31, 1996                 6,356,487   $    63,565       170,000   $ 1,480,000   $11,223,593   $(8,256,870)   $ 4,510,288
                                ===========   ===========   ===========   ===========   ===========   ===========    ===========
</TABLE>
         See accompanying notes to consolidated financial statements         F-5
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                                 Years Ended December 31,
                                                                                   1996           1995
                                                                                   ----           ----
<S>                                                                             <C>            <C>         
Cash Flows From Operating Activities
         Net Loss                                                               $(2,265,029)   $(2,482,110)
                                                                                -----------    ----------- 
         Adjustments to reconcile net loss to net cash
             used in operating activities
            Depreciation and amortization                                           195,058        139,861
            Expenses paid by stockholders and Common Stock
                 and warrants issued for services                                    45,733           --
            Extraordinary item                                                     (137,912)          --
            (Gain) loss on sale of equipment                                        (11,606)        20,755
            (Increase) decrease in assets, net of effect of acquisitions
                Trade accounts receivable                                             8,313        538,761
                Inventories                                                           7,540       (124,765)
                Other receivables                                                   (24,620)        82,613
                Prepaid expenses                                                    (19,074)        79,774
                Other assets                                                        (39,915)        17,227
            Increase (decrease) in liabilities, net of effect of acquisitions
                Accounts payable                                                   (153,462)      (302,781)

                Accrued expenses                                                    126,462        (51,862)
                Other liabilities                                                      --          (85,033)
                                                                                -----------    ----------- 
                    Total adjustments                                                (3,483)       314,550
                                                                                -----------    ----------- 
                         Net cash used in operating activities                   (2,268,512)    (2,167,560)
                                                                                -----------    ----------- 
Cash Flows From Investing Activities
        Capital expenditures                                                       (124,913)       (33,801)

        Cash received from the sale of equipment                                     32,475           --
        Decrease (increase) in certificates of deposit                               75,628         (4,110)

        Expenditures related to patents and patents pending                         (77,544)        (8,516)

        Cash paid in acquisition of subsidiaries, net of cash acquired             (218,929)       (43,981)
                                                                                -----------    ----------- 
                         Net cash used in investing activities                     (313,283)       (90,408)
                                                                                -----------    ----------- 
</TABLE>
         See accompanying notes to consolidated financial statements         F-6
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>

                                                                       Years Ended December 31,
                                                                         1996           1995
                                                                         ----           ----
<S>                                                                  <C>            <C>        
Cash Flows From Financing Activities
     Proceeds from issuance of Common Stock                            2,083,720        621,875
     Proceeds from issuance of Preferred Stock                         1,480,000           --
     Proceeds from issuance of notes payable
     and long-term debt                                                  336,000         70,000
     Principal payments under long-term debt obligations                (279,683)      (118,547)
                                                                     -----------    -----------
                         Net cash provided by financing activities     3,620,037        573,328
                                                                     -----------    -----------
Net Increase (Decrease) in Cash and Cash Equivalents                   1,038,242     (1,684,640)
Cash and Cash Equivalents, at beginning of period                        331,601      2,016,241
                                                                     -----------    -----------
Cash and Cash Equivalents, at end of period                          $ 1,369,843    $   331,601
                                                                     ===========    ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest                             $    18,331    $    44,952
</TABLE>

Noncash Investing and Financing Activities


During the year ended  December 31, 1995,  equipment with a cost of $303,124 was
reclassified as inventory held for sale. Of that total,  $75,706 was sold during
the year ended December 31, 1995.

During the year ended  December 31, 1995,  H.E.R.C.  acquired 100% of the Common
Stock of CCT  Corporation  through the issuance of 409,691  shares of its Common
Stock  valued  at $3.69  per  share.  H.E.R.C.  acquired  current  assets of CCT
Corporation  totaling $798,652,  net property and equipment totaling $42,181 and
other  assets  totaling   $17,276.   Additionally,   H.E.R.C.   assumed  current
liabilities  of CCT  Corporation  totaling  $790,207 and  long-term  liabilities
totaling $191,557.  This transaction  resulted in an increase in Common Stock of
$4,097 and an increase in additional paid-in capital of $1,506,640.  The Company
allocated  the excess of the purchase  price over net assets  acquired of CCT to
goodwill.

During 1996 notes payable to  stockholder  of $325,000  were repaid  through the
issuance of Common Stock.

During 1996 a note payable of $237,912 was paid in full by issuing  Common Stock
with a market value of $100,000 resulting in an extraordinary gain.

In  conjunction  with  the 1996  acquisition  described  in Note 3, the  Company
acquired   current  assets  of  $469,807,   goodwill  of  $131,342  and  current
liabilities of $367,795.

During 1996 inventory of $230,175 was reclassified to property and equipment.

During  1996 a note  payable  of  $276,135  was paid in full by  issuing  90,309
escrowed shares of Common Stock with a market value of $270,927 with the balance
paid by certain stockholders.

During 1996 200,000  warrants were issued to prepay  future  years'  expenses of
$48,000.

         See accompanying notes to consolidated financial statements         F-7
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Nature of Business and Summary of Significant Accounting Policies

Nature of Business

H.E.R.C.  Products  Incorporated (the "Company") commenced business in 1986 as a
manufacturer of consumer and industrial  water  treatment  chemicals and related
products.  As of May 1, 1995, the Company acquired CCT Corporation ("CCT") which
manufactures and distributes proprietary agricultural products (see Note 3). The
Company and its  subsidiaries  sell their  products to customers  throughout the
United States.

The Company markets its consumer  products to wholesale and retail customers and
recently developed and introduced its industrial water treatment products.  Some
agricultural  products  are  relatively  new, but many have  established  market
acceptance, particularly in the Western United States. The agricultural business
is seasonal  with  strongest  sales during the second and third  quarters of the
calendar year.

The Company  historically  has had a  concentration  of  significant  customers.
Although the Company considers its commercial relationships with its significant
customers to be good, a loss of these  customers,  or a significant  decrease in
purchases  by these  customers,  could have an adverse  effect on the  Company's
operations.  In 1996,  sales to two customers were 15% and 30%  respectively  of
consolidated sales. Sales to one customer were approximately 15% of consolidated
sales for the year ended December 31, 1995.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions  have been eliminated in  consolidation.  Certain 1995 balances
have been reclassified to conform with 1996 presentation.

Patents and Patents Pending

Patents  and  patents  pending are stated at cost.  Costs  related to  obtaining
patents for products are  amortized  on the  straight-line  basis over 10 years.
Costs for patents pending are amortized when the patents are awarded.  Costs for
patents  denied or  abandoned  are  expensed at the time that they are denied or
abandoned.


Inventories

Inventories  are stated at the lower of cost or market (net  realizable  value).
Cost is determined by various methods which approximate first-in, first-out.


Goodwill

Goodwill  represents the excess price over the fair value of net assets acquired
which is being  amortized on a  straight-line  basis over 20 years.  The Company
evaluates the  recoverability and measures any impairment of goodwill based upon
expectations of future undiscounted cash flows.

Property, Equipment and Depreciation
Property and  equipment  are stated at cost.  Depreciation  is computed over the
estimated useful lives of the assets by the  straight-line  method for financial
reporting and by accelerated methods for income taxes.

The useful lives of property and equipment for computing  depreciation  are five
to ten years.

                                                                             F-8
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Taxes on Income

At December 31, 1996,  unused net operating losses of  approximately  $4,000,000
are available for  carryforward  against future years' taxable income and expire
in various years through 2011.

The Company's ability to utilize its net operating loss carryforwards is subject
to an annual  limitation in future  periods due to the 1996 change in ownership,
pursuant  to Section  382 of the  Internal  Revenue  Code of 1986,  as  amended.
Utilization of net operating loss carryforwards will be limited to approximately
$170,000 annually plus any net operating loss carryforwards generated subsequent
to the aforementioned  change in ownership.  In addition,  use of certain of the
net  operating  loss  carryforwards  ($325,000),  which  were  obtained  in  the
acquisition of CCT, is subject to an annual limitation.


Statements of Cash Flows

For purposes of these statements, cash equivalents include cash on hand and bank
checking and money market  accounts and other highly liquid debt securities with
original maturities of 90 days or less.


Recent Accounting Pronouncements

In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
"Accounting for Stock-Based  Compensation." SFAS No. 123, which is effective for
the Company's 1996 year end,  encourages (but does not require)  adoption of the
fair value method of accounting for stock-based  compensation plans. The Company
has not  adopted  the fair value  method but  provides  the  required  pro forma
disclosures. (Note 10).

Use of Estimates

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported assets and liabilities at December 31,
1996 and the amounts of revenue and expenses during the years ended December 31,
1996 and 1995. Actual results could differ from those estimates.


2.  Inventories

Inventories at December 31, 1996 are:

          Raw materials                       $  9,126
          Work in process                        5,633
          Finished goods                       602,054
                                              --------
                                              $616,813
                                              ========

3.  Acquisitions

         CCT Corporation
         ---------------

On May 1, 1995, the Company  acquired,  for  $1,510,736,  all of the outstanding
capital stock of CCT which then became a wholly-owned subsidiary of the Company.
Shelby A. Carl, Chairman Emeritus of the Board of the Company,  was (through the
Shelby A. Carl Trust) the  majority  stockholder  of CCT, and his son, S. Steven
Carl, was a minority stockholder. S. Steven Carl is Chairman of the Board of the
Company.  The merger  transaction  was  accounted  for as a  purchase,  with the
results of operations of CCT included in the  Company's  consolidated  financial
statements from the date of the  acquisition.  As a result of this  transaction,
goodwill of $1,706,531 was recorded.
                                                                             F-9
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Pursuant to the Agreement of Merger, CCT shareholders were issued 500,000 common
shares of the Company of which  90,309  shares  were  placed in escrow  ("Escrow
Shares"), representing the number of shares, valued at $3.00 per share, equal to
the  remaining  amount  of  debt,  including  interest  to  maturity,  due to an
unrelated partnership.  During 1996, this partnership received the Escrow Shares
and 9,691  additional  common  shares from Messrs.  Carl to satisfy this debt in
full. The fair value of the 9,691 common shares  transferred by Messrs.  Carl to
the  partnership  was  charged  to  expense  in  the  accompanying  consolidated
statement of operations.  The Agreement of Merger provided for a further payment
to Messrs.  Carl based on the  earnings  of CCT for 1996,  as  defined,  above a
stated  minimum.  Since CCT's earnings for 1996, as defined,  were not above the
stated minimum, no additional shares will be issued.

H.E.R.C. Consumer Products Company
----------------------------------

On July 1, 1996,  the Company  acquired  the 50%  interest of H.E.R.C.  Consumer
Products  Company ("LLC") owned by Conair  Corporation  ("Conair") for $601,149,
including liabilities assumed. Prior to that date the Company and Conair equally
owned the LLC which was formed to produce  and  market  the  Company's  consumer
products.  The Company had  accounted  for its 50%  investment in the LLC by the
equity method of accounting, and accordingly,  sales of the LLC prior to July 1,
1996,  were not  reported as sales of the Company.  No amount of the  cumulative
losses of the LLC was  recognized by the Company since its investment in the LLC
was zero.  The Company  received  reimbursements  from the LLC for  research and
development  costs  attributable  to products  sold by the LLC of  approximately
$15,000 and $34,000 in 1996 and 1995, respectively.

Under the terms of the acquisition  agreement,  the Company paid Conair $276,000
on July 1, 1996, and the parties  terminated their respective  obligations under
certain  existing  agreements,  including,  but not limited to, the  partnership
agreement,  operating agreement and supply agreement resulting in the settlement
of the  Company's  obligation  to pay Conair  approximately  $230,000 and of the
obligation of LLC to pay the Company  approximately  $176,000.  The Company also
became  obligated  to pay  $276,690  to Conair in six  monthly  installments  of
$46,115 commencing July 31, 1996, for certain inventory products manufactured by
Conair, plus shipping and handling expenses; all such installments are paid. The
transaction resulted in $131,342 in goodwill.

Pro forma  results for the years ended  December 31, 1996 and 1995 are unaudited
and were  prepared as if the  aforementioned  acquisitions  had  occurred at the
beginning of the periods presented:

                                                       Years Ended December 31,

                                                        1996            1995
                                                     -----------    -----------
   Sales                                             $ 3,361,888    $ 3,973,245
   Loss before extraordinary item                     (2,312,453)    (2,271,555)
   Net loss                                           (2,174,541)    (2,271,555)
   Loss per common share before extraordinary item         (0.53)         (0.81)
   Net loss per common share                               (0.51)         (0.81)


4.  Income Taxes

The Company was in a consolidated loss position for the years ended December 31,
1996 and 1995 and therefore had no federal income tax expense.

Deferred tax assets of $1,500,000 from loss carryforward  benefits have not been
recorded because of the uncertainty of realizing such benefits.
                                                                            F-10
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.  Property and Equipment

Property and equipment at December 31, 1996 consists of the following:

         Equipment                                $459,289
         Office furniture and fixtures             176,407
                                                  --------
                                                   635,696
         Less accumulated depreciation             139,342
                                                  --------
         Net property and equipment               $496,354
                                                  ========


6.  Extraordinary Item

In September  1996,  the Company  issued 37,210  shares of Common Stock,  with a
market  value of  $100,000,  in full  satisfaction  of  certain  long-term  debt
obligations of $237,912. As a result of this transaction, the Company recognized
an extraordinary gain of $137,912 from the extinguishment of debt.


7.  Lease Commitments

The  Company  has  operating  leases,  expiring  through  2001,  for  office and
warehouse  facilities in Phoenix,  Arizona,  Portsmouth,  Virginia and Carlsbad,
California and for certain computer equipment.  Rent expense associated with all
operating  leases was $111,957 and $85,333 for the years ended December 31, 1996
and 1995, respectively.

Future minimum payments under operating leases as of December 31, 1996 are:

                         Year Ending
                         December 31           Amount
                         -----------           ------

                           1997              $176,653
                           1998               156,862
                           1999               114,670
                           2000               116,868
                           2001                70,371
                                             --------
                                             $635,424
                                             ========

8.  Loss Per Share of Common Stock

Loss per share of Common Stock is based on the weighted average number of shares
of Common Stock  outstanding  during each year.  Shares of Common Stock issuable
upon conversion of Preferred Stock (Note 9) and exercise of outstanding  options
and warrants are anti-dilutive and are not included in the computation of shares
outstanding.

Loss per share of Common  Stock for the year  ended  December  31,  1996 is also
impacted by a recent Securities and Exchange Commission  interpretation  whereby
net loss per share applicable to common  stockholders must reflect the amount of
any specified  discount to the market price of Common Stock into which Preferred
Stock is convertible. Because the Preferred Stock described in Note 9 has such a
conversion feature,  the net loss applicable to common stockholders is increased
by $566,667 for an imputed Preferred Stock dividend equivalent to the conversion
discount. Accordingly loss per share of Common Stock is increased by $ 0.11.
                                                                            F-11
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



9.  Stockholders' Equity

         Convertible Preferred Stock

In December  1996 the Company  completed  a private  equity  offering of 170,000
shares of Class A  Preferred  Stock  ("Preferred  Stock")  for $10 per share and
received net proceeds of  $1,480,000.  The Preferred  Stock has a par and stated
value of $.01 and $10, respectively.

The holders of the Preferred  Stock are entitled to receive  dividends of 10% of
the stated  value per annum from the date of issuance  through  the  "Conversion
Date," as defined,  payable solely in shares of the Company's  Common Stock. The
preferred  stockholders  have the right to convert each share of Preferred Stock
and the accrued amount of dividends  thereon,  through the Conversion Date, into
shares of Common Stock  determined by dividing the aggregate of the stated value
of the Preferred Stock plus accrued dividends,  by the greater of (i) 75% of the
average  closing bid price of the shares of Common  Stock,  as defined,  or (ii)
$.10. The Preferred Stock will automatically  convert based on the above formula
on December 17,  1999.  The  Preferred  Stock does not carry any  redemption  or
voting rights.  In the event of a liquidation,  dissolution or winding up of the
Company, the holders of the Preferred Stock will participate with the holders of
the Common Stock as if the Preferred Stock was fully converted immediately prior
to the event.


         Common Stock

In April 1995, the Company issued 100,000 shares of Common Stock to an affiliate
of two of the principal stockholders of the Company at a purchase price of $2.00
per share. The Company also issued the buyer warrants to purchase 400,000 shares
of Common Stock at a price of $2.50 per share which expired on October 6, 1995.

In April 1996, the Company completed the private placement of 3,214,902 units at
a price of $.85 per unit and received net proceeds of approximately  $2,277,000.
Each unit consisted of one share of Common Stock and one warrant, which entitles
the  holder to  purchase  one share of Common  Stock at a price of $2 per share,
subject to adjustment, until April 3, 1999.

During  1996,  the  Company's  Chief  Executive  Officer and  Chairman  Emeritus
advanced  an  aggregate  of  $325,000  to  the  Company.   Concurrent  with  the
aforementioned  April   1996  private  placement,   the  Company  satisfied  its
repayment obligation through the issuance of 382,353 units which are included in
the amounts noted above.

Also, during 1996:

a.       Various  consultants  were paid for  services  through the  issuance of
         19,625 shares of Common Stock, and $29,932 was charged to expense based
         on the market price at the measurement dates.

b.       Certain  shares of Common Stock  related to the CCT merger were issued.
         See Note 3.

c.       Warrants were  exercised to acquire 66,000 shares of Common Stock at $2
         per share.

d.       37,210  shares of Common Stock were issued in  satisfaction  of certain
         debt obligations. See Note 6.


         Warrants

In May and September of 1993 and January of 1994,  the Company  issued  warrants
for 600,000 shares of Common Stock. The warrants became  exercisable in May 1994
at $2.50 per share and expire at various  dates from 1995 through  1999.  During
1995,  warrants for 168,750 shares of the Company's  Common Stock were exercised
at $2.50 per share resulting in proceeds of $421,875.  At December 31, 1996 such
warrants for 212,500  shares of Common Stock  remain  outstanding  and expire in
1999.
                                                                            F-12
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In  connection  with the public  offering of its Common  Stock in May 1994,  the
Company was required to reduce the existing  number of shares of its outstanding
Common Stock to no more than 950,000 shares.  As consideration for the reduction
of shares, the stockholders were granted warrants exercisable until December 31,
1999 to acquire 50,000 shares of the Company's Common Stock at $5.00 per share.

In 1994, the underwriter of the Company's  public offering  acquired,  for $130,
warrants for the  purchase of 130,000  shares of the Common Stock of the Company
at $6.50 per share.  The warrants are currently  exercisable  and expire May 10,
1999.

Through 1996, the Company issued  warrants for the purchase of 450,000 shares of
Common Stock to various consultants at exercise prices ranging from $2 to $5 per
share.  During 1996, 66,000 warrants were exercised at $2 per share.  184,000 of
the warrants are currently  exercisable  within the above price range and expire
at various dates through November 19, 2001.

In 1996, the placement  agent for the 1996 private  offering of shares of Common
Stock was granted a warrant to acquire  321,490  units at $.935 per unit. A unit
consists  of one share of Common  Stock and one  warrant to acquire one share of
Common  Stock at $2.00 per share.  The  warrant  is  currently  exercisable  and
expires April 3, 2001.

In 1996, the placement  agent for the 1996 private  offering of Preferred  Stock
was  granted a warrant to  acquire  85,000  shares of Common  Stock at $3.00 per
share. The warrants are currently exercisable and expire December 10, 2001.


10.  Stock Based Compensation

In October 1993, the Company  adopted an incentive stock option plan for 350,000
shares of Common Stock which may be granted to employees. The Company adopted an
additional  plan in 1996 for  1,000,000  shares  of  Common  Stock  for grant to
employees,   officers,   directors  and  consultants  of  the  Company  and  its
wholly-owned subsidiaries. The exercise price per share may not be less than the
fair  market  value per share on the date the options  are  granted.  Generally,
options  granted  vest over a period up to five  years and expire  over  varying
periods through 2004.

In addition to the above plans, the Company granted:

(a)      an officer/director  options to purchase 400,000 shares of Common Stock
         at exercise  prices ranging from $2.50 to $3.75 per share.  The options
         vest not  later  than  December  1,  1998  and  150,000  are  currently
         exercisable;

(b)      a former  Director  options to  purchase  a total of 100,000  shares of
         Common Stock at exercise  prices ranging from $2.50 to $4.00 per share.
         The options,  granted in 1995, are currently  exercisable and expire in
         December 1999;

(c)      various key employees  options to purchase a total of 280,000 shares of
         Common Stock at exercise  prices ranging from $1.50 to $3.63 per share.
         The options,  granted through 1996, are  exercisable  from 1996 to 2001
         and expire in various years through 2001. At December 31, 1996, 138,000
         options are currently exercisable.
                                                                            F-13
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Overall activity in the Company's stock options:
                                             Years Ended December 31,

                                         1996                      1995
                                ======================     =====================
                                           Weighted -                 Weighted -
                                            Average                    Average
                                           Exercise                   Exercise
                                Shares       Price         Shares      Price

Outstanding, at beginning
of year                        1,117,000     $ 3.23        712,000    $ 5.46
Granted                          575,000       1.75      1,045,000      3.27
Exercised                           --          --            --         --
Forfeited                       (145,000)      4.76       (640,000)     5.78
                              ----------      -----      ----------    -----

Outstanding at end of year     1,547,000     $ 2.54      1,117,000    $ 3.23
                              ==========      =====     ==========     =====

Exercisable, at end of year      595,000     $ 2.79        360,000    $ 3.68
                              ==========      =====     ==========     =====


Details regarding the options outstanding at December 31, 1996.

                               Outstanding                 Exercisable
==================================================     ====================
                           Weighted -   Weighted -               Weighted -
  Exercise                  Average      Average                  Average
   Price          Number   Remaining    Exercise       Number    Exercise
   Range          ------      Life       Price         ------     Price

$1.50 - $2.50   1,065,000   5.03 yrs   $   2.05        430,500   $   2.42
$3.13 - $3.75     430,000   6.90 yrs   $   3.56        112,500   $   3.63
$4.00 - $5.00      52,000   2.90 yrs   $   4.04         52,000   $   4.04

The weighted-average grant-date fair value of stock options granted to employees
during  the  year  and the  weighted  average  significant  assumptions  used to
determine those fair values using a modified Black-Scholes option pricing model,
and the pro forma  effect on  earnings  of the fair value  accounting  for stock
options under SFAS No. 123 are:

                                                    Years Ended December 31,
                                                    ------------------------

                                                     1996              1995
                                                -------------     -------------
Grant-date fair value per option                $        1.51     $        0.33

Significant assumptions (weighted-average)
     Risk-free interest rate at grant date               5.67%             5.85%
     Expected stock price volatility                      236%               24%
     Expected dividend payout                              --                --
     Expected option life*                             2.7 yrs           2.0 yrs
Net loss
     As reported                                $  (2,265,029)    $  (2,482,110)
     Pro forma                                  $  (2,567,641)    $  (2,568,322)
Net loss per share of  Common Stock
     As reported                                $       (0.53)    $       (0.93)
     Pro forma                                  $       (0.59)    $       (0.96)
*The expected  option life considers  historical  option  exercise  patterns and
future changes to those exercise patterns anticipated at the date of grant.
                                                                            F-14
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.  Segment Information

The Company's major business segments are the manufacture and distribution of:

a.    Consumer water treatment and related products

b.    Industrial water treatment and related products

c.    Proprietary agricultural products

No amounts  are  included  in the 1995  consolidated  financial  statements  for
consumer water treatment and related products. (Note 3).



Information by segment for the year ended December 31, 1996:
<TABLE>
<CAPTION>
                                      Consumer       Industrial     Agricultural
                                      Products       Products       Products     Corporate     Consolidated
                                      --------       --------       --------     ---------     ------------

<S>                                 <C>            <C>            <C>           <C>            <C>        
Sales to unaffiliated customers     $   893,754    $   329,803    $ 1,377,085          --      $ 2,600,642
Operating loss                         (117,896)      (838,892)      (257,797)  $(1,205,582)    (2,420,167)
Identifiable assets                     491,425        883,764      2,074,986     1,672,412      5,122,587
Depreciation and amortization             3,284         41,845         92,471        57,458        195,058
Capital expenditures                       --           51,352         28,214        45,347        124,913
</TABLE>

Information by segment for the year ended December 31, 1995:
<TABLE>
<CAPTION>
                                                                  Agricultural
                                                   Industrial     Products
                                                   Products          (Note 3)    Corporate      Consolidated
                                                   --------       -----------    ---------      ------------
<S>                                                <C>            <C>            <C>            <C>        
Sales to unaffiliated customers                    $   612,820    $   736,966           --      $ 1,349,786
Operating loss                                      (1,872,970)      (112,933)   $  (562,955)    (2,548,858)
Identifiable assets                                  1,296,957      1,836,777        337,418      3,471,152
Depreciation and amortization                          131,056          8,805           --          139,861
Capital expenditures                                    16,120         17,681           --           33,801
</TABLE>

12.  Commitments and Contingencies

The Company has employment agreements with its executive officers,  the terms of
which expire at various dates through May 1, 1999. Such  agreements,  which have
been revised from time to time,  provide for minimum salary levels and incentive
bonuses on prescribed  formulas over their terms.  The aggregate  commitment for
future  salaries at December  31, 1996,  excluding  bonuses,  was  approximately
$1,073,000.
                                                                            F-15
<PAGE>
                                   SIGNATURES


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


                                        H.E.R.C. PRODUCTS INCORPORATED


                                        By: /s/ Gary S. Glatter
                                           -------------------------------------
Dated:  March 28, 1997                     Gary S. Glatter, President

         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.
<TABLE>
<CAPTION>
Name                          Title                                                Date
----                          -----                                                ----

<S>                           <C>                                                  <C>
/s/ S. Steven Carl            Chairman of the Board, Chief Executive Officer       March 28, 1997
------------------------
S. Steven Carl                and Director



/s/ Shelby A. Carl            Chairman Emeritus and Director                       March 28, 1997
------------------------
Shelby A. Carl


/s/ Gary S. Glatter           President, Chief Operating Officer, Treasurer        March 28, 1997
------------------------
Gary S. Glatter               and Director


/s/ Jerome H. Ludwig          Executive Vice President, Secretary and Director     March 28, 1997
------------------------
Jerome H. Ludwig


/s/ Robert M. Leopold         Director                                             March 28, 1997
------------------------
Robert M. Leopold


/s/ Salvatore DiMascio        Director                                             March 28, 1997
------------------------
Salvatore DiMascio


/s/ John P. Johnson           Chief Financial Officer (Principal Financial and     March 28, 1997
------------------------
John P. Johnson               Accounting Officer)
</TABLE>
                                                                         Page 40