SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   Form 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934:
                  For the Fiscal Year Ended December 31, 1999

[ ]  TRANSITION Report under section 13 or 15 (d) of the Securities Act of 1934:
     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)

      Delaware                                              86-0570800
(State of Incorporation                                    (IRS Employer
   or Organization)                                      Identification Number)


                         2215 West Melinda Lane, Suite A
                             Phoenix, Arizona 85027
                    (Address of principal executive offices)

                                 (623) 492-0336
                (Issuer's telephone number, including area code)

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

                                            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 15(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. [ ]

State issuer's revenues for its most recent fiscal year. $3,489,743

At February 17,  2000,  the  aggregate  market value of the voting stock held by
non-affiliates  of the  registrant  was  $5,264,478  based on the closing market
price of the  Common  Stock on such  date as  reported  by the OTC BB  Market of
$0.48. This calculation assumes that the affiliates of the Company are its board
of directors and its officers.

At March 10,  2000,  there were  11,666,187  shares of Common  Stock  issued and
outstanding.

Transitional Small Business Disclosure Format: Yes [ ]  No[X]

Documents Incorporated by Reference: None
<PAGE>
FORWARD-LOOKING STATEMENTS

     Parts of this report describe historical information,  such as the 1998 and
1999 operating results, and H.E.R.C. Products Incorporated ("HERC") believes the
descriptions to be accurate.  In contrast to describing the past, some sentences
in this report indicate that HERC believes that events or financial  results are
likely to occur in 2000 or thereafter.  These  sentences  typically use words or
phrases like "believe," "expects,"  "anticipates,"  "estimates," "will continue"
and similar expressions. Statements using those words or similar expressions are
intended  to  identify  "forward-looking  statements"  as  that  term is used in
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities Exchange Act of 1934, as amended.  Forward-looking statements include
projections  of  operating  results for 2000 and  beyond,  either  concerning  a
specific segment of HERC's business, or concerning HERC as a whole.

     Actual  results,  however,  may be  materially  different  from the results
projected  in the  forward-looking  statements,  due to a  variety  of risks and
uncertainties.  These risks and uncertainties  include those set forth in Item 1
of Part I hereof,  entitled  "Business,"  in Item 6 of Part II hereof,  entitled
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," in Exhibit 99 hereof and elsewhere in this report.

     The  forward-looking  statements  in this report are current only as of the
date this report is filed with the Securities and Exchange Commission. After the
filing of this report,  HERC's  expectations  of likely results may change,  and
HERC may come to believe that certain forward-looking  statements in this report
are no longer accurate. HERC does not have an obligation to release publicly any
corrections or revisions to any forward looking statements in this report,  even
if HERC believes the forward looking statements are no longer true.

                                     PART I

ITEM 1. BUSINESS

GENERAL

     H.E.R.C.  Products  Incorporated is a chemical and  engineering  technology
company that develops and patents  products and processes for use on water scale
and corrosion on surfaces,  in pipeline  systems and in soils.  HERC markets its
products to municipal,  industrial and other customers  directly and through key
strategic  alliances.  HERC's cleaning services are directed toward  commercial,
industrial, marine, municipal and other customers.

     Over time,  most water  systems,  such as potable water  delivery  systems,
sprinkler systems, waste systems,  process water systems and water wells, become
internally  corroded and openings become  tuberculated.  The effect is a smaller
diameter  through which water and waste can travel and a less efficient  system.
HERC  cleaning  methodologies  remove the scale and  corrosion  and  restore the
efficiency and flow characteristics of the system.

     HERC uses patented and other proprietary  chemical products in its cleaning
services. HERC's chemistry is circulated through a pipe system that is no longer
functioning  properly.  HERC's chemicals dissolve and remove scale and corrosion
and retain the  components  of scale and  corrosion in solution,  even at highly
concentrated  levels,  until they are flushed from the  systems.  The system may
then be treated with other chemical  products that retard  corrosion or suppress
the environment  that supports  biological  growth and, thus, is maintained as a
more efficient  pipe system after the HERC cleaning.  Many of the chemicals used
by HERC are non-fuming,  non-abrasive and non-flammable. Many of HERC's products
are certified biodegradable by Scientific  Certification Systems, an independent
certifying and testing laboratory ("Green Cross").

     HERC's  chemical  products and processes  were  developed to provide a more
cost  effective  and  efficient  means of cleaning  pipe  systems in contrast to
replacement, mechanical scraping, pigging, hydro blasting or other pipe cleaning
methods.  HERC's products include Pipe-Klean(R) and Well-Klean(R),  which remove
encrustation from water pumping and distribution systems; Compound 360, Compound
400 and Slug(R) to clean and maintain cooling and other water treatment systems;
and  Line-Out(R)  for salt removal  from soil  surfaces and the cleaning of drip
irrigation  systems.  HERC also  sells  private  label  products  utilizing  its
proprietary  formulations or products  complementary to its formulations for key
customers.

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<PAGE>
     The  relative  contribution  of the business  segments to HERC's  operating
revenue and operating  profit for the two years ended December 31, 1999, and the
identifiable  assets  of each  segment  at the end of each of  those  years  are
included in Note 7 to the consolidated financial statements in this report.

     HERC was  incorporated in Arizona in December 1986 and  re-incorporated  in
Delaware in 1994. HERC executive offices,  warehouse and manufacturing  facility
for some of the  proprietary  products  are located in Phoenix,  Arizona and its
telephone number is (623) 492-0336.

PRODUCTS AND SERVICES

     Water  is  critical  to many  industries  and  uses,  ranging  from  wells,
waterlines,  fire  protection  systems,  heating and  air-conditioning  and most
industrial production processes.  Water is a chemically active substance and any
surface that 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 from  dissolved  minerals or biological  corrosion from water
born  microbes.  Scaling or corrosion  will  eventually  lead to the plugging or
fouling of the surface,  pipe, pump, air condition system or other water exposed
surface.

     The generally  accepted  cleaning methods for various water systems include
replacement, mechanical scraping, hydro blasting, pigging and chemical cleaning.
HERC offers a method of  chemical  cleaning  which it believes is a  significant
improvement over most other cleaning  methods because it is faster,  cheaper and
more complete and has a lower environmental impact.

     Pipe-Klean  and  Well-Klean,  some of the products of HERC used in its pipe
system  cleaning,  act to remove scale and  corrosion.  These products have been
tested  and  certified  to  ANSI/NSF  Standard  60 by  the  National  Sanitation
Foundation  (NSF) for use as well  cleaning and pipe  cleaning  aids in drinking
water  systems.   ANSI/NSF  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.

PIPE CLEANING DIVISION

     HERC  provides  pipe  cleaning  and other  corrosion  removal  and  control
services  targeted at many customers and  industries.  Included are pipe systems
for marine,  industrial,  potable water, wastewater,  fire protection,  cooling,
chemical  feed line and other  applications.  During 1999,  total pipe  cleaning
revenue increased 11% to $3,248,000 from $2,919,000 in 1998.

MARINE

     The marine applications focus on the cleaning of shipboard pipe systems for
water and wastewater. In particular, the vacuum waste systems aboard most marine
vessels   develop  a  scale  in  the  pipe  interiors  that  requires   cleaning
approximately  once every 12-18  months.  The  principal  customers  of the pipe
cleaning  division are the United States Coast Guard and the United States Navy.
In September  1997,  HERC  received a five-year  contract from the United States
Navy-Supervisor of Shipbuilding (SupShip) office in Portsmouth,  Virginia.  This
contract is renewable on a year-to-year basis at the option of the U.S. Navy and
calls for HERC to clean pipe  systems on board ships based in the Norfolk  area.
The  Portsmouth  contract  permits HERC to charge set amounts for its  services.
Other SupShip  offices of the Atlantic Fleet and the  maintenance  office of the
United States Coast Guard also are using the Portsmouth contract to have vessels
cleaned.  During 1998 HERC cleaned  piping systems on board  seventy-two  United
States  vessels.  During 1999 HERC  cleaned  piping  systems on board a total of
eighty-four United States vessels.

     In order to meet the requirements of the Portsmouth contract, and to better
serve the East  Coast  market,  HERC  opened an office in  Portsmouth,  Virginia
during 1997.  In 1998,  HERC opened an office in San Diego to expand its ability
to offer its pipe cleaning services to the Pacific Fleet,  Western United States
Coast Guard and other west coast  customers.  The division employs a sales staff
located in both of its coastal offices and its corporate headquarters in Phoenix
to service its  existing  customers  and to generate  additional  pipe  cleaning
sales.

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<PAGE>
FIRE PROTECTION

     HERC developed its patented process for cleaning fire protection systems in
1993. Since then, HERC has chemically  cleaned many fire protection  systems for
several  industries  and  customers.  HERC  believes  that it has a  significant
advantage in securing fire  protection  system  cleaning work because HERC has a
patent that covers the process of chemically  cleaning a fire protection  system
and  because  HERC is  experienced  in such  work.  HERC is unaware of any other
current method that could be used to economically clean such systems.

     One such  system was in the  McCarran  International  Airport in Las Vegas,
Nevada.  As is typical of many such  systems,  the  sprinkler  system had become
severely corroded with microbiologically  influenced corrosion (MIC) and was not
achieving required  operational levels. As a result of the cleaning done on this
and other sites,  HERC has been  recognized  by the  American and National  Fire
Sprinkler  Associations as a rehabilitative  method for fire protection systems.
HERC continues to pursue  certification by Factory Mutual and IRI-Hartford Steam
Boiler, two of the major insurance  companies of fire protection systems so that
it will be able to market  more  aggressively  its  services to this area of the
pipe system market. HERC believes that these endorsements would be beneficial in
its  marketing,  since  insurance  premiums are usually a  reflection  of system
performance.  At  this  time  HERC  has  no  indication  that  it  will  achieve
certification  or what  the  timing  might be if it did.  HERC is also  pursuing
certification  of its Pipe Klean  product  by  Underwriters  Laboratories,  Inc.
("UL").  Sales from chemical cleaning of fire protection  systems increased 200%
to $300,000 in 1999 from $100,000 in 1998.

     HERC is  currently  in the  process of  establishing  a  licensing  program
whereby HERC plans to license the use of its process  patent for  cleaning  fire
protection  systems  to  acceptable  fire  sprinkler  contractors  and/or  other
companies involved in the fire protection industry for a minimum yearly fee plus
royalties based on the licensee's fire protection cleaning revenue. HERC has not
entered  into any such  agreement  as of  December  31,  1999.  There  can be no
assurance  that HERC will be successful in its  implementation  of the licensing
program or that HERC will successfully complete any such license agreement.

POTABLE WATER

     Underground  potable waterlines  represent another market in which HERC may
use its expertise in pipe system  cleaning.  HERC has many patents  covering the
process of chemically cleaning potable water distribution  systems. In addition,
its  chemical  products  used for this  application  are  ANSI/NSF  Standard  60
certified.  Because of the above  factors and because of the size of the potable
water  distribution  system  market,  HERC  believes  that  it  has  significant
potential in this business.  The standards  developed by NSF that have been used
to approve HERC's  products have been adopted  legislatively  in many states and
are policy in many others.

     The most common problem found in potable water lines is tuberculation. This
is the development of chemical and biological  corrosion inside the pipes to the
point where the useful  diameter of the pipe is severely  restricted.  It is not
unusual  to have a  four-inch  main line  with only one inch of useful  diameter
remaining.  Tuberculation  may also cause colored water,  bad odors,  unpleasant
taste and increased chemical treatment and pumping costs.

     Recently  HERC has focused its  attention  primarily on marine  system pipe
cleaning and  secondarily  on fire  protection  system pipe  cleaning  where its
margins are better and the sales cycle is faster.  One reason for this focus has
been the long lead-time to consummate  potable water system sales  contracts and
the  expense of  obtaining  and  servicing  these  contracts.  Often  payment is
dependent  on the work of other  contractors  and  lengthy  approval  processes.
Although  HERC focused its attention in this segment from 1994 to early 1997, it
currently represents an insignificant portion of its business.  HERC anticipates
it becoming a more significant part of its business over time.

INDUSTRIAL, WATER TREATMENT AND OTHER

     In  industrial  plants,   tuberculation   greatly  reduces  heat  exchange,
condensing and flow capacities.  In water treatment plants,  chemical feed lines
become  internally  clogged to the point  where they do not  function  properly.
Anywhere  there are pipes,  there is a need for HERC cleaning  methods.  HERC is
currently  working to expand its  application  base to  multiple  areas.  In the
future, HERC believes that industrial,  water treatment and other piping systems
will benefit from HERC's cleaning processes.

                                        4
<PAGE>
INDUSTRIAL CHEMICALS DIVISION

     The industrial chemicals division  manufactures and sells chemical products
using HERC's  proprietary and patented  formulas for applications in the removal
of salt,  scale and corrosion and in the  maintenance of water process  systems.

These  products are  currently  Well-Klean(R),  Line Out(R) and several  Process
Water products  including certain products  currently being manufactured under a
private  label for  Dupont.  Industrial  chemical  sales  totaled  $250,000  and
$242,000 in 1998 and 1999 respectively.

     Well-Klean is used to remove scale and corrosion in water wells.  Over time
the well screen and many other well  components  become  clogged.  When added to
wells following HERC's  instructions,  Well-Klean  removes the harmful corrosion
and corrosion by products from the well components and the  surrounding  aquifer
to restore well pumping  characteristics  that  ultimately lead to improved well
performance. With no marketing emphasis, Well-Klean sales were flat from 1998 to
1999.  HERC  anticipates  that  it  will  increase  its  marketing  efforts  for
Well-Klean in 2000.

     Line Out is used in the  cleaning of drip  irrigation  systems and for salt
removal  from  soils in the root  zone of turf  grasses  on golf  courses.  Drip
systems will clog with scale over time and require regular  maintenance in order
to continue to perform.  HERC's Line Out product  provides a superior  method of
providing for cleaning while also improving water distribution. In addition, the
use of high salt  content  water by golf courses for  irrigation  has caused the
need for a product  to remove  salt from the turf root zone.  HERC  manufactures
Line Out as a private labeled product called Deliminate(R) for Eco Soil Systems,
Inc. (NASDAQ: ESSI) for golf courses in the United States.

     Chlor*Rid  is a product  that  utilizes  one of HERC's  core  formulas  for
removing salt from surfaces prior to the application of high performance  paints
or coatings.  During 1998 HERC sold its half ownership of a patent covering this
application  to Chlor*Rid  International.  Under the sales  agreement  HERC will
maintain  manufacturing  rights of the product or  royalties on future sales for
the life of the patent, which is about fourteen years.

     Process  water  products are sold  primarily  under the trade name Compound
360. These are used in the  de-scaling  and  maintenance of all types of process
water systems.  These include  cooling  towers,  heat exchangers and condensers.
During  1999,  HERC  entered  into  agreements  with  Dupont  whereby  HERC will
manufacture private labeled products for Dupont using HERC formulas. In addition
to realizing the gross profit from the  manufacturing of the product,  HERC will
receive royalties on the sales of the defined product.  HERC may also market its
products  to the same  customers  and can use the  Dupont  trade name in certain
marketing pieces.

MARKETING AND DISTRIBUTION

     HERC  markets its products and  services  through its  marketing  and sales
staff and independent  distributors and sales representatives as well as through
strategic partnerships and marketing agreements.  In 1998 and 1999, sales to the
U.S.  Navy  under  the  Portsmouth  contract  were 66% and 70%  respectively  of
consolidated sales from continuing operations.

ADVERTISING

     HERC  advertises  and  publishes  in  selected  industry  publications  and
initiates  direct mail pieces to specific  groups of potential  consumers of its
various  products.  HERC also uses several "800" numbers in connection  with its
advertising,  direct mail  programs and order  entry.  HERC has a web sight that
explains HERC's products and services and gives detailed  information  about the
Company.  HERC's web site address is  WWW.HERCPROD.COM.  The primary emphasis of
the  advertising  is to promote  awareness of HERC and its various  products and
services.

COMPETITION

     Regional  contractors  normally perform water well and water-based pipeline
system  revitalization  and  rehabilitation.  There are no major  companies that
dominate  this  business in the Marine,  Municipal or  Industrial  markets.  The
largest  company in the water well field is  Layne-Christensen,  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 HERC. To the extent that HERC
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<PAGE>
seeks to sell its water system pipeline  rehabilitation products directly to end
users,  it may be perceived as competing with the regional  contractors to which
it might also seek to market its pipe  rehabilitation  products and  technology.
While they are not as large as the chemical producers, the contracting companies
are still generally larger and more established in the industry than HERC.

     HERC  anticipates  that  the  companies  with  which it  competes  have the
resources to develop, have developed, are developing,  or may develop and market
products  and  services  directly   competitive  with  those  of  HERC.  Current
competitors  or new market  entrants  could  produce  directly  new or  enhanced
products with features that render HERC's products  obsolete or less marketable.
HERC's competitive success will depend on its ability to promote and to adapt to
technological changes and advances in the water systems treatment industry.

     In the  opinion of HERC's  management,  HERC's  products  and  methods  are
superior to many other water system treatment chemicals and methods because they
work  better,  are  easier  to use,  less  expensive  and  less  harmful  to the
environment.  HERC competes  principally on the basis of these  qualities and by
securing  strategic  relationships with established  companies.  HERC has patent
protection  for certain of its  chemicals and processes and is seeking to expand
patent  protection by making new  applications  with respect to its  proprietary
products and technologies in order to provide a diverse product base.

MANUFACTURING AND SUPPLIES

     The majority of HERC's  industrial  products are formulated and packaged at
its plant in Phoenix,  Arizona.  The balance of these products are  manufactured
and packaged for it by a third party manufacturer  located in Chandler,  Arizona
using  HERC's  formulas.  HERC  generally  does not  maintain  long-term  supply
agreements  with its suppliers and purchases raw materials  pursuant to purchase
orders or short-term contracts in the ordinary course of business. HERC believes
that the raw  materials  and other  supplies  are  available  from a variety  of
sources and that there are numerous companies available to formulate and package
its products.

PATENT AND TRADEMARK PROTECTION

     HERC has a series of United  States  patents for the use of its  Pipe-Klean
technology in the cleaning of potable  water  distribution  and fire  protection
systems, a United States patent on the mobile  re-circulation  units employed in
the pipe  cleaning  process  and a series of United  States  patents on the core
chemical  technology used for pipe cleaning and industrial  water  applications.
HERC has also received a Notice of Allowance for its basic pipe-cleaning patents
for the  association  of European  countries  and has applied for these  patents
throughout Europe in 1999. Additionally, U.S. Patent applications for Methods of
Pipe Cleaning and  improvements  on the basic method were issued and received by
HERC during  1999.  Other  patent  applications  for pipe  cleaning  markets and
methods are pending from prior years and new applications filed during 1999.

     There can be no  assurance  that any patents  applied for will be obtained.
Moreover,  there  can  be  no  assurance  that  any  patents  will  afford  HERC
commercially  significant  protection  of its  technology or that HERC will have
adequate   resources  to  enforce  its  patents.   HERC  believes  that  it  has
independently  developed its proprietary  technologies  and they do not infringe
the  proprietary  rights of  others.  Although  HERC 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 HERC's products infringe patent or proprietary  rights of
others, HERC may be required to modify its processes or obtain a license.  There
can be no assurance  that HERC would be able to do so in a timely  manner,  upon
acceptable  terms and  conditions  or at all.  The failure to do so could have a
material  adverse  effect on HERC. In addition,  there can be no assurance  that
HERC will have the financial or other resources  necessary to defend a patent or
proprietary rights action.  Moreover, if any of HERC's products infringe patents
or proprietary rights of others,  HERC under certain  circumstances could become
liable for damages that could have a material adverse effect on HERC.

     h.e.r.c.(R),  Well-Klean(R),  Pipe-Klean(R),  and Line-out(R)are registered
trademarks of HERC.

     HERC  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,

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ideas and  documentation.  Although  HERC  requires all of its employees to sign
confidentiality agreements,  there can be no assurance that HERC will be able to
protect its trade secrets or that other  companies will not acquire  information
that HERC 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 HERC.

GOVERNMENT REGULATION

     Water  pollution is a major focus of federal,  state and local  environment
protection laws and regulations.  The discharge from water systems  treatment is
subject to these  laws and  regulation.  The water  system  treatment  chemicals
industry  and  HERC'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
HERC's operations.  NSF has indicated that Pipe-Klean and Well-Klean comply with
the standards for chemicals that can be used in cleaning drinking water systems.
In addition,  many of HERC's products are Green Cross certified as biodegradable
by Scientific  Certification Systems.  Products are biodegradable if they can be
broken down into carbon dioxide,  water and minerals  without harmful effects to
the environment.

     Some of HERC'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 HERC will not incur  environmental  liability  arising out of the
use of corrosive substances. To date, HERC does not believe that it has incurred
any such  liability.  HERC 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 HERC's  products  is
subject to frequently  changing  federal,  state and local laws and  substantial
regulation  under these laws by  governmental  agencies,  including the EPA, the
Occupational Health and Safety Administration, various state agencies and county
and local authorities  acting in conjunction with federal and state authorities.
Among other matters, 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.

     HERC has obtained  certification for its Pipe-Klean,  Pipe-Klean  Preblend,
Acid Klean and  Pipe-Klean  Neutralizer  products as "pipe  cleaning aids" under
ANSI/NSF  Standard 60 from NSF for use in potable  water  distribution  systems.
Also, HERC has obtained  ANSI/NSF Standard 60 certification for their Well-Klean
II Concentrate,  Acid Klean and Well-Klean  Preblend  products as "well cleaning
aids" for potable water wells.

     HERC  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 HERC 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 sanctions, including restrictions on its
business  operations,  monetary liability and criminal  sanctions,  any of which
could have a material adverse effect upon HERC's business.

     Advertising  relating  to HERC'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 HERC's products.

RESEARCH AND DEVELOPMENT

     HERC estimates that it spent $13,000 on research and development activities
during 1999.

DISCONTINUED OPERATIONS

     During the fourth quarter of 1997, HERC  discontinued the operations of its
wholly owned  subsidiary,  CCT  Corporation.  CCT  manufactured  and distributed
proprietary agricultural products. CCT is treated as a discontinued operation.

     On December 9, 1998, HERC sold the business of its wholly owned subsidiary,
HERC Consumer  Products,  Inc. HERC Consumer Products marketed and sold consumer
products to wholesale and retail customers.  HERC received an initial payment of
$200,000 at the closing and will receive a royalty payment of 3% of the adjusted
revenue above

                                        7
<PAGE>
$1,000,000  for some of the consumer  products for three years after the closing
date. All remaining  consumer product  inventories were purchased as part of the
transaction.

     The operating  results  relating to these  businesses  have been segregated
from  continuing  operations  and  reported  as a  separate  line  item  on  the
consolidated statements of operations.

EMPLOYEES

     As of February 21, 2000,  HERC had 53  employees.  3 are  officers,  39 are
engaged in field operations and production,  8 are in administration,  and 3 are
in marketing and sales.  None of HERC's employees is represented by labor unions
or  covered  by a  collective  bargaining  agreement.  HERC  believes  that  its
relationship with its employees is satisfactory.

SEASONALITY

     Sales of Pipe-Klean and Well-Klean  products and certain cleaning  services
are  seasonal  in those  parts of the United  States in the Snow Belt.  Seasonal
sales can result in uneven cash flow for HERC,  which may require HERC to obtain
and maintain  short-term  financing  arrangements.  In the event such  financing
arrangements are not available or, once acquired, cease to be available,  HERC's
operations and financial condition could be materially adversely affected.

ITEM 2. DESCRIPTION OF PROPERTY

     HERC  leases  approximately  22,000  square  feet of office  and  warehouse
facilities  in  Phoenix,  Arizona,  5,530  square  feet of office and  warehouse
facilities  in  Portsmouth,  Virginia,  and  2,400  square  feet of  office  and
warehouse  facilities  in National  City,  California.  One Phoenix  location is
16,000  square feet,  is under an operating  lease that expires on July 31, 2001
and provides  for monthly  payments  escalating  from $8,796 to $10,053 over the
term of the lease.  This 16,000 square foot facility is not occupied by HERC and
has been sublet for the duration of the lease. HERC's corporate headquarters are
located in a facility approximately 6,000 square feet in size. This 6,000 square
foot  facility  is under an  operating  lease that  expires  April 30,  2002 and
provides for monthly payments  escalating from $4,491 to $4,617 over the term of
the lease. The Portsmouth facility is under an operating lease expiring December
31, 2002.  The lease  provides for monthly  payments  escalating  from $2,627 to
$2,841  over  the term of the  lease.  The  National  City  location  is under a
month-to-month  operating lease with payments of $1,440 per month and requires a
30-day written notice to cancel.

     Under the terms of the sublease  discussed above,  HERC will receive rental
payments from the sublessee in the amount of $10,210 per month until April 2001.

ITEM 3. LEGAL PROCEEDINGS

     On or about January 14, 1999 in the Supreme Court of the State of New York,
County of Suffolk,  the Suffolk County Water  Authority and R & L Well Drilling,
LLC filed as a  third-party  plaintiff a civil claim  against  HERC in an action
filed on April 8, 1998 by five  individual  residents of  Ronkonkoma,  New York,
alleging negligence resulting in personal injury and seeking monetary damages of
$11  million.  HERC,  acting  through  its  insurance  carrier  pursuant  to the
submitted  claim  under  its  comprehensive   general   liability  policy,   has
substantially denied liability for the original claim.

     Although the  resolution  of this matter is not known,  management  and its
legal  counsel  believe HERC has  meritorious  defenses and believes the outcome
will  have no  material  effect on  HERC's  financial  position  or  results  of
operations.

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

     No matters were  submitted  to a vote of HERC's  security  holders  through
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year ended December 31, 1999.

                                        8
<PAGE>
                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

TRADING MARKETS

     The  common  stock of HERC is listed on the OTC BB Market and on the Boston
Stock  Exchange  under the symbols  "HERC" and "HER",  respectively.  The OTC BB
Market is the principal market for the common stock.

     The  following  table  sets  forth the high and low  trading  prices of the
common  stock as quoted by OTC BB for the  periods  indicated.  Such  quotations
reflect inter-dealer prices, without retail mark-up,  markdown or commission and
may not necessarily represent actual transactions.

  The information is believed, but not guaranteed, to be accurate.

1998                               High                   Low
----                              ------                 ------
First Quarter                     $ 0.59                 $ 0.25
Second Quarter                      0.44                   0.25
Third Quarter                       0.44                   0.25
Fourth Quarter                      0.37                   0.19

1999                               High                   Low
----                              ------                 ------
First Quarter                     $ 0.41                 $ 0.22
Second Quarter                      0.42                   0.28
Third Quarter                       0.39                   0.27
Fourth Quarter                      0.55                   0.30

     On February  17, 2000 the closing  price for the common  stock as quoted by
OTC BB was $0.48.

HOLDERS

     As of February 22, 2000, there were 117 record holders of the Common Stock.
HERC believes  that as of such date there were  approximately  1,530  beneficial
holders of the Common Stock.

DIVIDENDS

     To date,  HERC has not paid any cash dividends on its Common Stock,  and it
does not  anticipate  paying  any cash  dividends.  HERC  intends  to retain all
earnings, if any, for use in its business for the foreseeable future

                                        9
<PAGE>
RECENT SALES OR GRANTS OF UNREGISTERED SECURITIES

The following  relates to all securities of HERC sold or granted within the last
fiscal year that were not registered under the Securities Act of 1933.

<TABLE>
<CAPTION>
                                               CONSIDERATION RECEIVED AND
                                                     DESCRIPTION OF
                                                 UNDERWRITING OR OTHER           EXEMPTION
                                                  DISCOUNTS TO MARKET               FROM
                  TITLE OF                         PRICE AFFORDED TO            REGISTRATION     TERMS OF
DATE OF GRANT     SECURITY       AMOUNT                PURCHASERS                 CLAIMED        EXERCISE
-------------     --------       ------                ----------                 -------        --------
<S>            <C>               <C>           <C>                              <C>              <C>
                  Incentive                                                                   Exercisable At
                Stock Options                                                                    Prices of
                     to                         Incentive Stock Options                         $0.33-$0.39
  3/14/99 -       Purchase                     Granted to Employees With          Section         Through
  12/22/99      Common Stock     20,000        No Consideration Received            4(2)         12/22/06

                                               Compensation and Deferred          Section
   6/15/99      Common Stock     80,000    Compensation to Corporate Officers       4(2)            N/a

  1/1/99 -                                                                        Section
   10/1/99      Common Stock     80,932        Board of Director Services           4(2)            N/a
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

1999 COMPARED WITH 1998

     Sales for the fiscal year ended December 31, 1999 were $3,490,000  compared
to $3,169,000 in 1998.  The pipe cleaning  division  accounted for $3,248,000 in
1999,  of which  $2,447,000  was billed under the  Portsmouth  contract with the
United States Navy. In 1998, the pipe cleaning division accounted for $2,919,000
of which  $2,095,000  was  billed  under  the  Portsmouth  contract.  Industrial
chemical sales were $242,000 in 1999 compared to $250,000 in 1998.

     HERC's  sales in 1999 have  continued to be  generated  primarily  from the
cleaning  of  pipe  systems  on  board  ships.  HERC  cleaned  pipe  systems  on
eighty-four  ships in 1999  compared  to  seventy-two  ships  in 1998.  HERC has
continued to focus much of its sales and marketing  efforts in this area because
of its  success in  penetrating  and  expanding  its  presence in this market in
addition  to the higher  margins it yields  compared to certain  other  chemical
cleaning  applications.  Sales in 1999 also  reflect  the third year of offering
fire protection cleaning services.  During 2000, HERC plans to more aggressively
market its pipe cleaning  services for fire protection  systems utilizing HERC's
patented chemical cleaning process. Sales of industrial chemicals remained about
the same from one year to the next.  Sales from cleaning  potable and industrial
water  systems  increased  in 1999 because of HERC's  efforts to  diversify  the
markets in which it cleans pipes and other water systems.

     Consolidated  gross margins were 54% in 1999  compared to 58% in 1998.  The
decrease   resulted  from   increased   pipe  cleaning   revenue  in  non-marine
applications at lower margins than are typically realized cleaning pipe on ships
in addition to certain other one time expenses.

     Gross profit increased from $1,841,000 in 1998 to $1,876,000 in 1999 due to
increased revenue.  Selling expenses increased to $404,000 in 1999 from $367,000
in 1998 while general and  administrative  expenses decreased from $1,631,000 in
1998 to  $1,551,000  in  1999.  The  increase  in  selling  expenses  was due to
increases  in  payroll,  advertising,  trade  show,  travel and  travel  related
expenses partially offset by a decrease in commission expenses.  The decrease in
general and  administrative  expenses is attributable  primarily to decreases in
rent,  amortization,  payroll, legal and office equipment rental expenses offset
somewhat by increases in depreciation,  telephone, moving, insurance, travel and
bad debt expenses.

                                       10
<PAGE>
     For the year ended  December 31, 1999,  HERC's  operating  loss was $79,000
compared to $157,000 for the same period in 1998.  Additionally,  net income for
1999 was $97,000 consisting of income from continuing  operations of $24,000 and
income from discontinued  operations of $73,000. This compares to net income for
1998 of $40,000  consisting of income from  discontinued  operations of $571,000
offset by a loss from continuing operations of $531,000.

     As HERC continues to focus on marine system pipe cleaning and increases its
efforts to generate a greater  percentage of its revenue from chemical sales and
other pipe  cleaning  applications,  it  anticipates  that revenues in 2000 will
increase  over those of 1999.  This belief is based on the results of operations
in  1999,  the  level  of  activity  seen  thus  far in the  year  2000  and the
anticipated  results of its increased  efforts to expand its revenue base to new
customers and applications,  but is subject to change depending on many factors,
including   continuing  to  provide  services  under  the  Portsmouth  contract,
expanding  operations  on the  west  coast  and  securing  contracts  in new and
existing  markets and  locations.  It also depends on many  factors  outside the
control of HERC.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents were $66,000 at December 31, 1999 and $243,000 at
December  31, 1998 while  working  capital was  $593,000  and  $449,000 at those
respective  dates.  The  decrease  in cash was due to a  temporary  slowdown  in
collection  of  accounts  receivable  in  addition  to the  use of  cash to fund
numerous  ongoing  projects during the fourth  quarter.  The increase in working
capital during 1999 is a function of HERC's positive EBITDA  partially offset by
cash used for  capital  expenditures,  patent  expenditures  and the pay down of
current debt.

     As of  December  31,  1999,  HERC  had  total  long-term  debt  of  $6,000.
Additionally, as of December 31, 1999, HERC had factored $162,000 of receivables
under  its  factoring  facility  (See  Note  4  to  the  consolidated  financial
statements).

     During the fourth  quarter of 1998,  HERC  concluded the sale of its wholly
owned subsidiary,  HERC Consumer Products,  Inc. that marketed and sold consumer
products to wholesale and retail customers.  HERC was paid a cash  consideration
of $200,000 at the closing and will be paid a 3% royalty of the adjusted revenue
above $1 million for  certain  consumer  products  for the three years after the
closing date. All remaining  consumer  products  inventories were purchased as a
part of the transaction.

     In the second quarter of 1998,  HERC sold 3,240,000  shares of Common Stock
at $0.31 per share and received net proceeds of $999,400.

     HERC currently contracts with a few customers responsible for a majority of
HERC's  revenues,  and HERC  expects the high  concentration  levels to continue
through 2000. Thus, any material delay, cancellation or reduction of orders from
these customers could have a material adverse effect on HERC's operations.

     Management has no plans to sell additional securities to raise cash and can
make no guarantee that it could sell additional  securities.  However,  any such
sale, if necessary,  would substantially  dilute the interest of HERC's existing
stockholders.

YEAR 2000 COMPLIANCE DISCLOSURE

     Many  existing  computer  programs  and  databases  use only two  digits to
identify  a year in the date  field  (i.e.,  99  would  represent  1999).  These
programs and  databases  were  designed and developed  without  considering  the
impact  of the  upcoming  millennium.  Consequently,  in  the  Year  2000,  date
sensitive  computer  programs  may  interpret  the date "00" as 1900 rather than
2000. If not  corrected,  many computer  systems could fail or create  erroneous
results in the Year 2000.

     HERC has experienced no problems as a result of the Year 2000.

OTHER MATTERS

     In June 1997, SFAS No. 130, "Reporting  Comprehensive Income," and SFAS No.
131, "Disclosure about Segments of an Enterprise and Related  Information," were
issued. No. 130 specifies presentation of comprehensive

                                       11
<PAGE>
income and its components;  No. 131 requires certain  additional  information on
operating segments, products and services, geographic areas and major customers.

Implementation  of both  statements,  which are  effective  for 1998 and  future
years, will have no material impact on HERC's financial statements.

ITEM 7. FINANCIAL STATEMENTS

     See Index to Financial Statements on page 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; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

Name                   Age           Position
----                   ---           --------
S. Steven Carl         42    Chairman of the Board of Directors, Chief Executive
                              Officer and President

Michael H. Harader     32    Vice President of Finance, Chief Financial Officer

Salvatore DiMascio     60    Director

R. John Armstrong      56    Director

     S. Steven Carl has been the Chief Executive  Officer and a Director of HERC
since  August 1995 and was  President  of HERC from August 1995 to February  28,
1996.  Effective  February 28, 1996,  Mr. Carl became  Chairman of the Board and
resigned as President of HERC. Mr. Carl was re-appointed  President in May 1997.
From May 1992 to August 1995,  Mr. Carl was the  President  and Chief  Executive
Officer of CCT  Corporation,  a wholly owned  subsidiary of HERC acquired in May
1995.

     Michael H. Harader has been Vice  President of Finance since July 27, 1998.
Effective  October 27, 1998,  Mr. Harader became Chief  Financial  Officer.  Mr.
Harader  joined HERC in January 1996 and has held  positions as  Controller  and
Accounting  Manager.  From January 1992 until  February  1994,  Mr.  Harader was
Corporate Controller of 90 Clothing Company,  Inc. From April 1994 until January
1996,  Mr.  Harader was Credit  Manager of Isley's RV Service  Center,  Inc. Mr.
Harader is a Certified Public Accountant.

     Salvatore  DiMascio  has been a Director of HERC since  September  3, 1996.
Since 1986, Mr. DiMascio has been President of DiMascio  Venture  Management,  a
management  and  investment-consulting  firm.  From June 1994 to June 1997,  Mr.
DiMascio was  Executive  Vice  President and Chief  Financial  Officer of Anchor
Gaming, a public company.  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 and other service industries. Mr. DiMascio
is currently a Director of Fotoball  USA, a public  company.  Mr.  DiMascio is a
Certified Public Accountant.

     R. John  Armstrong has been a Director of HERC since  January 1, 1999.  Mr.
Armstrong  served eleven years in the U.S. Navy, with experience in ship design,
construction and maintenance,  with a four-year tour at a SupShip (supervisor of
shipbuilding  office),  serving in quality  assurance,  contracts  and  planning
departments in addition to serving two years on the  engineering  faculty at the
Naval Academy.  Following his resignation from the Navy, Mr. Armstrong served as
a Project  Manager and,  ultimately,  Executive Vice President of a professional
services company in Washington DC, providing  engineering and computer  services
to a broad  spectrum  of  clients.  In 1986 he became the  President  of Seaward
Marine Services, Inc., engaged in international diving services.

                                       12
<PAGE>
BOARD OF DIRECTORS; COMMITTEES

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

     Outside Directors elected at duly convened annual shareholder's meetings or
other  properly  convened Board  elections are  compensated by an annual Outside
Director's Retainer in the amount of $15,000 per annum,  payable as follows, (a)
$1,500  semi-annually  on the  first  day  of the  second  and  fourth  quarters
following  such  election,  (b) $1,000 for personal  attendance at duly convened
quarterly  meetings of the Board, and (c) the issuance of HERC restricted common
stock payable quarterly on the first day of each quarter in an amount equivalent
to $2,000 of market  value  measured on the close of trading of the last trading
day of the prior quarter, plus out-of-pocket expenses.

     The Board held 5 meetings during the year ended December 31, 1999.

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

     The Audit Committee, currently comprised of Messrs. DiMascio and Armstrong,
has been  formed  to:  (i)  recommend  annually  to the Board of  Directors  the
appointment  of  the  independent   auditors  of  HERC;  (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 overall accounting
practices,  policies,  and  accounting and financial  controls of HERC;  (iv) be
available to the independent  auditors during the year for  consultation and (v)
review  related  party  transactions  by HERC on an  ongoing  basis  and  review
potential  conflicts  of  interest  situations  where  appropriate.   The  Audit
Committee held 2 meetings during the year ended December 31, 1999.

     The Compensation  Committee,  currently comprised of Messrs. Carl, DiMascio
and Armstrong,  has been formed to review  overall  executive  compensation  and
review HERC's employee benefit plans. The Compensation  Committee held 1 meeting
during the year ended December 31, 1999.

     HERC is obligated  through  April 2001,  if so requested by GKN  Securities
Corporation ("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 HERC
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
HERC's  directors  and officers and persons who  beneficially  own more than ten
percent  of  HERC's  Common  Stock to file  with  the  Securities  and  Exchange
Commission ("SEC") and the Boston Stock Exchange initial reports of ownership of
Common  Stock in HERC.  Officers,  directors  and  greater-than-ten  percent  of
shareholders  are required by SEC  regulation to furnish HERC with copies of all
Section 16(a) reports they filed. To HERC's knowledge, based solely on review of
the copies of such reports furnished to HERC and written  representation that no
other  reports were  required,  during the year ended  December  31, 1999,  such
persons complied with all Section 16(a) filing requirements.

ITEM 10. EXECUTIVE COMPENSATION

     Set forth in the following  table is  information  about 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, 1999.

<TABLE>
<CAPTION>
Name & Principal Position                               Year       Salary      Stock Grant
-------------------------                               ----       ------      -----------
<S>                        <C>                          <C>        <C>          <C>
S. Steven Carl             Chairman of the Board,       1999       $133,913     $ 16,500
                           Chief Executive Officer      1998       $ 82,100     $     --
                           & President                  1997       $100,100     $     --
</TABLE>
     Other  than the  compensation  stated in the  table,  the  Named  Executive
Officer did not receive  non-cash  benefits  having a value exceeding 10% of his
stated compensation.

                                       13
<PAGE>
STOCK OPTION PLANS

     In 1993,  the Board of Directors of HERC 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.  Key employees are persons whose
efforts,  knowledge and expertise are integral to the  operations and success of
HERC.  The  Board of  Directors  administers  the 1993  Plan,  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  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 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 HERC's  stock).  No options may be granted  after
the year 2003.  As of December  31,  1999,  HERC had issued  under the 1993 Plan
88,000 options exercisable at prices ranging from $0.3125 to $0.32 per share.

     In 1996, the Board of Directors of HERC 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
HERC and its  subsidiaries,  as both ISOs and  non-qualified  options  and other
equity  based  awards.  Holders  of these  awards  are  persons  whose  efforts,
knowledge and expertise are integral to the  operations and success of HERC. The
Board of Directors  administers  the 1996 Plan,  but the Board of Directors  may
appoint a committee to act on its behalf.  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 HERC's stock).  The exercise price of a  Non-qualified  Option
may not be less  than  100% of the fair  market  value on the last  trading  day
before the date of grant.  No options may be granted  after the year 2006. As of
December 31, 1999 HERC had issued options under the 1996 Plan to acquire 586,500
shares of Common Stock,  exercisable  at prices  ranging from $0.31 to $1.75 per
share.

OTHER OPTIONS AND WARRANTS

     In addition to the options under the 1993 Plan and the 1996 Plan,  HERC has
outstanding  the  following  options and warrants as of December  31, 1999:  (i)
warrants to purchase  85,000 shares of Common Stock at $3.00 per share issued to
Perrin,  Holden & Davenport  Capital  Corporation in connection with its private
placement in December 1996, (ii) an option to purchase 171,490 units,  each unit
consisting of one share of Common Stock and one warrant to purchase one share of
Common Stock at $2.00 per share,  issued to GKN and its  designees in connection
with the private  placement in April 1996,  (iii) warrants issued to consultants
to purchase  392,500  shares of Common Stock at prices  ranging from $0.21875 to
$2.75 per share,  (iv) other  options  issued to employees  to purchase  390,000
shares of Common Stock at prices  ranging  from $0.3125 to $1.75 per share,  (v)
warrants to purchase 300,000 shares of Common Stock at prices ranging from $1.31
to $2.00 per  share,  issued to GKN and its  designees  in  connection  with the
exercise of 150,000  units in June 1997 and (vi)  warrants  to purchase  125,000
shares  of  Common  Stock at  prices  ranging  from  $1.18 to  $1.47  issued  to
InterEquity  in  connection  with the term loan in  September  1997.  All of the
foregoing  securities are exercisable  into an aggregate of 2,309,980  shares of
Common Stock.

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

Options Granted in Last Fiscal Year: NONE

Aggregate Year-End Option Values:

<TABLE>
<CAPTION>
                   Number of Unexercised Options      Value of Unexercised in-the-money
                        At December 31, 1999             Options at December 31, 1999
                     ----------------------------         -----------------------------
Name                 Exercisable    Unexercisable         Exercisable     Unexercisable
----                 -----------    -------------         -----------     -------------
<S>                    <C>             <C>                   <C>              <C>
S. Steven Carl         210,000         40,000                0(1)             0(1)
</TABLE>

----------
(1)  The market value at December 31, 1999 of the Common  Stock  underlying  the
     options  was $0.30 per share.  The  options  are  exercisable  at prices of
     $0.3125 or more.

                                       14
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth as of January 31, 2000 certain  information
regarding the beneficial  ownership of shares of Common Stock by (i) each person
who is known by HERC to beneficially own 5% or more of the outstanding shares of
Common Stock;  (ii) each of HERC's directors;  and (iii) all executive  officers
and directors of HERC as a group.


<TABLE>
<CAPTION>
                                          Amount and Nature of     Percentage of Outstanding
                                               Beneficial              Common Stock Owned
Name and Address of Beneficial Owner          Ownership (1)               Beneficially
------------------------------------          -------------               ------------
<S>                                               <C>                           <C>
S. Steven Carl (2)(3)                             727,709                       6.13
R. John Armstrong (2)                              72,752                          *
Salvatore T. DiMascio (2)(5)                       59,863                          *
Lance Laifer and Laifer
  Capital Management, Inc. (2)                  3,410,000                      29.23
Norman H. Pessin (2)                            1,025,000                       8.79
Shelby A. Carl (2)(4)                             597,470                       5.10
All executive officers and directors
as a group (6) (four persons)                     946,524                       7.94
</TABLE>

----------
*    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  January  31,  2000 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  January 31,  2000 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,  Armstrong  and
     DiMascio is c/o H.E.R.C. Products Incorporated, 2215 W. Melinda Lane, Suite
     A,  Phoenix,  Arizona  85027.  The  address  for  Norman  H.  Pessin is c/o
     Neuberger & Berman,  LLC, 605 Third Avenue, New York, NY 10158. The address
     for Lance  Laifer is c/o  Laifer  Capital  management,  Inc.,  45 West 43rd
     Street, 9th Floor, New York, NY 10036.

(3)  Includes  210,000  shares  issuable  pursuant  to  immediately  exercisable
     options. Excludes 40,000 shares issuable on options that become exercisable
     in the future.

(4)  Includes 50,000 shares issuable pursuant to immediately exercisable options
     and warrants.

(5)  Includes  20,000  shares  issuable  pursuant  to  immediately   exercisable
     options.

(6)  Includes  shares  referred to as being  included in notes (3), (4) and (5),
     68,200 additional shares and 18,000 shares issuable pursuant to immediately
     exercisable options.  Excludes shares referred to as being excluded in note
     (3) and 32,000 shares  issuable on options that become  exercisable  in the
     future.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None

                                       15
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

Exhibit No:                         Exhibit
-----------                         -------

(3)(1)    Certificate of  Incorporation  of HERC, filed as Exhibit 3.1 to HERC's
          Registration Statement (No. 33-75166).

(3)(2)    By-Laws of HERC, filed as Exhibit 3.2 to HERC's Registration Statement
          (No. 33-75166).

(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  (reference also made to exhibit
          3.1 and 3.2),  filed as Exhibit 4.1 to HERC's  Registration  Statement
          (No. 33-75166).

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

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

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

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

(10)(1)   1993 Incentive Stock Option Plan, as amended, filed as Exhibit 10.3 to
          HERC's Registration Statement No. 33-75166.

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

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

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

(10)(5)   Form of Subscription  Agreement between HERC and investors dated April
          3, 1996, filed as Exhibit 10.11 to HERC's Annual Report on Form 10K-SB
          for the fiscal year ended December 31, 1995

(10)(6)   1996  Performance  Equity  Plan,  filed  as  Annex A to  HERC's  Proxy
          Statement dated June 11, 1996.

(10)(7)   Form of Purchase  Option issued to GKN Securities  Corporation and its
          designees  dated June 18, 1997,  filed as Exhibit 10.15 to HERC's Form
          10-KSB for the year ended December 31, 1997.

(10)(8)   Loan Agreement by and between HERC and InterEquity  Capital  Partners,
          LLP dated  September  15,  1997 filed as Exhibit  10.18 to HERC's Form
          10-KSB for the year ended December 31, 1997.

(10)(9)   Account Transfer and Purchase Agreement by and between HERC,  H.E.R.C.
          Consumer  Products,   Inc.,  and  KBK  Financial   Incorporated  dated
          September  22,  1997 filed as Exhibit  10.19 to HERC's Form 10-KSB for
          the year ended December 31, 1997.

                                       16
<PAGE>
(10)(10)  Agreement by and between  HERC and the U.S.  Navy dated August 8, 1997
          filed as  Exhibit  10.20 to  HERC's  Form  10-KSB  for the year  ended
          December 31, 1997.

(10)(11)  Lease by and between HERC and Roger  Buttrum  dated May 14, 1996 filed
          as Exhibit 10.21 to HERC's Form 10-KSB for the year ended December 31,
          1997.

(10)(12)  Form of Warrant Agreement between HERC and Jerry Ludwig and Associates
          dated  September 3, 1997 filed as Exhibit  10.22 to HERC's Form 10-KSB
          for the year ended December 31, 1997.

(10)(13)  Form of Warrant Agreement between HERC and Shelby Carl dated September
          3, 1997  filed as  Exhibit  10.23 to HERC's  Form  10-KSB for the year
          ended December 31, 1997.

(10)(14)  Amendment to Stock Option Agreement by and between Gary S. Glatter and
          HERC dated March 23, 1995 filed as Exhibit 10.24 to HERC's Form 10-KSB
          for the year ended December 31, 1997.

(10)(15)  Amendment  Number two to Stock Option Agreement by and between Gary S.
          Glatter  and HERC dated  February  1, 1997  filed as Exhibit  10.25 to
          HERC's Form 10-KSB for the year ended December 31, 1997.

(10)(16)  Employment  contract by and between S. Steven Carl and HERC dated June
          15, 1999 filed as exhibit  10.26 to HERC's form 10-QSB for the quarter
          ended September 30, 1999.

                                                          Sequential Page Number
                                                          ----------------------

(21)      Subsidiaries                                              37

(23)      Consent of Independent Public Accountants
          (Arthur Andersen LLP)                                     38

(27)      Financial Data Schedule                                   39

(99)      Risk Factors                                              40

(b)       Reports on Form 8-K: NONE.


                                       17
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   Index to Consolidated Financial Statements

                                                                        Page No.
                                                                        --------
Report of Independent Public Accountants                                   F-2
  Financial Statements:
  Consolidated Balance Sheet
    December 31, 1999                                                      F-3
  Consolidated Statements of Operations
    Years Ended December 31, 1999 and 1998                                 F-4
  Consolidated Statements of Stockholders' Equity
    Years Ended December 31, 1999 and 1998                                 F-5
  Consolidated Statements of Cash Flows
    Years Ended December 31, 1999 and 1998                                 F-6

  Notes to Consolidated Financial Statements                               F-7

                                       F-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To H.E.R.C. Products Incorporated:

We have audited the accompanying consolidated balance sheet of H.E.R.C. PRODUCTS
INCORPORATED (a Delaware  corporation)  AND  SUBSIDIARIES  ("the Company") as of
December  31,  1999,  and the related  consolidated  statements  of  operations,
stockholders'  equity and cash flows for the years ended  December  31, 1999 and
1998.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United  States.  Those  standards  require  that we plan and  perform the
audits 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 the Company as of
December 31, 1999,  and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.

                                        Arthur Andersen LLP
Phoenix, Arizona,
   March 3, 2000.

                                       F-2
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                December 31, 1999

                                     ASSETS
CURRENT ASSETS
     Cash and cash equivalents                                   $     65,722
     Trade accounts receivable, net of allowance for
           doubtful accounts of $44,620                               873,045
     Inventories                                                       45,990
     Deferred expenses                                                118,443
     Other receivables                                                  8,611
     Prepaid expenses                                                 120,380
                                                                 ------------
           Total Current Assets                                     1,232,191
                                                                 ------------
PROPERTY AND EQUIPMENT
     Property and equipment                                         1,107,000
     Less accumulated depreciation                                    508,773
                                                                 ------------
           Net Property and Equipment                                 598,227
                                                                 ------------
OTHER ASSETS
     Patents, net of accumulated amortization of $109,465             108,017
     Patents pending                                                   89,104
     Refundable deposits and other assets                              62,579
                                                                 ------------
            Total Other Assets                                        259,700
                                                                 ------------
                                                                 $  2,090,118
                                                                 ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                            $    263,462
     Accrued wages                                                     77,503
     Current portion of notes payable                                  30,592
     Other accrued expenses                                           267,601
                                                                 ------------
            Total Current Liabilities                                 639,158

LONG-TERM LIABILITIES
     Notes payable, net of current portion                              6,134
                                                                 ------------
            Total Liabilities                                         645,292
                                                                 ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
     Preferred stock, $10.00 stated value;
       authorized 1,000,000 shares;
       issued and outstanding zero shares                                  --
     Common Stock, $0.01 par value; authorized
       40,000,000 shares; issued and outstanding
       11,652,853 shares                                              116,529
     Additional paid-in capital                                    13,972,584
     Accumulated deficit                                          (12,644,287)
                                                                 ------------
            Total Stockholders' Equity                              1,444,826
                                                                 ------------
                                                                 $  2,090,118
                                                                 ============

The accompanying notes are an integral part of this consolidated balance sheet.

                                       F-3
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Operations

                                                    Years Ended December 31,
                                                  ----------------------------
                                                      1999            1998
                                                  ------------    ------------
SALES                                             $  3,489,743    $  3,168,955
COST OF SALES                                        1,613,620       1,327,782
                                                  ------------    ------------
GROSS PROFIT                                         1,876,123       1,841,173
SELLING EXPENSES                                       403,955         366,946
GENERAL AND ADMINISTRATIVE EXPENSES                  1,550,992       1,630,966
                                                  ------------    ------------
OPERATING LOSS                                         (78,824)       (156,739)
                                                  ------------    ------------
OTHER INCOME (EXPENSE)
 Interest expense                                      (18,105)        (85,760)
 Miscellaneous                                          24,698          18,760
 Expenses relating to settlement of lawsuits                --        (120,000)
 Gain (loss) on sale or disposal of equipment           96,028        (265,222)
 Gain on sale of patent                                     --          77,597
                                                  ------------    ------------
   Total Other Income (Expense)                        102,621        (374,625)
                                                  ------------    ------------
INCOME (LOSS) FROM CONTINUING
  OPERATIONS BEFORE INCOME TAXES                        23,797        (531,364)
   Income tax provision                                     --              --
                                                  ------------    ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                23,797        (531,364)
DISCONTINUED OPERATIONS:
   Income from Operations of
     Discontinued Segments                                  --         256,792
   Income from Disposition of
    Discontinued Segments                               73,063         315,002
                                                  ------------    ------------
NET INCOME                                        $     96,860    $     40,430
                                                  ============    ============

INCOME (LOSS) PER COMMON SHARE -
  BASIC AND DILUTED

INCOME (LOSS) FROM CONTINUING OPERATIONS          $         --    $      (0.05)
INCOME FROM DISCONTINUED OPERATIONS                       0.01            0.05
                                                  ------------    ------------
NET INCOME PER COMMON SHARE                       $       0.01    $         --
                                                  ============    ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC                                               11,596,318      10,391,936
                                                  ============    ============
DILUTED                                             11,658,081      10,391,936
                                                  ============    ============

  The accompanying notes are an integral part of these consolidated statements.

                                       F-4
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                         Common Stock        Additional
                                     ---------------------     Paid-in      Accumulated
                                       Shares      Amount      Capital        Deficit         Total
                                     ----------   --------   -----------   ------------    ----------
<S>                                  <C>         <C>        <C>           <C>             <C>
BALANCE,
DECEMBER 31, 1997                     8,230,588   $ 82,306   $12,947,406   $(12,781,577)   $  248,135

Net Income                                   --         --            --         40,430        40,430

Warrants issued for services                 --         --         3,600             --         3,600

Issuance of shares of Common Stock    3,261,333     32,613       972,787             --     1,005,400
                                     ----------   --------   -----------   ------------    ----------
BALANCE,
DECEMBER 31, 1998                    11,491,921    114,919    13,923,793    (12,741,147)    1,297,565

Net Income                                   --         --            --         96,860        96,860

Issuance of shares of Common Stock      160,932      1,610        48,791             --        50,401
                                     ----------   --------   -----------   ------------    ----------
BALANCE,
DECEMBER 31, 1999                    11,652,853   $116,529   $13,972,584   $(12,644,287)   $1,444,826
                                     ==========   ========   ===========   ============    ==========
</TABLE>

  The accompanying notes are an integral part of these consolidated statements.

                                       F-5
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                                               -----------------------
                                                                  1999        1998
                                                               ---------    ---------
<S>                                                            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                   $  96,860    $  40,430
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities
    Depreciation and amortization                                219,969      311,234
    (Gain) loss on sale or disposal of equipment                 (96,028)     265,222
    Gain on sale of patent                                            --      (77,597)
    Common stock issued for services                              43,800        6,000
    (Increase) decrease in assets
      Trade accounts receivable                                 (256,689)    (605,852)
      Inventories                                                (26,560)         946
      Deferred expenses                                         (104,450)     (13,993)
      Other receivables                                           (4,356)       7,708
      Prepaid expenses                                           (63,748)     (16,875)
      Refundable deposits and other assets                        14,414       17,019
    Increase (decrease) in liabilities
      Accounts payable                                           107,812     (174,070)
      Accrued wages and other accrued expenses                   139,032       11,676
      Customer Deposits                                          (42,447)      42,447
      Change in net liabilities of discontinued operations       (40,314)    (167,707)
                                                               ---------    ---------
    Net cash used in operating activities                        (12,705)    (353,412)
                                                               ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                          (164,885)    (232,276)
  Cash received from the sales of equipment                      106,000        5,974
  Expenditures related to patents and patents pending            (51,025)     (48,677)
                                                               ---------    ---------
    Net cash used in investing activities                       (109,910)    (274,979)
                                                               ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of common stock                              --      999,400
  Proceeds from issuance of notes payable and long-term debt     155,996      137,431
  Principal payments under notes payable                        (210,526)    (400,969)
                                                               ---------    ---------
    Net cash provided by (used in) financing activities          (54,530)     735,862
                                                               ---------    ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            (177,145)     107,471
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                 242,867      135,396
                                                               ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                     $  65,722    $ 242,867
                                                               =========    =========
</TABLE>

  The accompanying notes are an integral part of these consolidated statements.

                                       F-6
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1999 AND 1998

1.  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

H.E.R.C.  Products Incorporated (the "Company") provides pipeline rehabilitation
services for marine, fire protection,  potable water,  wastewater and industrial
systems and  manufactures  and sells water  treatment  chemicals.  The Company's
wholly owned  subsidiaries,  CCT  Corporation  ("CCT")  which  manufactured  and
distributed  proprietary  agricultural products and HERC Consumer Products, Inc.
("HCP") which marketed  consumer products toward wholesale and retail customers,
are accounted for as discontinued operations (Note 2).

The Company's strategy involves  concentrating its efforts on providing pipeline
rehabilitation  services  to a  diverse  group of  customers.  The  company  has
undertaken  and  continues to  undertake  substantial  efforts to diversify  its
customer base and expand its markets.  In 1999 and 1998,  sales to the U.S. Navy
under the Portsmouth  contract were 70% and 66%,  respectively,  of consolidated
sales. The 5-year U.S. Navy contract is renewable each year at the option of the
U.S.  Navy. If the U.S. Navy renews the contract for any such year,  the minimum
annual amount that the U.S. Navy must spend with HERC to meet the obligations of
the contract is approximately $75,000.

PRINCIPLES OF CONSOLIDATION AND PREPARATION OF FINANCIAL STATEMENTS

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.  All references to the
Company  herein  refer  to the  Company  and its  subsidiaries.  CCT and HCP are
accounted for as discontinued operations (Note 2).

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

                                       F-7
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

Cash  equivalents  include cash on hand, bank checking and money market accounts
and other highly liquid investments with original maturities of 90 days or less.

INCOME TAXES

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109
requires  the use of an asset or  liability  approach in  accounting  for income
taxes. Deferred tax assets and liabilities are recorded based on the differences
between the financial  statement and tax bases of assets and liabilities and the
tax rates in effect when these differences are expected to reverse.

STOCK-BASED COMPENSATION

The Company  accounts for its stock-based  compensation  plans under  Accounting
Principles  Board Opinion No. 25 (APB No. 25), under which no compensation  cost
is recognized.  In October 1995, the Financial Accounting Standards Board issued
SFAS No.123  requiring  companies that account for  stock-based  compensation as
prescribed  by APB No. 25 to  disclose  the pro forma  effects on  earnings  and
earnings  per share as if SFAS No.123 had been  adopted and certain  disclosures
with respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS No.123.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated  fair value of financial  instruments  has been  determined by the
Company  using  available  market   information  and  valuation   methodologies.
Considerable  judgment is required in estimating fair values.  Accordingly,  the
estimates  may not be  indicative  of the  amounts  that would be  realized in a
current  market  exchange.  The carrying  values of cash  equivalents,  accounts
receivable,  accounts  payable and other accrued  liabilities  approximate  fair
value due to the short maturities of these instruments.

INVENTORIES

Inventories  consist  primarily of finished goods and are stated at the lower of
cost or market  (net  realizable  value).  Cost is  determined  by a method that
approximates first-in, first-out.

                                       F-8
<PAGE>
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 tax reporting purposes.

Property and equipment at December 31, 1999 are:

Equipment                                $   951,856
Office furniture and computers               155,144
                                         -----------
                                           1,107,000
Less accumulated depreciation               (508,773)
                                         -----------
Net property and equipment               $   598,227
                                         ===========

The Company  periodically  evaluates the carrying value of long-lived  assets in
accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG LIVED  ASSETS TO BE DISPOSED  OF.  Under SFAS No.  121,  long-lived
assets  and  certain  identifiable  intangible  assets  to be held  and  used in
operations are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be fully recoverable. An impairment
loss is recognized if the sum of the expected long-term  undiscounted cash flows
is less than the carrying amount of the long-lived assets being evaluated.

The useful lives of property and equipment for computing depreciation range from
three to ten years. Depreciation expense was $193,111 and $161,728 for the years
ended December 31, 1999 and 1998, respectively.

PATENTS AND PATENTS PENDING

Patents issued are stated at cost and amortized on the straight-line  basis over
10 years.  Costs for patents pending are amortized when the patents are awarded.
Unamortized costs for patents that are denied or have no continuing  application
to the Company's  ongoing product base are expensed.  Such expenses  amounted to
approximately $9,000 and $4,000 for the years ended 1999 and 1998, respectively.

REVENUE RECOGNITION

The Company  recognizes  revenue when  products  are  shipped.  The Company also
performs pipe-cleaning  services,  which are recorded when the work is complete.
Costs  related to  uncompleted  projects of  $118,443  at December  31, 1999 are
deferred until the projects are completed.

                                       F-9
<PAGE>
EARNINGS PER SHARE

The Company has adopted SFAS No. 128,  EARNINGS PER SHARE.  Pursuant to SFAS No.
128,  basic earnings per common share are computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding  during the
year.

A reconciliation  of the basic and diluted earnings per share (EPS)  computation
for the years ended December 31, 1999 and 1998 is as follows:

                                         Year Ended December 31, 1999
                                         ----------------------------
                                         Net Income       Shares      Per Share
                                         (Numerator)   (Denominator)   Amount
                                         -----------   -------------   ------

Basic EPS                                  $96,860      11,596,318     $   0.01
                                                                       ========

Effect of stock options and warrants            --          61,763
                                           -------      ----------
Diluted EPS                                $96,860      11,658,081     $   0.01
                                           =======      ==========     ========

                                         Year Ended December 31, 1998
                                         ----------------------------
                                         Net Income       Shares      Per Share
                                         (Numerator)   (Denominator)   Amount
                                         -----------   -------------   ------

Basic EPS                                  $40,430      10,391,936     $    --
                                                                       ========

Effect of stock options and warrants            --              --
                                           -------      ----------
Diluted EPS                                $40,430      10,391,936     $     --
                                           =======      ==========     ========

RECENTLY ADOPTED ACCOUNTING STANDARDS

In 1998,  the Company  adopted SFAS No. 131,  DISCLOSURES  ABOUT  SEGMENTS OF AN
ENTERPRISE AND RELATED  INFORMATION.  The new rules establish  revised standards
for public  companies  relating to the  reporting of financial  and  descriptive
information about their operating segments in financial statements.  The Company
adopted SFAS No. 131 and all of the required disclosures.

2. DISCONTINUED OPERATIONS

During the fourth  quarter of 1997, the Company  discontinued  operations of its
agricultural business,  CCT, and wrote down its related assets. CCT is accounted
for as a discontinued operation in the accompanying financial statements. During
the fourth  quarter of 1998,  the Company  concluded the sale of the business of
its wholly owned  subsidiary  HCP, which is also accounted for as a discontinued
operation in the  accompanying  financial  statements.  In connection  with this
sale, the Company received cash consideration of $200,000,  plus a 3% royalty of
future adjusted annual  revenues above $1 million on certain  consumer  products
for a period of three  years from the  closing  date.  These  royalties  will be
recognized  as  revenue  when and if they are  earned.  All  remaining  consumer
products inventories were purchased as a part of the transaction.

                                      F-10
<PAGE>
CCT Operating Results were:
                                                Year Ended December 31,
                                                -----------------------
                                                        1998
                                                      --------
Sales                                                 $341,965
Expenses                                               203,588
                                                      --------
Income from discontinued operation                    $138,377
                                                      ========

HCP Operating Results were:
                                                Year Ended December 31,
                                                -----------------------
                                                        1998
                                                    ----------
Sales                                               $1,171,556
Expenses                                             1,053,141
                                                    ----------
Income from discontinued operation                  $  118,415
                                                    ==========

During  1999,  a disputed  marketing  agreement  and certain  other  issues were
resolved resulting in income from disposal of discontinued segments of $73,063.

3. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

                                             Year Ended December 31,
                                             -----------------------
                                                1999          1998
                                             ---------     ---------
           Current                           $      --     $      --
           Deferred                                 --            --
                                             ---------     ---------
                                             $      --     $      --
                                             =========     =========

The components of deferred taxes as of December 31, 1999, are as follows:

Current deferred tax assets:
  Accruals not currently deductible for tax                       $    78,146
  Current portion of valuation allowance                              (78,146)
                                                                  -----------

                                                                  $        --
                                                                  ===========

Non-current deferred tax assets:
  Book amortization/depreciation in excess of tax and other       $   112,152
  Net operating loss carry forwards                                 2,640,000
  Non-current portion of valuation allowance                       (2,752,152)
                                                                  -----------
                                                                  $        --
                                                                  ===========

                                      F-11
<PAGE>
The Company was in a consolidated tax loss position for the years ended December
31, 1999 and 1998,  and  therefore  had no current  federal  income tax expense.
Deferred  tax  assets  of  approximately  $2,640,000  as of  December  31,  1999
($4,106,000 as of December 31, 1998),  from loss carry forward benefits have not
been recorded  because of the  uncertainty of realizing  such benefits.  For the

year ended  December 31, 1999, the Company has reduced the value of its deferred
tax asset  from loss carry  forwards  in order to take into  account  loss carry
forwards expected to expire due to tax limitations.  The valuation allowance has
been decreased to reflect the change.

A reconciliation of the U.S. Federal  statutory rate to the Company's  effective
tax rate is as follows:

                                     1999
                                     ----
Statutory federal rate                 34%
Effect of state taxes                   6%
Change in valuation allowance        (40)%
                                     ----
                                       --
                                     ====

Net operating loss carry forwards for federal tax purposes totaled approximately
$6,732,000  at December 31, 1999.  These losses are  available for carry forward
against future years' taxable income, subject to certain limitations, and expire
in various years through 2019.

4. LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Long term debt and other  financing  arrangements  consist of the  following  at
December 31, 1999:

              Equipment financing                  $ 29,106
              Insurance financing                     7,620
                                                   --------
              Total financing                        36,726
              Less current portion                  (30,592)
                                                   --------
              Total long term debt                 $  6,134
                                                   ========

Equipment  financings are payable in monthly  installments  over varying periods
through  November  2001.  Interest  rates  range from 11.5% to 30.2%.  Principal
payments are scheduled to be $22,972 in 2000 and $6,134 in 2001.

The  Company has an  arrangement  for a  factoring  facility  whereby the factor
purchases  eligible  receivables and advances 80% of the purchased amount to the
Company.  Purchased  receivables may not exceed $600,000 at any one time. Either
party may cancel the arrangement with 30 days notice. At

                                      F-12
<PAGE>
December 31, 1999, there were  approximately  $162,000 of factored  receivables.
This  arrangement  is accounted for as a sale of receivables on which the factor
has  recourse  to the  20%  residual  of  aggregate  receivables  purchased  and
outstanding.  Interest  payable by the Company to the factor is  calculated as a
fixed discount fee equal to 1% of the amount of the  receivable  factored plus a
variable  discount  fee  computed  on the amount  advanced  to the  Company  and
accruing  on the basis of actual days  elapsed  from the date of the 80% advance
until 5 days after

collection of such account receivable by the factor at a per annum rate equal to
an internal rate set by the factor.

5. STOCKHOLDERS' EQUITY

COMMON STOCK

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 entitled
the  holder to  purchase  one share of Common  Stock at a price of $2 per share,
subject to adjustment,  until April 3, 1999. All 3,214,902  warrants  expired on
April 3, 1999. In addition, the placement agent was granted a warrant to acquire
321,490 units at $.935 per unit which  consists of one share of Common Stock and
one  warrant to acquire  one share of Common  Stock at $2.00 per share.  In June
1997, the placement  agent  partially  exercised the units and acquired  150,000
shares of common stock and 150,000  warrants.  The  remaining  171,490 units are
currently  exercisable  and expire April 3, 2001. In connection with the partial
exercise,  the Company  granted  warrants to  purchase an  aggregate  of 150,000
shares  of  Common  Stock at  $1.3125  per share to the  placement  agent.  Such
warrants are currently exercisable and expire on June 18, 2002.

During  1998,  the Company  sold  3,240,000  shares of Common Stock at $0.31 per
share and received net proceeds of $999,400.

During 1998 and 1999,  the  Company  issued  21,333 and 80,932  shares of Common
Stock,  respectively,  to its  outside  directors  as a  part  of  their  annual
compensation.

During 1999,  the Company  issued 80,000 shares of Common Stock to its executive
officers as compensation.

                                      F-13
<PAGE>
WARRANTS

In May and  September  1993 and January  1994,  the Company  issued  warrants to
purchase 600,000 shares of Common Stock. The warrants became  exercisable in May
1994 at $2.50 per  share and  expired  at  various  dates  through  1999.  As of
December 31, 1999 all such warrants had expired.

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,  which were exercisable until
December 31, 1999, to acquire  50,000  shares of the  Company's  Common Stock at
$5.00 per share. All 50,000 warrants expired on December 31, 1999.

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. All 130,000 warrants expired on May 10, 1999.

As of December 31, 1999,  outstanding warrants issued for the purchase of shares
of Common Stock to various  consultants at exercise prices ranging from $0.21875
to $2.75 per share totaled 392,500.  The Company valued the warrants at the date
of grant using a modified  Black-Scholes  model and is amortizing the costs over
the service period. All such warrants are currently exercisable within the above
price range and expire at various dates through September 2005.

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 2001.

Warrants  for the  purchase of 125,000  shares of common  stock were issued to a
lender in September  1997.  Such  warrants are currently  exercisable  at prices
ranging from $1.18 to $1.475 through August 2003.

6. STOCK BASED COMPENSATION

In October 1993, the Company  adopted an incentive stock option plan for 350,000
shares of Common Stock that 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.  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 2008.

                                      F-14
<PAGE>
In  addition  to the above  plans,  the Company  granted:  (1) a former  officer
options to purchase 250,000 shares of Common Stock at an exercise price of $1.75
per share.  The  options  are  currently  exercisable  and expire not later than
December 31, 2005. (2) a former Director  options to purchase  100,000 shares of
Common  Stock at  exercise  prices  ranging  from $2.50 to $4.00 per share.  The
options expired in December 1999. (3) various key employees  options to purchase
140,000  shares of Common Stock at an exercise  price of $0.3125 per share.  The
options,  granted  through 1995, are currently  exercisable  and expire no later
than 2002.

Overall activity in the Company's stock options:

                                            Years ended December 31,
                                 ----------------------------------------------
                                         1998                     1999
                                 ---------------------   ----------------------
                                             Weighted-                Weighted-
                                              Average                   Average
                                             Exercise                 Exercise
                                 Options      Price      Options       Price
                                 -------      -----      -------       -----

Outstanding, at
  beginning of year             1,351,400    $   1.79   1,307,500    $   0.95
Granted                           763,500        0.31      50,000        0.33
Exercised                            --            --          --          --
Canceled/Expired                 (807,400)       0.65    (293,000)       1.80
                                ---------                --------

Outstanding at end of year      1,307,500        0.95   1,064,500        0.69
                                =========               =========
Exercisable at end of year      1,078,700        1.07     879,100        0.75
                                =========               =========

During the second  quarter of 1998,  543,000  options  were  repriced  to market
value. The repricings are counted as a cancellation and grant of a new option in
the above table.

Details regarding the options outstanding at December 31, 1999:

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

 $0.31 - $0.41      784,500      3.50       $ 0.31     607,100    $ 0.31

 $1.00 - $2.50      280,000      4.28       $ 1.72     272,000    $ 1.72
                  ---------                            -------
                  1,064,500                            879,100
                  =========                            =======

                                      F-15
<PAGE>
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 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,
                                                  ------------------------
                                                    1998         1999
                                                    ----         ----
Weighted average grant-date fair value            $   0.23     $  0.24

Significant assumptions (weighted average)
     Risk-free interest rate at grant date             5.6%        5.1%
     Expected stock price volatility                  87.8%       87.8%
     Expected dividend payout                           --          --
     Expected option life                            5 years    5.5 years
Net income (loss)
     As reported                                  $ 40,430     $ 96,860
     Pro forma                                     (89,062)        (771)
Net income (loss) per share of Common Stock
     As reported                                        --     $   0.01
     Pro forma                                       (0.01)          --

The expected  option life  considers  historical  option  exercise  patterns and
future changes to those exercise patterns anticipated at the date of grant.

7.  SEGMENT INFORMATION

For the years ended  December 31, 1999 and 1998,  the Company's  major  business
segments are pipe cleaning services and industrial chemical sales.

Information by segment for the year ended December 31, 1998:

                             Pipe      Industrial
                           Cleaning     Chemical
                           Services      Sales     Corporate     Consolidated
                           --------      -----     ---------     ------------
Sales                     $2,919,016   $249,939   $        --    $ 3,168,955
Income (loss) from
  continuing operations      903,983     91,325    (1,526,672)      (531,364)
Total assets               1,342,549    100,559       504,388      1,947,496
Depreciation and
  amortization               128,141         --       183,093        311,234
Capital expenditures         208,233         --        24,043        232,276

                                      F-16
<PAGE>
Information by segment for the year ended December 31, 1999:

                             Pipe      Industrial
                           Cleaning     Chemical
                           Services      Sales     Corporate     Consolidated
                           --------      -----     ---------     ------------
Sales                     $3,247,613   $242,130   $        --    $3,489,743
Income (loss) from
  continuing operations    1,036,347     44,092    (1,056,642)       23,797
Total assets               1,728,201     35,106       326,811     2,090,118
Depreciation and
  amortization               156,093      5,999        57,877       219,969
Capital expenditures         129,769         --        35,116       164,885

8.  COMMITMENTS AND CONTINGENCIES

LITIGATION

On or about  January  14,  1999 in the  Supreme  Court of the State of New York,
County of Suffolk,  the Suffolk County Water  Authority and R & L Well Drilling,
LLC filed as a  third-party  plaintiff a civil  claim  against the Company in an
action filed on April 8, 1998 by five  individual  residents of Ronkonkoma,  New
York,  alleging  negligence  resulting in personal  injury and seeking  monetary
damages of $11  million.  The  Company,  acting  through its  insurance  carrier
pursuant  to the  submitted  claim  under its  comprehensive  general  liability
policy, has substantially denied liability for the original claim.  Although the
resolution of this matter is not known, management and its legal counsel believe
the Company has  meritorious  defenses  and  believes  the outcome  will have no
material effect on the Company's financial position or results of operations.

ENVIRONMENTAL MATTERS

Management  believes  the  Company  is in  compliance  with  federal  and  state
environmental regulations that pertain to the sale and use of its products.

                                      F-17
<PAGE>
LEASE COMMITMENTS

The  Company  has  operating  leases,  expiring  through  2002,  for  office and
warehouse  facilities  in Phoenix,  Arizona,  Portsmouth,  Virginia and National
City,  California and for office and other equipment.  Rental expense associated
with all operating leases was $220,929 and $166,995 for the years ended December
31, 1999 and 1998, respectively.

Future minimum payments under operating leases as of December 31, 1999 are:

Years Ending

December 31,                                           Amount
------------                                           ------
2000                                                 $ 217,699
2001                                                   220,850
2002                                                    55,187
                                                      --------
                                                     $ 493,736
                                                     =========

HERC has entered into a sublease for one of its two Phoenix locations. Under the
terms of this sublease,  HERC will receive payments of $122,520 and $102,100 for
the years ending December 31, 2000 and 2001, respectively.

9. RELATED PARTY TRANSACTIONS

The Company has entered into transactions  with a subcontractor  whose President
is a  member  of the  Company's  Board of  Directors.  Under  the  terms of this
agreement,  the  subcontractor  has the right of first refusal for subcontractor
work in certain  territories.  In exchange,  the  subcontractor  will notify the
Company of any business opportunities in these territories.  Amounts paid to the
subcontractor  pursuant to this  contract  were $24,695 and $2,807 in 1999,  and
1998, respectively.

                                      F-18
<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/ S. Steven Carl
                                           ------------------------------------
Dated:  March 16, 2000                     S. Steven Carl,
                                           President and Chief Executive Officer

     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.

Name                                Title                   Date
----                                -----                   ----
/s/ S. Steven Carl         Chairman of the Board,        March 16, 2000
----------------------     Chief Executive Officer
S. Steven Carl             and President

/s/ Salvatore DiMascio     Director                      March 16, 2000
----------------------
Salvatore DiMascio

/s/ R. John Armstrong      Director                      March 16, 2000
----------------------
R. John Armstrong

/s/ Michael H. Harader     Chief Financial Officer       March 16, 2000
----------------------     (Principal Financial and
Michael H. Harader         Accounting Officer)

                                       36