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, 2001

                         Commission File Number 1-13012


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


           DELAWARE                                             86-0570800
(State or other jurisdiction of                               (IRS Employer
 incorporation or organization)                           Identification Number)


     2215 WEST MELINDA LANE, SUITE A, PHOENIX, ARIZONA 85027 (623) 492-0336
       (Address, including zip code, and telephone number, including area
                      code, of issuer's executive offices)

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

                                                     Name of each exchange
          Title of each class                         on which registered
          -------------------                         -------------------
      COMMON STOCK, $.01 PAR VALUE                   BOSTON STOCK EXCHANGE

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

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 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. [X]

State issuer's revenue for its most recent fiscal year.  $5,966,564

As of March 5, 2002,  the  aggregate  market  value of the voting  stock held by
non-affiliates of the registrant  (7,374,016 shares) was $1,106,102 based on the
closing  market  price of the Common  Stock on such date as reported by the NASD
Over-The-Counter  Bulletin Board,  or OTCBB, of $0.15.  For the purposes of this
calculation,  all  officers,   directors,  and  10%  beneficial  owners  of  the
registrant are deemed to be affiliates.  Such determination should not be deemed
to be an admission that such officers,  directors, or 10% beneficial owners are,
in fact, affiliates of the registrant.

As of March 5, 2002,  there were  11,904,872  shares of Common  Stock issued and
outstanding.

Documents Incorporated by Reference: None
<PAGE>
                         H.E.R.C. PRODUCTS INCORPORATED
                          ANNUAL REPORT ON FORM 10-KSB
                       FISCAL YEAR ENDED DECEMBER 31, 2001

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I

  ITEM 1.  DESCRIPTION OF BUSINESS............................................ 2

  ITEM 2.  DESCRIPTION OF PROPERTY............................................ 9

  ITEM 3.  LEGAL PROCEEDINGS.................................................. 9

  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 9

PART II

  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........10

  ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS...............................10

  ITEM 7.  FINANCIAL STATEMENTS...............................................13

  ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            AND FINANCIAL DISCLOSURE..........................................13

PART III

  ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a)
            OF THE EXCHANGE ACT...............................................14

  ITEM 10. EXECUTIVE COMPENSATION.............................................15

  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....19

  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................19

  ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................20

SIGNATURES....................................................................21

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1

                 STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     PORTIONS OF THIS REPORT DESCRIBE HISTORICAL  INFORMATION,  SUCH AS THE 2000
AND 2001 OPERATING RESULTS,  AND WE BELIEVE THE DESCRIPTIONS TO BE ACCURATE.  IN
CONTRAST TO DESCRIBING THE PAST, SOME STATEMENTS IN THIS REPORT INDICATE THAT WE
BELIEVE  THAT  EVENTS OR  FINANCIAL  RESULTS  ARE LIKELY TO OCCUR IN THE FUTURE.
THESE  STATEMENTS  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 2002 AND BEYOND,  EITHER CONCERNING A SPECIFIC SEGMENT OF
OUR BUSINESS, OR CONCERNING OUR COMPANY 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,
"DESCRIPTION  OF BUSINESS," IN ITEM 6,  "MANAGEMENT'S  DISCUSSION AND ANALYSIS,"
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,  OUR EXPECTATIONS AND BELIEFS MAY CHANGE, AND WE MAY COME
TO BELIEVE THAT CERTAIN FORWARD-LOOKING  STATEMENTS IN THIS REPORT ARE NO LONGER
ACCURATE.  WE DO NOT HAVE AN OBLIGATION TO CORRECT OR REVISE ANY FORWARD LOOKING
STATEMENTS IN THIS REPORT, EVEN IF WE BELIEVE THE FORWARD LOOKING STATEMENTS ARE
NO LONGER TRUE.
<PAGE>
                                     PART I


ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

OUR COMPANY

     We provide chemical cleaning  services for water pipe systems,  waste water
systems,  cooling  towers  and  HVAC  systems,  tanks  and  boilers,  and  other
water-based and industrial  chemical  process systems using our proprietary line
of  specialty  chemical  products and chemical  cleaning  processes.  We use our
patented and proprietary  chemical products and chemical  cleaning  processes to
remove scale and corrosion from pipeline systems,  water systems,  and surfaces.
Chemical  cleaning  service  markets are the main source of our  revenue,  which
include municipal,  industrial,  governmental,  commercial,  and other customers
serviced  directly  and  through  strategic  marketing  alliances.  Our  largest
customer is currently the U.S. Navy. We provide chemical  cleaning  services for
pipe systems and tanks on U.S. Navy and Coast Guard vessels.

     Over time  most  water  and  water-based  systems,  such as  potable  water
delivery systems, fire sprinkler systems, waste systems,  process water systems,
holding tanks, and water wells develop internal  surface scale,  corrosion,  and
tuberculation.  These  corrosive  substances  reduce the diameter  through which
water and waste can  travel  through  the  pipes,  causing a less  efficient  or
non-functioning  system.  Our cleaning  methodologies  remove the  corrosion and
restore the efficiency and flow characteristics of the system.

     We use patented and other  proprietary  chemical  products and processes in
our cleaning  services.  Our chemical  formulation,  when circulated  through an
obstructed  pipe system,  dissolves and removes scale and corrosion  build-up in
solution  until  flushed  from the system.  The system may then be treated  with
other chemical  products that retard  corrosion or suppress the environment that
supports  biological  growth.  Most of the chemicals that we use are non-fuming,
non-abrasive,  and  non-flammable.  Most of our chemical  products are certified
biodegradable by Scientific Certification Systems.

     Our chemical  products and chemical  cleaning  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. Additionally, our chemical products and chemical cleaning
processes  are safer than many other  chemical  cleaning  methods.  Our chemical
products include the following:

     *    Pipe-Klean  and  Well-Klean,  which  remove  encrustation  from  water
          pumping and distribution systems;

     *    Compound 360, Compound 400, Corr-Hib and Slug which clean and maintain
          cooling and other water treatment systems; and

     *    Line-Out  which cleans drip  irrigation  systems and removes salt from
          soil surfaces.

We also  sell  private  label  chemical  products  utilizing  our  patented  and
proprietary  formulations or products  complementary to our formulations for key
customers.

     Our   company   was   incorporated   in  Arizona  in   December   1986  and
re-incorporated  in Delaware in May 1994.  Our executive  offices are located at
2215 West Melinda Lane, Suite A, in Phoenix, Arizona and our telephone number is
(623) 492-0336.  Our service operations,  warehouse,  and manufacturing facility
for  some  of our  chemical  products  are  located  at  1420  Columbus  Avenue,
Portsmouth, Virginia.

PRODUCTS AND SERVICES

     Water has many uses and is  therefore  transported  through and an integral
component  of many  systems in use  today.  These  systems  range from wells and
potable  waterlines to fire  protection  systems,  heating and  air-conditioning
units, cooling towers, water tanks, industrial production processes, waste water
systems,  collection-holding-transfer  (CHT) systems,  waste tanks, and landfill
drainage systems. Water is a chemically active substance and any surface that is
regularly exposed to water is subject to corrosion.  Since water is rarely pure,

                                       2
<PAGE>
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.  We  offer a  method  of  chemical  cleaning  which  we  believe  is a
significant  improvement  over most  other  cleaning  methods  due to  increased
efficiency, safety, and effectiveness with less environmental impact.

     Pipe-Klean  and  Well-Klean  are used to remove  scale and  corrosion  from
drinking  water  systems and water wells.  These  products  have been tested and
certified by NSF International and Underwriters Laboratories,  or UL, for use as
well cleaning and pipe cleaning aids in drinking  water  systems.  NSF Standards
were developed under authority of the federal Environmental Protection Agency to
establish minimum requirements for the control of potential adverse human health
effects from products used in drinking water systems.

PIPE CLEANING DIVISION

     Our company provides pipe cleaning and other corrosion  removal and control
services for industries such as marine, fire protection,  industrial, municipal,
and others.  During fiscal 2001, total chemical pipe cleaning revenue  increased
13% to $4,381,089 from $3,862,563 during fiscal 2000.

MARINE SERVICES

     Our marine applications focus on the cleaning of water and waste water pipe
systems on ships  including CHT, tank,  fire main, and  countermeasure  washdown
systems.  For  example,  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.  We have a five-year
agreement with the United States  Navy-Supervisor  of Shipbuilding,  or SupShip,
office in Portsmouth,  Virginia, which expires during September 2002. Under this
agreement,  we clean pipe  systems on board ships based in the Norfolk  area for
indefinite  quantities  of chemical  cleaning  services at fixed  prices.  Other
SupShip offices of the Atlantic and Pacific Fleets and the maintenance office of
the United States Coast Guard use the Portsmouth CHT contract. We cleaned piping
systems on board 84 United States  vessels  during fiscal 1999, 76 United States
vessels  during  fiscal 2000,  and 73 vessels  during  fiscal 2001.  SupShip has
issued a notice of contemplated  procurement  for similar CHT chemical  cleaning
services in 2002.

     In order to meet the  requirements  of the Portsmouth CHT contract,  and to
serve the East Coast market, we have located an office in Portsmouth,  Virginia.
We also opened an office in San Diego, California to expand our ability to offer
pipe-cleaning  services to the Pacific Fleet, Western United States Coast Guard,
and other west coast  customers and have deployed  cleaning units for service in
Puget Sound, Hawaii, Japan, and Egypt.

FIRE PROTECTION

     We patented our  proprietary  process method for  chemically  cleaning fire
protection systems in 2000. Since then, we have chemically cleaned multiple fire
protection  systems for several  industries and  customers.  We believe that our
company has a significant  advantage in securing fire protection system chemical
cleaning  work  because we have  patents  that cover the  process of  chemically
cleaning and passivating a fire protection system.

     The fire protection  industry is in the beginning stages of learning how to
diagnose and treat the problem of  microbiologically  influenced  corrosion,  or
MIC, in fire sprinkler  systems.  Sprinkler systems across the United States and
abroad have been found to have severe internal corrosion  resulting from MIC and
are  not  achieving  required  operational  levels.  As a  result  of  increased
awareness of MIC by the fire protection industry, the American and National Fire
Sprinkler  Associations  have recognized our method for cleaning and passivating
fire protection systems.  We continue to pursue  certification by Factory Mutual
and  IRI-Hartford  Steam Boiler,  two of the major  insurers of fire  protection
systems in order to more  aggressively  market our  services to this area of the
water pipe system market.

     The market for fire  protection  system pipe cleaning could grow rapidly if
insurance  companies or governmental  regulation were to require building owners
to maintain properly functioning fire protection systems inside their buildings.

                                       3
<PAGE>
We continue to consult with members of the industry on the  development  of fire
protection  system  operational  maintenance  standards.  In  addition  to  fire
protection system performance problems,  MIC causes minute leaks in water pipes,
which  results in damage to the  building  structure,  equipment,  and  business
inventory  contents.  To avoid  operational  problems and water damage, we offer
fire protection system assessment services which include:

     *    internal fire system pipe inspection and video;

     *    water content analysis;

     *    scale content analysis; and

     *    recommended remediation method.

POTABLE WATER

     Underground potable waterlines  represent another market where we offer our
patented  water pipe system  cleaning  services.  We have  numerous  product and
method  patents  covering  the  process of  chemically  cleaning  potable  water
distribution  systems.  In addition,  our chemical products have been tested and
certified by the NSF for use as water well  cleaning and pipe  cleaning  aids in
drinking water systems.  NSF standards were developed under the authority of the
EPA to establish minimum requirements for the control of potential adverse human
health effects from products used in drinking  water  systems.  Many states have
enacted these and similar standards.

     Over time, potable water lines develop chemical and biological corrosion, a
process known as  tuberculation.  Tuberculation is the most common problem found
in potable water lines, and without proper cleaning,  the useful diameter of the
pipe will become 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.

     Public and private water infrastructure capital and maintenance funding may
serve to create  large  markets for system  rehabilitation  in the  future.  The
practical  need  for  underground   water   distribution   system  cleaning  and
passivation is growing  world-wide,  and the United States Congress is beginning
to budget  and fund  water  distribution  rehabilitation  programs  administered
through the EPA. Our core process patents  directly  address this practical need
with a more efficient, more economical, and less intrusive method of remediation
than traditional methods.

SPECIALTY CLEANING

     In industrial process plants,  scale and tuberculation  greatly reduce heat
exchange,  condensing,  and liquid flow  capacities in a variety of systems.  In
water treatment  plants,  chemical feed lines become  internally  clogged to the
point  where they do not  function  properly.  In fabric  manufacturing  plants,
process pipe systems  develop  chemical  scale  deposits.  We currently  provide
chemical cleaning services to several industrial companies and municipalities in
areas such as systems in fiber plants,  waste water systems,  and other types of
systems.

MARINE TANK CLEANING SERVICES

     In February 2001, we acquired the operating assets of a Norfolk area marine
tank cleaning  company to add to our marine and land based water and waste water
system  cleaning  services.  We provide marine tank cleaning  services to United
States  Navy and  Coast  Guard  vessels  through  our  agreements  with  private
shipyards and ship repair  companies,  and through a subcontract under a SupShip
tank and bilge  cleaning  agreement  renewable  annually to 2005. We clean fuel,
oil, bilge,  and CHT tanks.  Total tank cleaning  revenue during fiscal 2001 was
$1,335,795, our first year of offering these services.

INDUSTRIAL CHEMICALS DIVISION

     Our industrial chemicals division manufactures and sells specialty chemical
products using our  proprietary  and patented  formulas for  applications in the
removal of salt,  scale,  and corrosion and in the  maintenance of process water
systems. These products are currently Well-Klean,  Line Out, and several process
water products currently manufactured under private label for DuPont. Industrial
chemical  sales  decreased  38% to $249,680  during  fiscal 2001,  compared with
$404,172 during fiscal 2000.

                                       4
<PAGE>
     Well-Klean  removes scale and corrosion in water wells. Over time, the well
screen and many other well  components  become  clogged.  When added to wells as
directed,  Well-Klean  removes the harmful  corrosion and corrosion  by-products
from the well  components  and the  surrounding  aquifer to restore well pumping
characteristics, ultimately leading to improved well performance.

     Line Out cleans drip irrigation  systems and removes salt from soils in the
root zone of turf  grasses on golf  courses.  Drip systems  become  clogged with
scale over time and require regular maintenance in order to continue to perform.
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.  Our Line Out product
provides a superior method of cleaning while improving  water  distribution.  We
manufacture  Line Out as a private  labeled  product called  Deliminate for golf
courses in the United States.

     Chlor*Rid is a product  developed  from one of our core  formulas to remove
salt from  surfaces,  prior to the  application  of high  performance  paints or
coatings.  During  1998,  we sold a 50%  interest  in our patent  covering  this
application to Chlor*Rid  International which became the sole owner of Chlor*Rid
in 2002. Under the sales agreement,  we retain royalties on future sales for the
life of the patent, which is approximately thirteen years.

     We sell process water products primarily under the trade name Compound 360.
These  products  de-scale  and  maintain  many types of process  water  systems,
including  cooling towers,  heat  exchangers,  and  condensers.  During 1999, we
entered into  agreements  with DuPont whereby our company  manufactures  private
labeled  products for DuPont using our  formulas.  In addition to realizing  the
gross profit from the manufacturing of the product,  we receive royalties on the
sales of the  defined  product.  We may also  market  our  products  to the same
customers and can use Dupont's name in certain marketing representations.

MARKETING AND DISTRIBUTION

     We market our products and services  through our marketing and sales staff,
independent distributors, sales representatives,  and strategic partnerships and
marketing  agreements.  Sales to the U.S. Navy under the Portsmouth CHT contract
were 45% of our  consolidated  sales during fiscal 2001 and 73% of  consolidated
sales during fiscal 2000. We generate our revenue from  relatively few customers
and  we  expect  the  high   concentration   levels  to  decline  through  2002.
Nonetheless, any material delay, cancellation, or reduction of orders from these
customers could have a material  adverse effect on our results of operations and
financial position.

COMPETITION

     Several small regional  companies and certain larger customers compete with
us   for   our   marine   business.   Our   company   competes   directly   with
Layne-Christensen, Inc. in the market for water well cleaning. 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 we do. To the
extent that we seek to sell our water system  pipeline  rehabilitation  products
directly  to end users,  we may be  perceived  as  competing  with the  regional
contractors  to which we  might  also  seek to  market  our 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 our company.

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

     Our company competes principally on the basis of our superior  methodology,
ease of use, price, and environmental impact. We also strive to secure strategic
relationships with established companies.  We have patent protection for certain
of our  chemicals  and  processes  and we  are  seeking  to  expand  our  patent
protection by making new applications  with respect to our proprietary  products
and technologies in order to provide a diverse product and service offering.

                                       5
<PAGE>
MANUFACTURING AND SUPPLIES

     We  formulate  and  package  our  industrial   products  at  our  plant  in
Portsmouth,  Virginia.  We generally do not maintain long-term supply agreements
with our suppliers and we purchase raw materials  pursuant to purchase orders or
short-term contracts in the ordinary course of business. We believe 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 our products.

PATENT AND TRADEMARK PROTECTION

     We rely on patent protection, including the following:

     *    a  series  of  United  States  patents  for the use of our  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.

We received a Notice of Allowance  for our basic  pipe-cleaning  patents for the
association  of European  countries  and applied  for these  patents  throughout
Europe during 1999 and 2000. Additionally,  U.S. Patent applications for Methods
of Pipe Cleaning and  improvements  on the basic method were issued and received
by us during  1999 and  2000,  and a new  application  was  filed  during  2001.
h.e.r.c.,  Well-Klean,  Pipe-Klean,  and Line-out are  registered  trademarks of
HERC.

     There can be no  assurance  that any patents  applied for will be obtained.
Moreover,  there can be no  assurance  that any of the  patents  will afford our
company  commercially  significant  protection of our technology or that we will
have adequate resources to enforce our patents.  We believe that our company has
independently developed its proprietary technologies and that these technologies
do not infringe the proprietary  rights of others.  Although we have received no
claims of infringement,  it is possible that  infringement of existing or future
patents or proprietary rights may occur.

     In the event that our products or processes  infringe patent or proprietary
rights of  others,  we may be  required  to  modify  our  processes  or obtain a
license.  We may not be able to obtain a  license  in a timely  manner,  or upon
acceptable  terms and  conditions.  The  failure  to do so could have a material
adverse effect on our business.  In addition,  there can be no assurance that we
will have the  financial  or other  resources  necessary to defend a patent or a
proprietary  rights  action.  Moreover,  if  any of our  products  or  processes
infringe on patents or proprietary rights of others, under certain circumstances
we could become liable for damages that could have a material  adverse effect on
our results of operations and financial condition.

     Our company relies on proprietary know-how and confidential information and
employs  various  methods  to  protect  the  processes,   concepts,  ideas,  and
documentation  associated  with our  technology.  However,  such methods may not
afford complete protection, and others may independently develop such processes,
concepts, ideas, and documentation.  Although we require all of our employees to
sign  confidentiality  agreements,  we may  not be  able to  protect  our  trade
secrets,  and other  companies  may acquire  information  that we consider to be
proprietary.  Moreover,  other  companies  may  independently  develop  know-how
comparable to or superior to that of our company.

GOVERNMENT REGULATION

     Water pollution is a major focus of federal, state, and local environmental
protection laws and regulations.  The discharge from water systems  treatment is
subject to these laws and regulations.  The water system treatment  industry and
our 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 our 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 our
products are 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.

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<PAGE>
     Some of our products require the use of a chemical that is classified under
applicable  laws as a corrosive  chemical  and  substance,  and our use of these
chemicals and substances may subject us to environmental  liability.  The use of
certain  chemicals  contained in our 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.

     We have obtained  certification  for our 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.
Additionally,  we have  obtained  ANSI/NSF  Standard  60  certification  for our
Well-Klean II Concentrate, Acid Klean, and Well-Klean Preblend products as "well
cleaning aids" for potable water wells.

     We believe that we are in substantial compliance with all material federal,
state, and local laws and regulations governing our business operations and that
we have  obtained  all material  licenses,  authorizations,  approvals,  orders,
certificates,  and permits required for the operation of our business. We cannot
provide  assurance  that in the future we will be able to comply with current or
future government regulations in every jurisdiction in which we will conduct our
business operations without substantial sanctions, including restrictions on our
business operations,  monetary liability,  and criminal sanctions,  any of which
could have a material adverse effect on our business.

     Advertising  relating  to our  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 our products.

RESEARCH AND DEVELOPMENT

     We estimate that we incurred  approximately  $12,000 during fiscal 2001 and
$24,000  during fiscal 2000 on research and  development  activities  related to
improving our cleaning methodologies.

EMPLOYEES

     As of March 1,  2002,  we had 68  employees.  Three  of our  employees  are
officers,  53 are  engaged  in  field  operations  and  production,  nine are in
administration,  and three are in marketing and sales. None of our employees are
represented by labor unions or covered by a collective bargaining agreement.  We
believe that our relationship with our employees is good.

SEASONALITY

     Sales of specialty chemical products and certain chemical cleaning services
are  seasonal  in those  parts of the United  States in the Snow Belt.  Seasonal
sales can result in uneven  cash flow for our  company,  which may require us to
obtain and maintain short-term financing  arrangements.  Our inability to obtain
financing  could have a material  adverse effect on our operations and financial
condition.

                             SPECIAL CONSIDERATIONS

     THE FOLLOWING  FACTORS,  IN ADDITION TO THOSE  DISCUSSED  ELSEWHERE IN THIS
REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING OUR BUSINESS.

WE DEPEND ON THE UNITED STATES NAVY, WHICH REPRESENTED  APPROXIMATELY 45% OF OUR
REVENUE DURING FISCAL 2001.

     During the most recent fiscal year,  the United  States Navy  accounted for
45% of our  revenue.  The loss of a  substantial  portion or all of the business
from this customer could result in a material  adverse effect on our revenue and

                                       7
<PAGE>
results of  operations.  If the United  States Navy cuts back or stops using our
services,  our sales staff may not be able to replace this  customer in a timely
enough fashion for our company to continue operations.

OUR COMPANY  MAY NEED  FINANCING  IN THE FUTURE AND DOES NOT HAVE ANY  COMMITTED
SOURCES OF FINANCING.

     If our company is not  profitable  in the future for an extended  period of
time, it will require additional  financing to cover operating  expenses.  Also,
any major capital expenditures might require capital from independent  financing
sources.  Our company does not have any  accumulated  retained  earnings to fund
cash  flow  deficits  and  significant  capital  requirements.  Other  than  our
factoring  arrangement,  we do not have any specifically  identified sources for
future financing requirements.

POTENTIAL COMPETITION EXISTS FOR CUSTOMERS IN THE MARINE BUSINESS.

     We do not believe that there are any substantial  capital  requirements for
or other  barriers to entry into the  chemical  cleaning of pipe systems for the
marine industry.  Therefore,  there is potential  competition from entities that
elect to enter  into this  industry.  As with any  competition,  there may be an
adverse effect on market share and current margins of our company.

THE LACK OF PATENTS MAY LIMIT OUR  ABILITY TO PROTECT  OUR  CURRENT  COMPETITIVE
POSITION IN THE MARINE BUSINESS.

     Our company competes on the basis of our knowledge and experience of marine
and other closed loop systems. The chemical products used in the marine business
are based mainly on  proprietary  chemistry,  but this chemistry is not patented
or, we believe,  patentable.  Therefore,  others may develop the same or similar
chemistry  through reverse  technology or by  experimentation.  If that happens,
another  entity could offer some of the same  benefits as we do and increase the
competition in the marine pipe systems chemical cleaning market.  Also, the lack
of patents limits our ability to market an absolutely unique product or service.
Our company relies on trade secret and  confidentiality  protection with respect
to the chemicals and methodologies we use in our marine business. It is possible
that these protections will not be adequate to protect us from competitors.

THE LOSS OF ANY OF OUR KEY  EXECUTIVES  OR OUR  FAILURE TO  ATTRACT,  INTEGRATE,
MOTIVATE,  AND RETAIN  ADDITIONAL  KEY EMPLOYEES  COULD HAVE A MATERIAL  ADVERSE
EFFECT ON OUR BUSINESS.

     Our  success  depends  to a large  degree  upon the  skills  of our  senior
management  team and current  key  employees  and upon our ability to  identify,
hire,  and  retain  additional  sales,  marketing,   technical,   and  financial
personnel.  The loss of any of our key  executives  or the  failure to  attract,
integrate,  motivate,  and retain additional key employees could have a material
adverse  effect on our  business.  We may be unable to retain our  existing  key
personnel or attract and retain additional key personnel. We depend particularly
upon our Chief  Executive  Officer and  President,  S. Steven  Carl.  We have an
employment agreement with Mr. Carl, which runs through June 2003.

THE EFFECT OF LIABILITY  CLAIMS IN EXCESS OF THE  INSURANCE  LIMITS COULD AFFECT
THE FINANCIAL CONDITION OF OUR COMPANY.

     We are  engaged in a business  that might  expose our company to claims for
personal or property  injury.  Suits may result from personnel or bystanders who
are injured on site,  from damage to a pipe system  being  cleaned or from other
issues  arising from the  performance  of our  services.  Our company  maintains
liability  insurance in the aggregate  amount of $2,000,000  and  $1,000,000 per
occurrence.  We  also  have  an  umbrella  liability  policy  in the  amount  of
$5,000,000.  A successful  claim  against our company that exceeds the insurance
limits  or that is not  covered  will  have a  material  adverse  effect  on our
financial condition.

A SUBSTANTIAL NUMBER OF SHARES ARE ELIGIBLE FOR FUTURE SALE.

     As of March 5, 2002, there were outstanding 11,904,872 shares of our common
stock.  Approximately  11,737,633  of these shares are freely  tradable  without
restriction or further registration under the securities laws, unless held by an
"affiliate"  of our  company,  as that  term is  defined  in Rule 144  under the
securities  laws.  Shares held by  affiliates  of our company are subject to the
resale  limitations of Rule 144. The  eligibility of these shares for resale may
have a  depressive  effect on the price of our  common  stock or may  reduce the
liquidity of our common stock.

                                       8
<PAGE>
THE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS ON MARKET PRICE AND LIQUIDITY.

     As of March 15, 2002, we had  outstanding  options and warrants to purchase
2,045,000  shares of our common stock,  and the exercise  price of some of these
options or warrants are less than the current  market price of our common stock.
These options and warrants may have an adverse impact on the price and liquidity
of our common stock in the public market.  Also, the issuance of these shares at
prices below the market price will result in dilution to current stockholders.

DIRECTORS, OFFICERS, AND CERTAIN OTHER STOCKHOLDERS OWN A SIGNIFICANT PORTION OF
OUR STOCK.

     Our  directors  and  executive   officers   beneficially  own  a  total  of
approximately 14% of the issued and outstanding  shares of our common stock, and
one non-management stockholder beneficially owns approximately 28% of the issued
and outstanding shares of our common stock. As a result of this ownership, these
persons  have the power  effectively  to  control  our  company,  including  the
election  of  directors,  the  determination  of matters  requiring  stockholder
approval,   and  other  matters   pertaining  to  corporate   governance.   This
concentration  of ownership also may have the effect of delaying or preventing a
change in control of our company.

ITEM 2. DESCRIPTION OF PROPERTY

     We lease our corporate  headquarters in an approximately  3,000 square foot
facility in Phoenix,  Arizona.  The facility contains our executive offices. The
lease expires in April 2002.

     We lease approximately  10,000 square feet of office and warehouse space in
Portsmouth,  Virginia  and  approximately  3,000  square feet in National  City,
California.  We believe that these facilities will be adequate for our needs for
the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     We are involved in various legal proceedings  arising out of our operations
in the  ordinary  course of business.  We do not believe that such  proceedings,
even if  determined  adversely,  will  have a  material  adverse  effect  on our
business, financial condition, or results of operations.

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

     Not applicable.

                                       9
<PAGE>
                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common  stock is quoted on the OTCBB  under the symbol  "HERC",  and is
listed on the Boston Stock Exchange under the symbol "HER." The following  table
sets  forth the high and low  closing  prices of our  common  stock as quoted by
OTCBB for the periods indicated.  Such quotations reflect  inter-dealer  prices,
without  retail  mark-up,  mark-down,  or  commission  and may  not  necessarily
represent actual transactions.

                                                     HIGH          LOW
                                                     ----          ---
2002:
  First Quarter (through March 15, 2002)........    $0.16         $0.09

2001:
  First Quarter.................................    $0.38         $0.17
  Second Quarter................................     0.25          0.13
  Third Quarter.................................     0.25          0.09
  Fourth Quarter................................     0.22          0.09

2000:
  First Quarter.................................    $0.50         $0.27
  Second Quarter................................     0.50          0.30
  Third Quarter.................................     0.50          0.34
  Fourth Quarter................................     0.42          0.16

     As of March 15,  2002,  there were  approximately  130 record  holders  and
approximately  950 beneficial owners of our common stock. On March 15, 2002, the
closing sales price of our common stock as quoted by OTCBB was $0.09.

DIVIDEND POLICY

     For the foreseeable  future,  we intend to retain any future  earnings,  if
any,  to  finance  our  operations  and we do not  anticipate  paying  any  cash
dividends with respect to our common stock.  Subject to the preferences that may
be applicable to any then-outstanding preferred stock, the holders of our common
stock will be entitled to receive such dividends,  if any, as may be declared by
our  board of  directors  from  time to time  out of  legally  available  funds.
Payments  of any cash  dividends  in the  future  will  depend on our  financial
condition,  results of  operations,  and capital  requirements  as well as other
factors deemed relevant by our board of directors.

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

OVERVIEW

     We derive the  majority of our revenue from two  sources,  cleaning  piping
systems on U.S. Navy and U.S. Coast Guard vessels and cleaning bilge,  fuel, oil
and CHT tanks on ships. This subjects our company to certain business risks that
can cause  volatility in our revenue stream and our gross  margins.  We are also
subject to the  deployment  and servicing  schedules of the U.S. Navy as well as
the  available  maintenance  funds in the Navy budget.  These  factors can cause
revenue to change  dramatically from one quarter to the next.  Additionally,  we
are required by our Portsmouth CHT contract to perform work on different classes
of ships.  Performing  work on  different  classes  of ships can cause our gross
margins to vary widely from one quarter to the next because we make higher gross
margins on certain classes of ships than we do on others. Moreover, we are often
asked to perform work on ships outside of the state of Virginia. When we perform
work under the  Portsmouth  CHT contract  outside of the state of  Virginia,  we
incur  certain  reimbursable  travel costs that are included in both revenue and
cost of goods sold.  These  reimbursable  travel costs cause gross margins to be
lower than the margins that would have  otherwise  been  recognized had the work
been performed in Virginia.

                                       10
<PAGE>
     Our five-year  Portsmouth  CHT contract with the U.S. Navy is due to expire
in September  2002.  This contract has been  responsible for the majority of our
consolidated  revenue for several  years.  Management is currently  making plans
regarding the expiration of this contract and the anticipated re-solicitation by
the U.S. Navy for these  services.  If the new contract is not awarded to us, it
could have a material impact on our revenue and results of operations.

CRITICAL ACCOUNTING POLICIES

     High-quality   financial   statements   require  rigorous   application  of
high-quality accounting policies. The policies discussed below are considered by
management  to be  critical  to an  understanding  of our  financial  statements
because their  application  places the most significant  demands on managements'
judgment,  with  financial  reporting  results  relying on estimation  about the
effect  of  matters  that are  inherently  uncertain.  Specific  risks for these
critical accounting policies are described in the following paragraphs.  For all
of these policies, management cautions that future events rarely develop exactly
as forecast, and the best estimates routinely require adjustment.

REVENUE RECOGNITION

     For chemical  product sales, we recognize  revenue at the time products are
shipped to customers.  For most service projects,  we recognize revenue when the
services  are  completed.  For  fixed  price  contracts  that are in excess of 3
months, we recognize revenue on the percentage of completion method, measured by
the  percentage  of cost  incurred  to date to  estimated  total  cost  for each
contract.  We use this method because management  considers total cost to be the
best available measure of progress on these contracts.

     Contract costs include all direct  material,  subcontract  labor, and other
costs related to contract performance,  such as indirect labor, supplies, tools,
and repairs.  Selling,  general, and administrative costs are charged to expense
as incurred.  Provisions for estimated losses on uncompleted  contracts are made
in the period in which such losses are determined.  Changes in job  performance,
job  conditions,  and  estimated  profitability,  including  those  arising from
contract  penalty  provisions  and  final  contract  settlements  may  result in
revisions to estimates of contract  costs and profits and are  recognized in the
period in which the revisions are determined.

     The current asset,  "costs and estimated  earnings in excess of billings on
uncompleted  contracts"  represents  revenue  recognized  in excess  of  amounts
billed.  The  current  liability,  "billings  in excess of costs on  uncompleted
contracts," represents billings in excess of revenue recognized.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND DEFERRED TAX ASSETS

     Management   analyzes   accounts   receivable  to  determine  the  ultimate
collectibility  of those accounts.  If information is available to management to
make a determination that there exists a reasonable  possibility that an account
might not be collectible,  management  creates a reserve for that account at the
time of the  determination  and recognizes a related expense.  If the account is
later collected,  the reserve and expense are reversed in the current accounting
period. Since management must use its best judgment as to which accounts will be
collected,  there exists the risk that some accounts  might not be collected and
thus could have a negative impact on our liquidity and results of operations.

     Deferred  taxes are  provided on a liability  method  whereby  deferred tax
assets are  recognized  for deductible  temporary  differences  and deferred tax
liabilities  are  recognized  for  taxable  temporary   differences.   Temporary
differences  are the  differences  between  the  reported  amounts of assets and
liabilities and their tax bases.  Deferred tax assets are reduced by a valuation
allowance  when it is determined to be more likely than not that some portion or
all of the  deferred  tax assets will not be  realized.  Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.

IMPAIRMENT OF LONG-LIVED ASSETS

     We  periodically  evaluate  the  carrying  value of  long-lived  assets and
intangibles.  We review  long-lived assets and certain  identifiable  intangible
assets  to be held and used in  operations  for  potential  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.  Future losses may be recorded if cash flows
are less than expected.

                                       11
<PAGE>
ACCRUALS

     Loss  contingencies  are recorded as liabilities when it is probable that a
liability has been incurred and the amount of the loss is reasonably  estimable.
Disclosure is required when there is a reasonable  possibility that the ultimate
loss will  exceed  the  recorded  provision.  Contingent  liabilities  are often
resolved over long time periods. Estimating probable losses requires analysis of
multiple  forecasts that often depend on judgments  about  potential  actions by
third parties such as regulators.

     Other  significant  accounting  policies,  not  involving the same level of
measurement  uncertainties as those discussed above, are nevertheless  important
to a complete understanding of the financial statements. Also see Note 1, Nature
of Business and Summary of  Significant  Accounting  Policies,  which  discusses
other accounting policies relevant to our business.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 2000

     Sales for the fiscal year ended December 31, 2001 were $5,966,564  compared
with  $4,266,735  during  fiscal 2000.  Pipe  cleaning  services  accounted  for
$4,381,089  in 2001, of which  $2,670,958  was billed under the  Portsmouth  CHT
contract with the United States Navy. In 2000,  pipe-cleaning services accounted
for $3,862,563 of which $3,120,898 was billed under the Portsmouth CHT contract.
Tank cleaning services totaled  $1,335,795 during fiscal 2001, our first year of
offering these services.  Industrial  chemical sales were $249,680 during fiscal
2001 compared with $404,172 during fiscal 2000.

     Our sales mix during  2001  changed  significantly  from 2000.  Although we
continued  to generate a large  portion of our revenue from the cleaning of pipe
systems  on  ships,  our  entrance  into  the  tank  cleaning   services  market
significantly  reduced the percentage of consolidated  sales generated from pipe
system cleaning  pursuant to the Portsmouth CHT contract with the U.S. Navy. Our
continued  efforts to  diversify  our revenue base to  different  customers  and
markets  in order to reduce our  dependence  on one large  customer  has had the
effect of reducing the  percentage of  consolidated  sales  generated  from pipe
system cleaning  pursuant to the Portsmouth CHT contract with the U.S. Navy from
73% in 2000 to 45% in 2001.  We currently  focus  specific  sales and  marketing
efforts in the areas of marine,  industrial  and municipal pipe cleaning as well
as in the areas of marine and land based tank cleaning.  In the future,  we will
continue our efforts to diversify  our revenue  sources and thereby our reliance
on one large  customer for a significant  portion of our revenue.  Sales of pipe
cleaning services  increased 13% during fiscal 2001. Tank cleaning services were
offered for the first time during 2001. Sales of industrial  chemicals decreased
38% during fiscal 2001.

     Consolidated  gross  margins were 42% during  fiscal 2001 compared with 47%
during fiscal 2000. The decrease in gross margin was primarily the result of our
entrance into the tank  cleaning  market.  Lower tank  cleaning  margins had the
effect of lowering consolidated gross margins. We anticipate that future margins
will fluctuate with changes in revenue mix and other operational factors.

     Gross profit  increased to $2,503,316  during  fiscal 2001 from  $1,995,389
during  fiscal  2000.  The  increase  in gross  profit  was the result of higher
revenue offset by lower consolidated  gross margins.  Selling expenses decreased
to $291,509  during fiscal 2001 from  $393,556  during fiscal 2000 while general
and  administrative  expenses  increased to  $2,365,632  during fiscal 2001 from
$1,864,771  during fiscal 2000. The decrease in selling  expenses was the result
of reductions in sales personnel and marketing in underperforming  areas as well
as  a  reduction   in   commission   expenses.   The  increase  in  general  and
administrative  expenses is primarily attributable to our entrance into the tank
cleaning  services  market and the related  expenses of  starting,  staffing and
operating that  division.  Additionally,  increases in management  compensation,
insurance and certain other expenses accounted for the balance of the increase.

     For the year ended  December  31,  2001,  our  operating  loss was $153,825
compared to an operating  loss of $262,938 for the same period in 2000. Net loss
for fiscal 2001 was $163,607 compared to a net loss for fiscal 2000 of $256,884.

                                       12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     Cash was $75,759 at December  31,  2001 and  $302,392 at December  31, 2000
while working capital was $397,407 and $496,608 at those  respective  dates. The
decreases in cash and working  capital are a function of cash used for equipment
and  patent  expenditures,  cash  used in the pay down of debt and cash  used in
operating activities.

     We have entered into a factoring agreement under which the factor purchases
eligible accounts receivable and advances to us 80% of the purchased amount, not
to exceed $600,000. Either party may cancel the agreement within 30 days' notice
to the other party. Interest payable by us is calculated as a fixed discount fee
equal to 1.0% of the amount of the receivable  factored plus a variable discount
fee computed on the amount advanced. Interest on the outstanding balance accrues
on the basis of actual days elapsed from the date of the advance until five days
after collection of such account. Our inventory,  accounts receivable,  contract
rights,  and other general  intangibles  secure the amounts  factored  under the
agreement.  We are  required  to  maintain  tangible  net worth of not less than
$750,000  during the term of the  agreement.  As of December  31,  2001,  we had
factored $416,976 of accounts receivable. Additionally, as of December 31, 2001,
we had $2,570 in long-term debt.

     We rely primarily on our internally  generated  operating cash flow and our
factoring  arrangement  to fund our  operations  and our business.  We currently
contract with a few major customers  responsible  for a large  percentage of our
revenue and we expect the high  concentration  levels to continue  through 2002.
Thus,  any  material  delay,  cancellation  or  reduction  of orders  from these
customers could have a material adverse effect on our liquidity and operations.

     The table  below  describes  our  contractual  obligations  to make  future
payments under contracts such as debt and lease agreements:

                                                     Payments Due by Fiscal Year
                                                     ---------------------------
Contractual Obligations                                2002      2003      2004
-----------------------                              -------   -------   -------
Long-Term Debt and Other Financing Arrangements      $13,153   $ 1,338   $    --
Capital Lease Obligations                              6,791     1,232        --
Operating Leases                                      78,160    50,431     3,700

     On February 9, 2001, we acquired certain tank and boiler cleaning assets of
Industrial Chemical Cleaning Incorporated.  In exchange, the company assumed the
existing debt that was secured by the  particular  assets.  The actual amount of
debt assumed was $61,539.

     On February 9, 2001, we acquired a barge with a capacity of 19,500  barrels
from Hampton Roads Barge Rental,  LLC. In exchange,  we assumed  $88,978 of debt
that was secured by the barge.  During the second quarter, we sold the barge for
$135,000 and realized a gain of $52,378.

     We  currently  contract  with  a few  customers  responsible  for  a  large
percentage  of our  revenue  and we  expect  the high  concentration  levels  to
continue through 2002. Thus, any material delay,  cancellation,  or reduction of
orders  from  these  customers  could  have a  material  adverse  effect  on our
operations.

     While we believe that we will not need to raise additional  capital because
our  current  cash  and  revenue  from  operations  will be  sufficient  for the
foreseeable future, we may, in the future,  sell additional  securities to raise
capital. Any such sale, if necessary, could substantially dilute the interest of
our existing stockholders.  We cannot provide any assurance that we will be able
to sell additional  securities at terms acceptable to us. We may, in the future,
make  acquisitions  by utilizing debt financing.  Any such  acquisition and debt
financing  could have a material  adverse impact on our liquidity and results of
operations.

ITEM 7. FINANCIAL STATEMENTS

     Reference is made to the financial  statements,  the notes thereto, and the
reports  thereon,  commencing  on  page  F-1 of  this  report,  which  financial
statements, notes, and report are incorporated herein by reference.

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

     Not applicable.

                                       13
<PAGE>
                                    PART III


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
        EXCHANGE ACT

     The following  table sets forth certain  information  regarding each of our
directors and executive officers.

         NAME                AGE                  POSITION
         ----                ---                  --------
S. Steven Carl...........    44     Chairman of the Board of Directors, Chief
                                     Executive Officer and President
Michael H. Harader.......    34     Vice President of Finance, Chief
                                     Financial Officer
John A. Gulick III.......    46     Vice President, Corporate General Counsel
R. John Armstrong........    58     Director
Robert Affholder.........    66     Director

     S. STEVEN CARL has served as our Chairman of the Board of  Directors  since
February 1996, and has served as our Chief  Executive  Officer and as a director
of our company since August 1995. Mr. Carl has served as our President since May
1997 until the present,  and also from August 1995 until February 1996. Mr. Carl
served as the President and Chief Executive Officer of CCT Corporation, a wholly
owned subsidiary of our company acquired in May 1995.

     MICHAEL H. HARADER has served as our Vice  President of Finance  since July
1998 and as our Chief Financial  Officer since October 1998.  Prior to that, Mr.
Harader  served in various  accounting  capacities  since joining our company in
January  1996.  During April 1994 until January 1996,  Mr.  Harader  served as a
Credit  Manager at Isley's RV Service  Center,  Inc. Mr.  Harader is a certified
public accountant.

     JOHN A.  GULICK III has  served as our Vice  President,  Corporate  General
Counsel  since  January  2000.  Prior to joining our company,  Mr.  Gulick was a
self-employed  attorney  from January 1990 until  December  1999,  and served as
outside  counsel to our  company.  Mr.  Gulick is licensed  to  practice  law in
Arizona and Texas, and is a certified public accountant.

     R. JOHN ARMSTRONG has been a Director of our company 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, Mr. Armstrong became
the President of Seaward Marine Services,  Inc., engaged in international diving
services.

     ROBERT W.  AFFHOLDER  has been a Director of our company  since  October 1,
2000.  Mr.  Affholder  has been Senior  Executive  Vice  President of Insituform
Technologies,  Inc., a public company, since 1996. Mr. Affholder was previously,
since 1995,  Senior Vice  President-Chief  Operating  Officer of North  American
Contracting  Operations  of  Insituform  Technologies,  Inc. Mr.  Affholder  was
President of Insituform  Mid-America,  Inc. from 1987 until its  acquisition  by
Insituform  Technologies,  Inc. in 1995,  and was Vice  Chairman  of  Insituform
Mid-America, Inc. from 1993 to 1995.

BOARD OF DIRECTORS

     Directors  are  elected  to serve  until  the next  annual  meeting  of our
stockholders or until their successors are qualified and elected. Officers serve
at the discretion of our board of directors.

     Outside  directors  receive an annual  retainer  in the amount of  $15,000,
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
quarterly meetings of our board of directors, and (c) the issuance of our 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.  We  reimburse  expenses  of our  outside  directors
incurred in connection with service to our company.

                                       14
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Section  16(a) of the Exchange Act requires our  directors,  officers,  and
persons who  beneficially  own more than ten percent of our common stock to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission. Officers, directors, and 10% stockholders are required to furnish us
with copies of all Section  16(a)  reports they file.  To our  knowledge,  based
solely on  review of the  copies of such  reports  furnished  to us and  written
representation  that no other  reports  were  required,  during  the year  ended
December  31,  2001,  such  persons  complied  with  all  Section  16(a)  filing
requirements.

ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth information concerning the compensation paid
or accrued to our Chief Executive Officer for the three years ended December 31,
2001.  None of our  other  executive  officers  earned  cash  salary  and  bonus
exceeding $100,000 during fiscal 2001.

<TABLE>
<CAPTION>
                                                                         LONG TERM COMPENSATION
                                                                      -----------------------------
                                                                                 AWARDS
                                                                      -----------------------------
                                              ANNUAL COMPENSATION                       SECURITIES
NAME AND                                     ---------------------    RESTRICTED STOCK  UNDERLYING          OTHER
PRINCIPAL POSITION                   YEAR     SALARY (1)    BONUS        AWARDS(3)      OPTIONS (2)    COMPENSATION(4)
------------------                   ----     ----------    -----        ---------      -----------    ---------------
<S>                                  <C>     <C>           <C>        <C>               <C>            <C>
S. Steven Carl....................   2001      $140,233    $25,000              --        125,000          $9,285
   Chairman of the Board, Chief      2000      $129,706    $21,282              --             --          $8,155
   Executive Officer, and
   President                         1999      $122,469    $25,044         $16,500             --          $6,356
</TABLE>

----------
(1)  Mr.  Carl also  received  certain  perquisites,  the value of which did not
     exceed 10% of his salary and bonus during fiscal 2001.
(2)  The  exercise  prices of all stock  options  granted were equal to the fair
     market value of our common stock on the date of grant.
(3)  The awards of restricted  stock are calculated by  multiplying  the closing
     market  price of our  common  stock on the date of grant by the  number  of
     shares awarded.
(4)  Other  compensation  consists of 401(k) Plan matching  contributions and an
     automobile allowance.

EMPLOYMENT AGREEMENT

     During June 2001,  we entered into an employment  agreement  with S. Steven
Carl. The employment agreement had an initial term through June 15, 2002, and is
subject to automatic  renewal for successive  one-year terms unless either party
requests to renegotiate or terminates the agreement by giving the other party at
least six months' written notice.

     Mr. Carl's employment  agreement provides for him to serve as our President
and Chief Executive Officer.  The employment  agreement provides for Mr. Carl to
receive a base  salary of  $145,000.  However,  in the  event the  agreement  is
automatically renewed, the base salary will not increase without approval by the
Board of Directors. Mr. Carl is also entitled to receive annual bonuses, payable
in cash or with  shares of our common  stock,  equal to 7.5% our  annual  EBITDA
before  giving  effect to any  extraordinary  accounting  events  or  accounting
impacts  from  discontinued  operations.  Mr.  Carl  received a bonus of $25,000
during fiscal 2001.  The value of bonuses paid in common stock shall be based on
the  closing  bid  price of our  common  stock on the  last  trading  day of the
relevant year to which the bonus relates.  Our Board of Directors may also award
Mr. Carl such other bonuses and increases in base salary as warranted  from time
to time.

     In addition, the employment agreement generally requires us to

     *    provide Mr. Carl with a monthly car allowance of $500 or an automobile
          suitable for business use;

     *    reimburse Mr. Carl for all travel,  entertainment,  and other ordinary
          and necessary  expenses  incurred in connection  with our business and
          his duties under the employment agreements; and

     *    provide such other fringe benefits that we make generally available to
          our other senior executives.

                                       15
<PAGE>
     The employment agreement may be terminated by reason of resignation, death,
disability,  or as a result of termination of employment "for cause," as defined
in the  agreement.  In the event of a  termination  of the  agreement  or if the
agreement  expires without being renewed or extended,  Mr. Carl will resign as a
director of our company effective on the date of termination or expiration.

     The employment agreement also prohibits Mr. Carl from

     *    competing with us for a period of 18 months  following the termination
          of his employment with our company;

     *    taking certain actions  intended to solicit other persons to terminate
          their  business  relationship  with  us or to  terminate  his  or  her
          employment relationship with us; and

     *    making  unauthorized  use or  disclosure of our trade secrets or other
          confidential information.

PERFORMANCE EQUITY PLAN

     During 1996, we adopted the  Performance  Equity Plan to enable our company
to  offer  to  our  key  employees,  officers,  directors,  and  consultants  an
opportunity  to acquire a proprietary  interest in our company and to link their
interests  and  efforts to the  long-term  interests  of our  stockholders.  Our
stockholders  approved  the plan during  July 1996.  The plan  provides  for the
granting of awards to employees,  officers,  directors, and consultants eligible
to receive  awards  under the plan.  These  awards may  include  stock  options,
restricted  stock,  stock  appreciation  rights,  deferred  stock,  stock reload
options,  and other stock based  awards.  A total of 1,000,000  shares of common
stock may be issued under the plan.  As of March 15, 2002, we have issued 80,000
shares of restricted stock under the plan, and there were outstanding options to
acquire 885,000 shares of our common stock. The plan will remain in effect until
no  further  grants  can be made  and no  awards  remain  outstanding,  however,
incentive stock options may only be granted through May 2006.

     Awards may be made or granted  only to persons who at the time of grant are
key  employees,  officers,  directors,  and  consultants  who are deemed to have
rendered or to be able to render  significant  services to our company,  and who
are deemed to have  contributed  or to have the  potential to  contribute to the
success of our company.  Options that are  incentive  stock  options may only be
granted to  employees of our  company.  To the extent that  granted  options are
incentive  stock  options,  the terms and  conditions  of those  options must be
consistent with the qualification requirements set forth in the Internal Revenue
Code.

     The plan is administered  by the Board of Directors,  except that the Board
of  Directors  may  delegate  its power to  administer  the plan to a  committee
appointed by the Board of  Directors.  The Board of  Directors or the  committee
will have the authority to administer all matters governing the plan,  including
the persons  eligible to receive  awards,  the terms and conditions of grants of
awards,  the  specified  performance  goals or other  criteria  that  need to be
attained for the vesting of awards, and the substitution of any awards.

     The  exercise   prices,   expiration   dates,   maximum  number  of  shares
purchasable,  and the other provisions of the options will be established at the
time of grant. The exercise prices of options may not be less than 100% (110% if
the option is granted to a  stockholder  who, at the time of grant,  owns common
stock  possessing  more than 10% of the  combined  voting  power of all class of
stock of our  company) of the fair market  value of our common stock on the date
of grant.  Options  may be granted for terms  determined  by the  committee  and
become  exercisable in whole or in one or more  installments at such time as may
be  determined  upon grant of the options,  and may be waived at any time by the
committee.

     Under the plan,  the Board of  Directors  or the  committee  also may award
shares  of  restricted  stock or other  stock-based  awards  either  alone or in
addition to other awards  granted under the plan.  The committee  will determine
the eligible persons,  the number of shares to be awarded, the price (if any) to
be paid by the holder, and all other terms and conditions of such awards.

     Upon a merger or other  recapitalization of our company,  such substitution
or  adjustment  will be made in the  aggregate  number  of shares  reserved  for
issuance  under the plan, in the number,  terms of, and exercise price of shares
subject to  outstanding  awards,  as may be determined to be  appropriate by the
committee in order to prevent  dilution or enlargement of rights.  Upon a change
of control of our company that is not authorized by our Board of Directors,  the

                                       16
<PAGE>
vesting  periods  of all  awards  granted  and  outstanding  under the plan will
accelerate and become fully vested and immediately exercisable.

1993 INCENTIVE STOCK OPTION PLAN

     During October 1993, we adopted,  and our stockholders  approved,  the 1993
Incentive  Stock  Option  Plan  to  advance  the  interests  of our  company  by
encouraging  and enabling key  employees to acquire a financial  interest in our
company and to link their  interests and efforts to the  long-term  interests of
our  stockholders.  The plan  provides for the granting of stock  options to key
employees  of our  company.  A total of  350,000  shares of common  stock may be
issued under the plan.  As of March 15, 2002,  10,000 shares of our common stock
had been issued upon exercise of options  granted under the plan, and there were
outstanding  options to acquire  242,500  shares of our common  stock  under the
plan.

     Options  may be granted  only to  persons  who at the time of grant are key
employees  of our  company.  The plan is  administered  and  interpreted  by the
compensation  committee of the Board of Directors.  The committee determines the
individuals  to whom, and the time or times at which,  options are granted,  the
number of shares subject to each option, the duration,  exercise price, vesting,
and other terms and conditions of options granted.

     In no event  will the  exercise  price of an  option  be less than the fair
market  value of our common  stock on the date of grant.  Options may be granted
for terms of up to but not exceeding ten years from the date of grant.

     In the event of any  recapitalization  of our company,  the committee  will
adjust  the  number of shares of stock  available  for  options,  as well as the
shares and exercise  prices  subject to any options.  The plan will terminate on
the  earliest  of (a) the date  when all  shares of common  stock  reserved  for
issuance under the plan have been acquired  through  exercise of options granted
under the plan,  (b)  October  2003,  or (c) such  earlier  date as the Board of
Directors may determine.

OPTIONS AND WARRANTS

     In addition to the options under the 1993 Plan and the  Performance  Equity
Plan,  as of March 15,  2002,  we had  outstanding  the  following  options  and
warrants to purchase an aggregate of 917,500 shares of our common stock:

     *    warrants  to  purchase  567,500  shares of common  stock at  exercises
          prices  ranging from $0.22 to $2.00 per share  issued to  consultants.
          These warrants are currently  exercisable  and expire on various dates
          through September 2005; and

     *    other options to purchase  350,000  shares of common stock at exercise
          prices  ranging  from  $0.31 to $1.75 per share  issued to  employees.
          These  options are currently  exercisable  and expire on various dates
          through December 2005.

                                       17
<PAGE>
OPTION GRANTS

     The following  table provides  information on stock options  granted to Mr.
Carl during the fiscal year ended December 31, 2001.

                        OPTION GRANTS IN LAST FISCAL YEAR

                                                INDIVIDUAL GRANTS
                             ---------------------------------------------------
                              NUMBER OF      PERCENT OF
                             SECURITIES    TOTAL OPTIONS
                             UNDERLYING      GRANTED TO    EXERCISE
                              OPTIONS      EMPLOYEES IN     PRICE     EXPIRATION
NAME                         GRANTED (#)     FISCAL YEAR    ($/SH)       DATE
----                         -----------     -----------    ------       ----
S. Steven Carl.....           50,000(1)         10.4%        $0.19      3/29/11
                              75,000(2)         15.6%        $0.10     11/01/11

----------
(1)  All of the options vested and became exercisable on March 29, 2001.
(2)  All of the options vested and became exercisable on November 1, 2001.

YEAR END OPTION HOLDINGS

     The following  table provides  information  with respect to options held by
Mr. Carl as of December  31,  2001.  Mr. Carl did not  exercise  options  during
fiscal 2001.

                      OPTIONS HELD AS OF DECEMBER 31, 2001

NAME                          EXERCISABLE(1)        UNEXERCISABLE
----                          --------------        -------------
S. Steven Carl.....              362,500                  --

----------
(1)  None of the  unexercised  options listed had any value at fiscal  year-end,
     because the  exercise  prices of all options held by Mr. Carl were equal to
     or greater than $0.10 per share,  which was the closing  sales price of our
     common stock as quoted on the OTCBB on December 31, 2001.

                                       18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding the shares of
our common stock beneficially owned as of March 1, 2002 by Mr. Carl, each of our
directors, each person known by us to be the beneficial owner of more than 5% of
our common stock, and all of our directors and officers as a group.

                                                        SHARES
                                                     BENEFICIALLY
NAME OF BENEFICIAL OWNER                               OWNED (1)     PERCENT (2)
------------------------                               ---------     -----------

DIRECTORS AND EXECUTIVE OFFICERS:
S. Steven Carl...................................       880,209 (3)        7.2%
R. John Armstrong................................       162,318            1.4%
Robert Affholder.................................        79,613             *

All directors and executive officers as
 a group (5 persons) (4).........................     1,748,340           14.0%

5% STOCKHOLDERS:
Lance Laifer (5).................................     3,375,516           28.4%
Norman H. Pessin (6).............................       985,000            8.3%
Shelby A. Carl (7)...............................       638,470            5.3%

----------
*    Less than 1%
(1)  Except  as  indicated,   and  subject  to  community   property  laws  when
     applicable,  each  officer and  director  named in the table above has sole
     voting  and  investment  power with  respect to all shares of common  stock
     shown as beneficially  owned by them. Except as otherwise  indicated,  each
     director,  officer, or 5% stockholder may be reached through our offices at
     2215 West Melinda Lane, Suite A, Phoenix, Arizona 85027.
(2)  The percentages shown are calculated based upon 11,904,872 shares of common
     stock  outstanding  on March 1, 2002.  The  numbers and  percentages  shown
     include the shares of common stock  actually  owned as of March 1, 2002 and
     the  shares  of  common  stock  that the  person  or group had the right to
     acquire within 60 days of March 1, 2002. In  calculating  the percentage of
     ownership,  all shares of common stock that the identified  person or group
     had the right to acquire  within 60 days of March 1, 2002 upon the exercise
     of options and  warrants  are deemed to be  outstanding  for the purpose of
     computing the percentage of the shares of common stock owned by such person
     or group, but are not deemed to be outstanding for the purpose of computing
     the percentage of the shares of common stock owned by any other person.
(3)  Includes  362,500  shares of common stock  issuable  upon exercise of stock
     options.
(4)  All directors and our executive officers as a group includes two additional
     executive officers who are not listed individually in the table.
(5)  The  information  is based  solely  upon a  Schedule  13D/A  filed with the
     Securities  and Exchange  Commission on April 11, 2001.  Hilltop  Partners,
     L.P., Laifer Capital Management, Inc., and Lance Laifer are affiliates with
     respect to each other.  Hilltop  beneficially  owns 1,664,616 shares of our
     common stock,  and Laifer Capital  Management  beneficially  owns 3,375,516
     shares of our common stock in its capacity as investment advisor to various
     investment  entities including Hilltop.  Mr. Laifer is the president,  sole
     director, and principal stockholder of Laifer Capital Management, Inc., and
     is  deemed  to  have  the  same  beneficial  ownership  as  Laifer  Capital
     Management,   Inc.  The  address  for  Hilltop  Partners,   Laifer  Capital
     Management,  and Lance Laifer are c/o Laifer Capital Management,  Inc., 450
     Seventh Avenue, Suite 1604, New York, New York 10123.
(6)  Norman H. Pessin is a principal  of  Neuberger & Berman,  LLC, a registered
     broker/dealer and registered investment advisor. Mr. Pessin has sole voting
     and  dispositive  power with respect to all shares of our common stock held
     by him. The address for Mr. Pessin is c/o Neuberger & Berman LLC, 605 Third
     Avenue, New York, NY 10158-3698.
(7)  Includes  50,000  shares of common stock  issuable  upon  exercise of stock
     options and warrants.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.

                                       19
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

EXHIBIT
NUMBER                                 EXHIBIT
------                                 -------

3.1            Certificate of Incorporation of the Registrant (1)
3.2            Bylaws of the Registrant (1)
4.1            Specimen of Common Stock certificate (1)
10.1           1993 Incentive Stock Option Plan, as amended (1)
10.2           Agency  Agreement  between  the  Registrant  and  GKN  Securities
               Corporation dated March 4, 1996 (2)
10.3           Form of Purchase Option issued to GKN Securities  Corporation and
               its designees (2)
10.6           1996 Performance Equity Plan (3)
10.7           Form of Purchase Option issued to GKN Securities  Corporation and
               its designees dated June 18, 1997 (4)
10.8           Account  Transfer  and  Purchase  Agreement  by and  between  the
               Registrant,  H.E.R.C.  Consumer Products, Inc., and KBK Financial
               Incorporated dated September 22, 1997 (4)
10.9           Agreement by and between the  Registrant  and the U.S. Navy dated
               May 23, 1997 (4)
10.11          Form of Warrant Agreement between the Registrant and Jerry Ludwig
               and Associates dated September 3, 1997 (4)
10.12          Form of Warrant  Agreement between the Registrant and Shelby Carl
               dated September 3, 1997 (4)
10.13          Amendment  to  Stock  Option  Agreement  by and  between  Gary S.
               Glatter and the Registrant dated March 23, 1995 (4)
10.14          Amendment No. 2 to Stock Option  Agreement by and between Gary S.
               Glatter and the Registrant dated February 1, 1997 (4)
10.15          Employment  Agreement  by and  between  S.  Steven  Carl  and the
               Registrant dated June 15, 1999 (5)
10.16          Employment  Agreement  dated June 15, 2001 between S. Steven Carl
               and the Registrant
21             Subsidiaries of the Registrant
23.1           Consent of Arthur Andersen LLP
23.2           Consent of McGladrey & Pullen, LLP

----------
(1)  Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form SB-2,  (Registration  No.  33-75166),  as filed with the Commission on
     February 11, 1994.
(2)  Incorporated by reference to the Registrant's  Annual Report on Form 10-KSB
     for the fiscal year ended  December 31, 1995, as filed with the  Commission
     on April 15, 1996.
(3)  Incorporated by reference to the  Registrant's  Schedule 14A, as filed with
     the Commission on May 16, 1996.
(4)  Incorporated by reference to the Registrant's  Annual Report on Form 10-KSB
     for the fiscal year ended  December 31, 1997, as filed with the  Commission
     on March 31, 1998.
(5)  Incorporated  by reference  to the  Registrant's  Quarterly  Report on Form
     10-QSB  for the  quarter  ended  September  30,  1999,  as  filed  with the
     Commission on November 15, 1999.

(b)  REPORTS ON FORM 8-K

     Not applicable.

                                       20
<PAGE>
                                   SIGNATURES

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

                                     H.E.R.C. PRODUCTS INCORPORATED


                                     By: /s/ S. Steven Carl
                                         ---------------------------------------
Dated:  March 28, 2002                   S. Steven Carl, Chief Executive Officer
                                         and President (Principal 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.

       SIGNATURE                         POSITION                      DATE
       ---------                         --------                      ----

/s/ S. Steven Carl               Chairman of the Board,           March 28, 2002
---------------------------      Chief Executive Officer,
S. Steven Carl                   and President


/s/ Michael H. Harader           Chief Financial Officer          March 28, 2002
---------------------------      (Principal Financial and
Michael H. Harader               Accounting Officer)


/s/ John A. Gulick III           Vice-President-Office of         March 28, 2002
---------------------------      General Counsel
John A. Gulick III


/s/ R. John Armstrong            Director                         March 28, 2002
---------------------------
R. John Armstrong


/s/ Robert Affholder             Director                         March 28, 2002
---------------------------
Robert Affholder

                                       21
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE
                                                                            ----

Reports of Independent Public Accountants...............................     F-2

Financial Statements:

Consolidated Balance Sheet as of December 31, 2001......................     F-4

Consolidated Statements of Operations for the years ended
 December 31, 2001 and 2000.............................................     F-5

Consolidated Statements of Stockholders' Equity for the years ended
 December 31, 2001 and 2000.............................................     F-6

Consolidated Statements of Cash Flows for the years ended
 December 31, 2001 and 2000.............................................     F-7

Notes to Consolidated Financial Statements..............................     F-8

                                      F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT

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


We have audited the accompanying consolidated balance sheet of H.E.R.C. Products
Incorporated  and  Subsidiaries  as  of  December  31,  2001,  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the year then ended.  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 audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of H.E.R.C.  Products
Incorporated  and Subsidiaries as of December 31, 2001, and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

/s/ McGladrey & Pullen, LLP


Phoenix, Arizona
March 11, 2002

                                      F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity  and  cash  flows of  H.E.R.C.  Products  Incorporated  (a
Delaware corporation) and Subsidiaries (the Company) for the year ended December
31, 2000.  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 audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the results of the  Company's  operations  and its cash
flows  for the year  ended  December  31,  2000 in  conformity  with  accounting
principles generally accepted in the United States.

                                        /s/ Arthur Andersen LLP


Phoenix, Arizona
March 15, 2001

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

                           Consolidated Balance Sheet

                                December 31, 2001


                                     ASSETS
CURRENT ASSETS
  Cash                                                             $     75,759
  Trade accounts receivable, net of allowance for                       602,468
    doubtful accounts of $35,269 (NOTE 10)
  Inventories                                                            27,061
  Costs of uncompleted contracts                                        150,530
  Costs and estimated earnings in excess of billings                     74,289
    on uncompleted contracts (NOTE 2)
  Other receivables, includes unbilled amounts of $53,437                66,112
  Prepaid expenses                                                       51,008
                                                                   ------------
      Total Current Assets                                            1,047,227
                                                                   ------------

PROPERTY AND EQUIPMENT (NOTE 3)
  Property and equipment                                              1,374,993
  Less: accumulated depreciation                                       (938,755)
                                                                   ------------
      Net Property and Equipment                                        436,238
                                                                   ------------

OTHER ASSETS
  Patents, net of accumulated amortization of $100,397                  107,366
  Patents pending                                                       117,954
  Refundable deposits and other assets                                    9,940
                                                                   ------------
      Total Other Assets                                                235,260
                                                                   ------------
                                                                   $  1,718,725
                                                                   ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                 $    287,259
  Accrued wages                                                         117,350
  Current portion of notes payable (NOTE 3)                              19,944
  Other accrued expenses                                                225,267
                                                                   ------------
      Total Current Liabilities                                         649,820

LONG-TERM LIABILITIES
  Notes payable, net of current portion (NOTE 3)                          2,570
                                                                   ------------
      Total Liabilities                                                 652,390
                                                                   ------------

COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 12)

STOCKHOLDERS' EQUITY (NOTE 5)
  Preferred stock, $0.01 par 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 11,864,872 shares                            118,649
  Additional paid-in capital                                         14,012,464
  Accumulated deficit                                               (13,064,778)
                                                                   ------------
      Total Stockholders' Equity                                      1,066,335
                                                                   ------------
                                                                   $  1,718,725
                                                                   ============

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

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

                      Consolidated Statements of Operations


                                                     Years Ended December 31,
                                                   ----------------------------
                                                       2001            2000
                                                   ------------    ------------
SALES                                              $  5,966,564    $  4,266,735
COST OF SALES                                         3,463,248       2,271,346
                                                   ------------    ------------
GROSS PROFIT                                          2,503,316       1,995,389
SELLING EXPENSES                                        291,509         393,556
GENERAL AND ADMINISTRATIVE EXPENSES                   2,365,632       1,864,771
                                                   ------------    ------------
OPERATING LOSS                                         (153,825)       (262,938)
                                                   ------------    ------------
OTHER INCOME (EXPENSE)
  Interest expense                                      (68,335)        (15,014)
  Miscellaneous                                           6,175          19,964
  Gain on sale or disposal of equipment                  52,378           1,104
                                                   ------------    ------------
      Total Other Income (Expense)                       (9,782)          6,054
                                                   ------------    ------------
NET LOSS BEFORE INCOME TAXES                           (163,607)       (256,884)
  Income tax provision                                       --              --
                                                   ------------    ------------
NET LOSS                                           $   (163,607)   $   (256,884)
                                                   ============    ============

NET LOSS PER COMMON SHARE -BASIC AND DILUTED       $      (0.01)   $      (0.02)
                                                   ============    ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC                                                11,792,950      11,682,847
                                                   ============    ============
DILUTED                                              11,792,950      11,682,847
                                                   ============    ============

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

                                      F-5
<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, 1999                            11,652,853   $    116,529   $ 13,972,584   $(12,644,287)   $  1,444,826

Net loss                                                      --             --             --       (256,884)       (256,884)

Issuance of shares of common stock (NOTE 5)               49,875            498         17,501             --          17,999
                                                    ------------   ------------   ------------   ------------    ------------

BALANCE, DECEMBER 31, 2000                            11,702,728        117,027     13,990,085    (12,901,171)      1,205,941

Net loss                                                      --             --             --       (163,607)       (163,607)

Issuance of shares of common stock (NOTE 5)              162,144          1,622         22,379             --          24,001
                                                    ------------   ------------   ------------   ------------    ------------

BALANCE, DECEMBER 31, 2001                            11,864,872   $    118,649   $ 14,012,464   $(13,064,778)   $  1,066,335
                                                    ============   ============   ============   ============    ============
</TABLE>

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

                                      F-6
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                                   2001          2000
                                                                                ----------    ----------
<S>                                                                             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                      $ (163,607)   $ (256,884)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities
      Depreciation and amortization                                                258,379       244,637
      Gain on sale or disposal of equipment                                        (52,378)       (1,104)
      Common stock issued for services                                              24,001        17,999
      (Increase) decrease in assets
        Trade accounts receivable                                                 (274,691)      545,268
        Inventories                                                                 11,070         7,859
        Costs of uncompleted contracts                                             (77,633)       45,546
        Costs and estimated earnings in excess of billings
          on uncompleted contracts                                                 (74,289)           --
        Other receivables                                                          (55,761)       (1,740)
        Prepaid expenses                                                            33,228        29,544
        Refundable deposits and other assets                                        12,913        39,726
      Increase (decrease) in liabilities
        Accounts payable                                                           182,032      (158,235)
        Accrued wages and other accrued expenses                                   164,453      (166,937)
        Customer deposits                                                          (42,617)       42,617
                                                                                ----------    ----------
            Net cash provided by (used in) operating activities                    (54,900)      388,296
                                                                                ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                                            (120,032)     (112,962)
  Cash received from the sale of equipment                                         135,000         7,170
  Expenditures related to patents and patents pending                              (45,530)      (22,274)
                                                                                ----------    ----------
            Net cash used in investing activities                                  (30,562)     (128,066)
                                                                                ----------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of notes payable and long-term debt                       198,262       151,870
  Principal payments under notes payable                                          (339,433)     (175,430)
                                                                                ----------    ----------
            Net cash used in financing activities                                 (141,171)      (23,560)
                                                                                ----------    ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              (226,633)      236,670
CASH AT BEGINNING OF PERIOD                                                        302,392        65,722
                                                                                ----------    ----------
CASH AT END OF PERIOD                                                           $   75,759    $  302,392
                                                                                ==========    ==========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for interest                                        $   68,335    $   15,014
                                                                                ==========    ==========
Cash paid during the period for income taxes                                    $       --    $       --
                                                                                ==========    ==========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Purchase of assets through assumption of debt                                   $  150,517    $       --
                                                                                ==========    ==========
</TABLE>

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

                                      F-7
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000


1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

H.E.R.C.   Products  Incorporated  and  subsidiaries  (the  "Company")  provides
pipeline  rehabilitation,  tank cleaning,  and other  services for marine,  fire
protection,  potable  water,  wastewater,   industrial  and  other  systems  and
manufactures  and sells  specialty  chemicals.  The  Company  provides  services
primarily to the U.S.  Government and to U.S.  corporations in the United States
of America and in various locations throughout the world.

The  Company's  strategy  has  involved  concentrating  its efforts on providing
pipeline rehabilitation and other system cleaning 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 2001 and 2000,
sales to the U.S.  Navy  under the  Portsmouth  CIS  contract  were 45% and 73%,
respectively,  of consolidated sales. The 5-year U.S. Navy contract is renewable
each year at the option of the U.S. Navy. The U.S. Navy has renewed the contract
for each option year including the final option year that ends  September  2002.
For each year the U.S. Navy renews the contract,  the minimum annual amount that
the U.S.  Navy must spend with HERC to meet the  obligations  of the contract is
approximately  $75,000. The 5-year U.S. Navy contract expires in September 2002.
Included in accounts  receivable  at December  31, 2001 is $181,204 for the U.S.
Navy.

PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES

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.

The preparation of financial  statements  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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INCOME TAXES

Deferred taxes are provided on a liability  method  whereby  deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences.  Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases.  Deferred  tax assets are  reduced by a  valuation  allowance  when it is

                                      F-8
<PAGE>
determined  to be more likely than not that some  portion or all of the deferred
tax  assets  will not be  realized.  Deferred  tax assets  and  liabilities  are
adjusted  for the  effects  of  changes  in tax  laws  and  rates on the date of
enactment.

STOCK-BASED COMPENSATION

The  Company   accounts  for  stock-based   employee   compensation   under  the
requirements of Accounting Principles Board (APB) Opinion No. 25, which does not
require  compensation to be recorded if the  consideration  to be received is at
least equal to fair value of the common stock to be received at the  measurement
date.  Nonemployee   stock-based   transactions  are  accounted  for  under  the
requirements  of SFAS No. 123,  Accounting for Stock-Based  Compensation,  which
requires  compensation  to be recorded based on the fair value of the securities
issued or the services received, whichever is more reliably measurable.

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 trade  accounts  receivable,
accounts payable,  other accrued  liabilities and notes payable approximate fair
value due to the short maturities of these instruments.

INVENTORIES

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

CONCENTRATIONS OF CREDIT RISK

The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and trade accounts  receivable.  The Company from
time to time may have bank deposits in excess of the FDIC insurance limits.  The
Company has not  experienced  any losses in such accounts and believes it is not
exposed to any significant credit risk on cash.

COMPREHENSIVE INCOME

For the years ended December 31, 2001 and 2000, the Company had no components of
comprehensive  income  and,  therefore,  net  income  is equal to  comprehensive
income.

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.

                                      F-9
<PAGE>
Property and equipment at December 31, 2001 are:

      Equipment                                                   $ 1,150,903
      Office furniture, computers and leasehold improvements          224,090
                                                                  -----------
                                                                    1,374,993
      Less accumulated depreciation                                  (938,755)
                                                                  -----------
      Net property and equipment                                  $   436,238
                                                                  ===========

The useful lives of property and equipment for computing depreciation range from
three to ten years. Depreciation expense was $237,603 and $219,208 for the years
ended  December 31, 2001 and 2000,  respectively.  The  depreciation  expense on
assets  acquired  under capital lease is included with  depreciation  expense on
owned  assets.   Assets  acquired  under  capital  leases  totaled  $27,268  and
accumulated depreciation on these assets totaled $12,251 at December 31, 2001.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company  periodically  evaluates the carrying value of long-lived assets and
intangibles.  Long-lived assets and certain identifiable intangible assets to be
held and used in  operations  are reviewed  for  potential  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.  Future losses may be recorded if cash flows
are less than expected.

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  businesses as well as maintenance costs are expensed.
Such expenses were approximately $12,000 and $8,000 for the years ended 2001 and
2000, respectively.

ACCOUNTS RECEIVABLE

The Company factors certain receivables without recourse which meet the criteria
for sales and are treated accordingly.

REVENUE RECOGNITION

For chemical product sales, the Company  recognizes revenue at the time products
are shipped to  customers.  For most service  projects,  the Company  recognizes
revenue and costs when the services are completed.  For fixed price contracts in
excess  of 3  month  duration,  revenue  is  recognized  on  the  percentage  of

                                      F-10
<PAGE>
completion  method,  measured  by the  percentage  of cost  incurred  to date to
estimated total cost for each contract.  This method is used because  management
considers  total  cost to be the best  available  measure of  progress  on these
contracts.  During 2001 the  Company was awarded a contract  that is expected to
have a duration that is longer than normal.  Thus,  the percentage of completion
method was initially adopted in 2001.

Contract costs include all direct  material,  subcontract  labor and other costs
related to contract  performance,  such as indirect labor,  supplies,  tools and
repairs.  Selling,  general and  administrative  costs are charged to expense as
incurred.  Provisions for estimated losses on uncompleted  contracts are made in
the period in which such losses are determined.  Changes in job performance, job
conditions,  and estimated profitability,  including those arising from contract
penalty  provisions  and final contract  settlements  may result in revisions to
estimates  of contract  costs and profits  and are  recognized  in the period in
which the revisions are determined.

The  current  asset,  "costs and  estimated  earnings  in excess of  billings on
uncompleted  contracts"  represents  revenue  recognized  in excess  of  amounts
billed.  The  current  liability,  "billings  in excess of costs on  uncompleted
contracts," represents billings in excess of revenue recognized.

RESEARCH AND DEVELOPMENT

Research and development  costs are expensed as incurred.  The Company estimates
that it spent  approximately  $12,000 and $24,000 on  research  and  development
activities during fiscal 2001 and 2000, respectively.

LOSS PER SHARE

Basic loss per common  share is computed by  dividing  net loss by the  weighted
average number of shares of common stock outstanding during the year.

                                      F-11
<PAGE>
A reconciliation  of the basic and diluted loss per share (EPS)  computation for
the years ended December 31, 2001 and 2000 is as follows:

                                              YEAR ENDED DECEMBER 31, 2001
                                        ---------------------------------------
                                          NET LOSS       SHARES       PER SHARE
                                        (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                        ----------     ----------     --------
Basic EPS                               $ (163,607)    11,792,950     $  (0.01)

Effect of stock options and warrants            --             --
                                        ----------     ----------
Diluted EPS                             $ (163,607)    11,792,950     $  (0.01)
                                        ==========     ==========     ========

                                              YEAR ENDED DECEMBER 31, 2000
                                        ---------------------------------------
                                          NET LOSS       SHARES       PER SHARE
                                        (NUMERATOR)   (DENOMINATOR)    AMOUNT
                                        ----------     ----------     --------
Basic EPS                               $ (256,884)    11,682,847     $  (0.02)

Effect of stock options and  warrants           --             --
                                        ----------     ----------
Diluted EPS                             $ (256,884)    11,682,847     $  (0.02)
                                        ==========     ==========     ========

At December 31, 2001,  there were 50,000  options  outstanding  with an exercise
price of $0.09 per  share.  These  options  would be  dilutive  if there was net
income. These options have not been included in the calculation since they would
be anti-dilutive.

RECENTLY ISSUED ACCOUNTING STANDARDS,

In  October  2001,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 144,  "Accounting for
the Impairment or Disposal of Long-Lived  Assets".  This Statement addresses the
financial  accounting and reporting for the impairment or disposal of long-lived
assets and supersedes FASB Statement No. 121,  "Accounting for the Impairment of
Long-Lived  Assets  and  for  Long-Lived  Assets  to Be  Disposed  Of",  and the
accounting  and  reporting  provisions  of APB  Opinion No. 30,  "Reporting  the
Results  of  Operations-Reporting  the  Effects  of  Disposal  of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions",  for the  disposal  of a segment  of a  business  (as  previously
defined in that  Opinion).  The  applicable  provisions  of this  Statement  are
effective  for the Company's  financial  statements  beginning  January 1, 2002.
Management  does not anticipate  that the adoption of this Statement will have a
significant effect on the Company's financial statements.

SFAS 141,  Business  Combinations,  and SFAS 142,  Goodwill and Other Intangible
Assets,   modify  the  accounting  for  business   combinations,   goodwill  and
identifiable  intangible  assets.  As of  January  1,  2002,  all  goodwill  and
indefinite-lived   intangible  assets  must  be  tested  for  impairment  and  a
transition adjustment will be recognized.  Management does not believe that this
will have a material impact on its liquidity or results of operations.

SFAS 143, Accounting for Asset Retirement  Obligations,  Requires recognition of
the fair value of  obligations  associated  with the  retirement  of  long-lived
assets  when there is a legal  obligation  to incur such  costs.  This amount is

                                      F-12
<PAGE>
accounted for like an additional element of the corresponding  asset's cost, and
is depreciated over that asset's useful life. SFAS 143 will be effective for the
Company on January 1, 2003.  Management  does not believe  that this will have a
material impact on its liquidity or results of operations.

2. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

The components of contracts in progress consist of the following at December 31,
2001:

Total amounts of contracts                                             $371,716
                                                                       ========

Costs incurred on uncompleted contracts                                $305,008
Estimated earnings                                                       52,060
                                                                       --------
                                                                        357,068
Less billings to date                                                   282,779
                                                                       --------
Costs and estimated earnings in excess of
  billings on uncompleted contracts                                    $ 74,289
                                                                       ========

3. LONG TERM DEBT AND OTHER FINANCING  ARRANGEMENTS

Long term debt and other financing  arrangements consist of the following at
December 31, 2001:

Equipment financing                                                    $ 14,500
Insurance financing                                                       8,014
                                                                       --------
Total financing                                                          22,514
Less current portion                                                    (19,944)
                                                                       --------
Total long term debt                                                   $  2,570
                                                                       ========

4. INCOME TAXES

The Company has experienced  recurring losses and as such, there is no provision
(benefit) for income taxes.

The components of deferred taxes as of December 31, 2001, are as follows:

Current deferred tax assets:
  Accruals not currently deductible for tax                    $    26,400
  Current portion of valuation allowance                           (26,400)
                                                               -----------
                                                               $        --
                                                               ===========

                                      F-13
<PAGE>
Non-current deferred tax assets:
  Equipment                                                    $    67,800
  Net operating loss carry forwards for federal
   and state purposes                                            2,740,000
  Non-current portion of valuation allowance                    (2,807,800)
                                                               -----------
                                                               $        --
                                                               ===========

The Company was in a consolidated tax loss position for the years ended December
31, 2001 and December 31, 2000, and therefore had no current  federal income tax
expense. Deferred tax assets as of December 31, 2001 arising primarily from loss
carry  forward  benefits have not been recorded  because of the  uncertainty  of
realizing such benefits.

Because the Company has no prior year carry-back  taxable  income,  the expected
tax benefit  from the 2001 and 2000  operating  losses  results in deferred  tax
assets which have been fully reserved

Net operating loss carry forwards for federal tax purposes totaled approximately
$7,325,000  at December 31, 2001.  These losses are  available for carry forward
against future years' taxable income, subject to certain limitations, and expire
in various years from 2008 through 2022.

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 $.9375 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.  Such  warrants  are  currently
exercisable  and expire on June 18, 2002.  The  remaining  171,490 units expired
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 2001 and 2000,  the Company  issued  162,144 and 49,875  shares of Common
Stock,  respectively,  to its  outside  directors  as a  part  of  their  annual
compensation.

WARRANTS

As of December 31, 2001,  outstanding warrants issued for the purchase of shares
of Common Stock to various  consultants at exercise prices ranging from $0.21875
to $2.00 per share totaled 142,500.  The Company valued the warrants at the date
of grant  using a  Black-Scholes  model and is  amortizing  the  costs  over the

                                      F-14
<PAGE>
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 expired in 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 on the date of the
grant. Generally, options granted vest over a period up to five years and expire
over varying periods through 2011.

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) various key employees  options to purchase 140,000 shares
of Common  Stock at an  exercise  price of  $0.3125  per share.  Of the  140,000
options granted through 1995,  40,000 expired in December 2001 and the remaining
100,000 are currently exercisable and expire December 2002.

                                      F-15
<PAGE>
Overall activity in the Company's stock options:

                                             YEARS ENDED DECEMBER 31,
                                -----------------------------------------------
                                        2001                     2000
                                ---------------------    ----------------------
                                            WEIGHTED-                 WEIGHTED-
                                             AVERAGE                   AVERAGE
                                            EXERCISE                  EXERCISE
                                  OPTIONS     PRICE        OPTIONS      PRICE
                                ----------  ---------    ----------   ---------
Outstanding, at beginning
 of year                         1,104,500    $0.67       1,064,500     $0.69
Granted                            482,000     0.14          80,000      0.36
Exercised                               --       --              --        --
Canceled/Expired                   (87,800)    0.33         (40,000)     0.37
                                ----------    -----      ----------     -----
Outstanding at end of year       1,498,700     0.52       1,104,500      0.67
                                ==========    =====      ==========     =====
Exercisable at end of year       1,227,500     0.60         956,000      0.72
                                ==========    =====      ==========     =====

Details regarding the options outstanding at December 31, 2001:

                  OUTSTANDING                                EXERCISABLE
----------------------------------------------------   ----------------------
                               WEIGHTED     WEIGHTED                 WEIGHTED
  EXERCISE                      AVERAGE      AVERAGE                  AVERAGE
   PRICE                       REMAINING    EXERCISE                 EXERCISE
   RANGE           NUMBER        LIFE         PRICE      NUMBER        PRICE
  --------       ----------    ---------    --------   ----------    --------
$0.09 - $0.10       290,000      9.82        $0.098       150,000     $0.100
$0.17 - $0.25       192,000      8.40        $0.194       125,000     $0.190
$0.30 - $0.32       706,700      1.67        $0.312       663,500     $0.312
$0.37 - $0.40        30,000      6.48        $0.395         9,000     $0.391
$1.00 - $1.75       280,000      2.28        $1.723       280,000     $1.723
                 ----------                            ----------
                  1,498,700                             1,227,500
                 ==========                            ==========

                                      F-16
<PAGE>
The weighted-average grant-date fair value of stock options granted to employees
during  the years  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,
                                                  --------------------------
                                                      2001          2000
                                                  -----------    -----------
Weighted average grant-date fair value                  $0.13          $0.27

Significant assumptions (weighted average)
  Risk-free interest rate at grant date           4.65 - 5.16%          6.49%
  Expected stock price volatility                      100.00%         89.40%
  Expected dividend payout                                 --             --
  Expected option life                                5 years        5 years
  Forfeiture rate                                           5%            --
Net loss
  As reported                                       $(163,607)     $(256,884)
  Pro forma                                          (205,464)      (264,386)
Net loss per share of Common Stock
  As reported                                          $(0.01)        $(0.02)
  Pro forma                                             (0.02)         (0.02)

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 year ended December 31, 2001 the Company's  major business  segments are
pipe cleaning  services,  tank cleaning services and industrial  chemical sales.
For the year ended December 31, 2000 the Company's  major business  segments are
pipe cleaning services and industrial chemical sales.

Information by segment for the year ended December 31, 2001:

<TABLE>
<CAPTION>
                                               PIPE          TANK      INDUSTRIAL
                                             CLEANING      CLEANING     CHEMICAL
                                             SERVICES      SERVICES       SALES       CORPORATE     CONSOLIDATED
                                           -----------   -----------   -----------   -----------    ------------
<S>                                        <C>           <C>           <C>           <C>            <C>
Sales                                      $ 4,381,089   $ 1,335,795   $   249,680   $        --    $ 5,966,564
Income (loss) from continuing operations     1,076,740        24,950       128,212    (1,393,509)      (163,607)
Total assets                                   747,195       533,768        34,278       403,484      1,718,725
Depreciation and amortization                  186,223        18,427         6,723        47,006        258,379
Capital expenditures                            64,002       189,973         2,485        14,089        270,549
</TABLE>

                                      F-17
<PAGE>
Information by segment for the year ended December 31, 2000:

<TABLE>
<CAPTION>
                                               PIPE      INDUSTRIAL
                                             CLEANING     CHEMICAL
                                             SERVICES       SALES       CORPORATE     CONSOLIDATED
                                           -----------   -----------   -----------    ------------
<S>                                        <C>           <C>           <C>            <C>
Sales                                      $ 3,862,563   $   404,172   $        --    $ 4,266,735
Income (loss) from continuing operations       747,085       142,086    (1,146,055)      (256,884)
Total assets                                   856,639        28,042       660,436      1,545,117
Depreciation and amortization                  179,889         7,511        57,237        244,637
Capital expenditures                            90,809        13,757         8,396        112,962
</TABLE>

Segment profitability is determined before allocation of corporate overhead.

8. COMMITMENTS AND CONTINGENCIES

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.

LITIGATION

A civil claim under  federal  civil rights  statutes  has been filed  seeking an
unspecified amount of lost earnings and compensation for loss of future pensions
and benefits,  damages for non-pecuniary losses, punitive damages, and attorneys
fees,  expert fees and costs.  The Company has obtained  local legal counsel and
estimates the range of potential loss to be less than $50,000.

WASTE DISPOSAL LIABILITY

The Company has a facility in Virginia  that is  currently  used to store waste.
Before the lease of this  facility  expires,  the  Company  will be  required to
properly dispose of all waste.  Management has estimated the cost of disposal to
be $40,000.  This amount has been  accrued at December  31,  2001.  The facility
lease expires in 2004.

LEASE COMMITMENTS

The  Company  has  operating  leases,  expiring  through  2004,  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 $163,056 and $247,368 for the years ended December
31, 2001 and 2000, respectively.

                                      F-18
<PAGE>
Future minimum payments under operating leases,  exclusive of any subleases,  as
of December 31, 2001 are:

YEARS ENDING
DECEMBER 31,                                           AMOUNT
------------                                           ------
2002                                                 $  78,160
2003                                                    50,431
2004                                                     3,700
                                                     ---------
                                                     $ 132,291
                                                     =========

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 $20,944 and $1,656 in 2001,  and
2000,  respectively.  The Company also paid a commissioned sales representative,
who  is  also  a  greater  than  5%  stockholder,  $26,250  in  2001  for  sales
commissions.

10. AGREEMENT WITH FACTOR

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 December  31, 2001,
there was  $416,976 of factored  receivables  of which the Company has  received
$333,581 from the factor.  This $333,581 and $4,170 in interest  expense are not
shown as 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 (2% above the institutions base rate, with a minimum of
7%) 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.  The rate at December 31, 2001 was
7%. In  connection  with this  agreement,  the  Company is  required to maintain
certain  financial  covenants.  In the  event  of a  breach  of  representation,
warranty or agreement,  the institution has a security interest in the Company's
assets.

11. 401(K) PROFIT SHARING PLAN

The Company has a 401(k) profit sharing plan available to all eligible employees
who are age 21 (twenty-one) and have completed six months of service.  The Board
approved an employer matching contribution of 25% totaling $28,349 for 2001.

12. EMPLOYMENT AGREEMENTS

In connection with certain  employment  agreements there were $37,000 of bonuses
awarded to two officers for the year ended December 31, 2001.  Each agreement is
for a term of one-year.  One of the contracts has renewed under its terms.  Each
agreement  includes a non-compete  clause upon  termination of employment and an
auto allowance or company car. One non-officer employee was granted 25,000 stock
options under the 1996 Performance Equity Plan upon execution of that employee's
agreement.

                                      F-19