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, 1997

( )  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934:
     For the transition period from ________ to ________.


                         Commission File Number 1-13012

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

<TABLE>
<S>                                                      <C>
State of Incorporation or Organization: Delaware         IRS Employer Identification Number: 86-0570800
</TABLE>

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

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

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

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

    Common Stock, $.01 par value                    Boston Stock Exchange
                                                    Nasdaq SmallCap Market

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

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

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

State issuer's revenues for its most recent fiscal year. $3,162,846.

At March 19,  1998,  the  aggregate  market  value of the  voting  stock held by
non-affiliates  of the  registrant  was  $2,261,316  based on the closing market
price of the Common Stock on such date as reported by the Nasdaq Stock Market.

At March 18,  1998,  there  were  8,230,588  shares of Common  Stock  issued and
outstanding.

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

Documents Incorporated by Reference:  None
                                                                          Page 1
<PAGE>
PART 1

Item 1.  Description of Business

General

         H.E.R.C.  Products  Incorporated (the "Company")  manufactures consumer
and other water treatment  chemicals and provides water pipeline  rehabilitation
services. The Company markets its consumer products through wholesale and retail
customers and directs its other products and services toward industrial,  marine
and  municipal  customers.  During  the  fourth  quarter  of 1997,  the  Company
determined that it would exit the agricultural business and commenced efforts to
dispose of its wholly owned subsidiary, CCT Corporation,  which manufactured and
distributed  proprietary  agricultural  products.  Financial  information on the
Company's  business  segments  is in  Note  13  to  the  consolidated  financial
statements  of the  Company  for the  year  ended  December  31,  1997,  located
beginning at page F-1 of this Annual Report on Form 10-KSB.  CCT is treated as a
discontinued operation in the financial statements.

         Most of the Company's  products  depend upon its  proprietary  chemical
technology,  Eliminate,  which was developed to respond to the  disadvantages of
current  methods  of  treating  water  systems.  Many of the  chemicals  used in
treating  water  systems are corrosive  and can cause  scaling,  and it is often
difficult to achieve and maintain the correct  combination of chemicals.  To the
extent that  chemicals  used in treating  water systems are toxic,  corrosive or
non-biodegradable,  they are considered to be  pollutants,  subjecting the water
systems to  expensive  clean-up  and  regulatory  compliance  costs.  Many water
systems also require expensive monitoring.

         The Eliminate technology,  combined with water,  dissolves and prevents
scaling and  corrosion,  suppresses  the  environment  that supports  biological
growth and results in more efficient water utilization.  The Eliminate chemistry
keeps the dissolved components of scale and corrosion in solution even at highly
concentrated levels and is non-fuming,  non-abrasive and non-flammable.  Many of
the Company's Eliminate products are also certified  biodegradable by Scientific
Certification  Systems,  an independent  certifying  testing  laboratory ("Green
Cross").  The  Eliminate-based  products for the industrial  market include Pipe
Klean  and  Well-Klean,  which  remove  encrustations  from  water  pumping  and
distribution  systems,  and certain other chemical compounds which are used with
the Eliminate  technology to clean  cooling and other water  treatment  systems.
These products are sold directly by the Company. The Company's consumer products
include  Eliminate  Shower  Tub & Tile  Cleaner,  Eliminate  Evaporative  Cooler
Cleaner and Treatment  (used to clean and maintain  evaporative  cooler systems)
and  Eliminate  Toilet Bowl  Cleaner,  and are sold to the consumer  market by a
wholly-owned  subsidiary of the Company,  H.E.R.C.  Consumer Products,  Inc., an
Arizona corporation ("HCPI").

         The  Company  was   incorporated   in  Arizona  in  December  1986  and
reincorporated in Delaware in 1994. The Company's  executive offices,  warehouse
and  manufacturing  facility  for certain of its  Eliminate-based  products  are
located in Phoenix, Arizona and its telephone number is (602) 492-0336.

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

Market Overview
                                                                          Page 2
<PAGE>
         Eliminate Based Products

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

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

         The Company  estimates  that in 1998 the annual  U.S.  Market for water
systems treatment chemicals is in excess of $1.0 billion.

Products

         Industrial Products

         The Company's  Industrial Products Group ("IPG") is actively engaged in
the  application  of the  Eliminate  technology to provide  unique  products and
services to its customers. The Company's Pipe-Klean and Well-Klean chemicals are
used as core  products in what are typically  complex water systems  operational
enhancements,  and  as  tools  to  revitalize/rehabilitate  water  systems  with
diminished  capacities.  The  IPG  Field  Services  Division  provides  turn-key
application of all of the IPG technologies.

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

         The Company  currently  segments three markets for Pipe-Klean:  marine,
fire  protection and municipal.  The marine segment is primarily  shipboard pipe
systems for water and waste  water.  The  initial  development  of business  was
produced  from a response  by the U.S.  Coast Guard to a stock  promotion  radio
program.  In  responding to the inquiry from the U.S.  Coast Guard,  the Company
discovered  a large  market in the  vacuum  waste  systems  aboard  most  marine
vessels.  The system  develops an  evaporative  scale in the pipes that requires
cleaning approximately once per year.

         During 1997 the Company  cleaned pipe systems on board eight U.S. Coast
Guard and U.S.  Navy vessels for  aggregate  revenue of  $707,000.  In September
1997, the Company received a five year contract from the U.S. Navy to clean pipe
systems  on  board  ships  for  annual  billings   ranging  from  a  minimum  of
approximately $100,000 to an estimate of $1,200,000.

         The fire  protection  segment  developed  from a  contact  with a major
airport in the Western  United  States.  The fire  sprinkler  system  inside the
international  terminal had become corroded to the point of serious  operational
concern.  The Company cleaned segments of the system in February and March 1998.
Because the Pipe-Klean process is safe and minimally disruptive, it is ideal for
rehabilitation  of the systems.  Additional  customers could be attracted to the
Company's services since insurance premiums are impacted by system performance.
                                                                          Page 3
<PAGE>
         Municipalities represent another market in which the Company can expand
its existing  business  through its patented  technologies.  The Company's  core
patent covers the chemical cleaning of potable  waterlines with acid, neutral or
basic cleaning compositions that are ANSI/NSF Standard 60 certified.

         NSF is a  non-profit  organization  that has been  commissioned  by the
United  States  Environmental  Protection  Agency  (EPA) to develop the drinking
water and drinking water system  standards for the United States.  The standards
that have been developed by NSF have been adopted legislatively in 36 states and
are policy in 12 others.  Virtually  no product can be used in a drinking  water
system in the United States without NSF certification.

         The greatest and most common problem found in municipal  water lines is
tuberculation  which is the  development  of chemical and  biological  corrosion
inside the pipes to the point that the useful  diameter  of the pipe is severely
restricted. It is not unusual to have a four inch mainline with only one inch of
useful diameter remaining. Tuberculation may also cause colored water, bad odors
or taste and increased chemical treatment and pumping costs.

         The Company's  cleaning  process  addresses all but the potential  post
cleaning  red water  concerns.  Because of this,  the  Company  has  developed a
relationship  with  Calgon  Corporation  ("Calgon")  to  address  post  cleaning
corrosion inhibition (passivation) concerns of any potential customer.

         The  Company  signed a joint  marketing  agreement  in April  1997 with
Calgon for the cleaning and  passivation  of potable  water lines as well as the
marketing  of  Well-Klean.  The Company  provides  cleaning  services and Calgon
provides post cleaning water treatment  chemicals as well as marketing  support.
Revenue from municipal contracts was $400,000 in 1997.

         Well-Klean  is used to remove scale and  corrosion in deep water wells.
Over time the slotted  casing that allows water to be lifted with pumps  becomes
clogged.  Well-Klean was the first NSF certified  product to rehabilitate  water
wells. Well-Klean sales were $109,000 in 1997.

         Consumer Products

         Eliminate  Shower  Tub &  Tile  Cleaner.  Eliminate  Shower  Tub & Tile
Cleaner is a cleaning  solution  designed to remove soap scum,  hard water spots
and body oils from shower doors, walls, bathtubs and sinks. It is sprayed on and
rinsed off  approximately  a half hour later.  It is not  necessary  to scrub or
brush.  Eliminate  Shower  Tub &  Tile  Cleaner  is  Green  Cross  certified  as
biodegradable,  and it is the only such cleaner  containing a fragrance which is
also certified biodegradable. Eliminate Shower Tub & Tile Cleaner is packaged in
four sizes:  16, 20 and 32 ounce spray  bottles and gallon  refill  bottles.  In
1997,   approximately  56%  of  the  Company's  total  revenue  from  continuing
operations was derived from sales of Eliminate Shower Tub & Tile Cleaner.

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

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

         Proposed  Consumer  Products.  In order to expand  its  product  lines,
channels  of  distribution  and  classes of trade,  the  Company  has  developed
additional  products,  including  all-purpose  cleaners, a carpet cleaning line,
institutional products and a patented multi-purpose cleaner.


Marketing and Distribution

         Industrial Products
                                                                          Page 4
<PAGE>
         The Company markets its products and services through its marketing and
sales staff and independent distributors and sales representatives. During 1997,
sales to the U.S. Navy represented 40% of total IPG sales.

         As  discussed  above,  the  Company  has also  entered  into  strategic
relationships to market its products and service its customers.

         Consumer Products

         The  Eliminate  Shower  Tub & Tile  Cleaner  is sold by HCPI  primarily
through large  hardware and home  improvement  chains.  During 1997, the Company
sold  $1,474,000  consumer  products  to  The  Home  Depot,  Inc.,  representing
approximately 84% of consumer products sales.

         Advertising

         The Company advertises and publishes in selected industry  publications
and initiates  direct mail pieces to specific  groups of potential  consumers of
its various  products.  The Company also uses an "800" number in connection with
its  advertising,  direct mail programs and order entry. The primary emphasis of
the advertising is to promote awareness of the Company and its various products.

Competition

         Industrial Products

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

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

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

Consumer Products

         The markets for HCPI's products are highly  competitive.  HCPI competes
with numerous  well-established  chemical and consumer products companies,  that
have financial,  marketing,  personnel and other  resources which  substantially
exceed those of HCPI. In addition,  many  competitors  are large companies (e.g.
Johnson Wax,  Zepp/Enforcer)  that have  established  name  recognition of their
product,  have  established  distribution  networks for their  products and have
developed consumer loyalty to such products. HCPI will attempt to increase sales
in 1998 through  additional  retail outlets and other  channels of  distribution
such as catalog and club store sales.
                                                                          Page 5
<PAGE>
Manufacturing and Supplies

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

Patent and Trademark Protection

         The Company has a United  States  patent for the use of its  Pipe-Klean
technology  in the cleaning of potable water  distribution  systems and a United
States patent on the mobile  recirculation  units  employed in the pipe cleaning
process.  The Company has also received a Notice of Allowance for its basic pipe
cleaning patent for the association of European countries and can obtain patents
throughout  Europe in 1998.  Additionally,  the Company has received a Notice of
Allowance  on its  U.S.  Patent  application  for  "Pipe  Cleaning  and  In-Line
Treatment of Spent Pipe Cleaning  Solution",  an  improvement  on the basic pipe
cleaning  technology.  There  are also  three  other  U.S.  Patents  pending  on
improvements and application of the basic technology.

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

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

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

         Eliminate(R),     Clean    Sweep(R),    h.e.r.c.(R),     Well-Klean(R),
Pipe-Klean(R),  and  Line-out(R) are registered  trademarks of the Company.  The
Company also has Eliminate Man(C) registered as a copyright.

         The Company relies on proprietary know-how and confidential information
and  employs  various  methods to protect  the  processes,  concepts,  ideas and
documentation  associated  with its  technology.  However,  such methods may not
afford complete  protection,  and there can be no assurance that others will not
independently  develop  such  processes,   concepts,  ideas  and  documentation.
Although  the Company  requires  all of its  employees  to sign  confidentiality
agreements,  there can be no assurance  that the Company will be able to protect
its trade secrets or that other companies will not acquire  information that the
Company  considers to be proprietary.  Moreover,  there can be no assurance that
other  companies  will  not  independently  develop  know-how  comparable  to or
superior to that of the Company.

Government Regulation
                                                                          Page 6
<PAGE>
         Water  pollution  is  a  major  focus  of  federal,   state  and  local
environment  protection laws and  regulations.  The discharge from water systems
treatment is subject to these laws and  regulation.  The water system  treatment
chemicals  industry and the  Company's  operations  are subject to extensive and
significant  regulation by federal,  state and local  governmental  authorities.
Some  of  such  regulation  is  extensive  and may  from  time  to  time  have a
significant  impact on the  Company's  operations.  The NSF has  indicated  that
Pipe-Klean and Well-Klean  comply with the standards for chemicals  which can be
used in cleaning  drinking  water  systems.  In addition,  many of the Company's
products are Green Cross certified as biodegradable.  Products are biodegradable
if they can be broken  down into  carbon  dioxide,  water and  minerals  without
harmful effects to the environment.

         Some of the  Company's  products  require the use of a chemical that is
classified  under applicable laws as a corrosive  chemical and substance.  There
can be no  assurance  that the Company  will not incur  environmental  liability
arising out of the use of corrosive  substances.  To date,  the Company does not
believe that it has incurred any such  liability.  The Company does not maintain
insurance  to  compensate  it for any  liabilities  it may  incur  if it were to
violate  environmental  laws  or  regulations.  The  use  of  certain  chemicals
contained in the Company's  products is subject to frequently  changing federal,
state and local laws and substantial regulation under these laws by governmental
agencies,  including the 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.

         The Company  believes  that it is in  substantial  compliance  with all
material  federal,  state and local laws and regulations  governing its business
operations and has obtained all material  licenses,  authorizations,  approvals,
orders,  certificates  and permits  required for the  operation of its business.
There can be no assurance  that the Company in the future will be able to comply
with current or future government  regulations in every jurisdiction in which it
will conduct its business  operations without substantial  sanctions,  including
restrictions  on  its  business  operations,  monetary  liability  and  criminal
sanctions,  any of which could have a material adverse effect upon the Company's
business.

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


Research and Development

         The Company  estimates that it spent fifty thousand dollars on research
and development activities during 1997.


Employees

         As of February 20,  1998,  the Company had 29 employees of which 19 are
full time. Three (3) are officers,  sixteen (16) are engaged in field operations
and production,  eight (8) are in  administration,  and two (2) are in marketing
and sales.  Some of the field  employees  are part time.  None of the  Company's
employees is represented  by labor unions or covered by a collective  bargaining
agreement.  The Company  believes  that its  relationship  with its employees is
satisfactory.

Seasonality

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

Item 2.  Description of Property
                                                                          Page 7
<PAGE>
         The Company leases 15,700 and 5,530 square feet of office and warehouse
facilities  in Phoenix,  Arizona and  Portsmouth,  Virginia,  respectively.  The
Phoenix  location is under an operating lease which expires on July 31, 2001 and
provides for monthly payments escalating from $8,796 to $10,053 over the term of
the lease. The Portsmouth facility is under an operating lease expiring December
31, 1998,  with an option to extend the lease for three (3) additional  years to
December  31, 2001.  The lease  provides for monthly  payments  escalating  from
$2,225 to $2,640 over the term of the lease, including the extension term.

         The Company has no policy  regarding  investments in real estate,  real
estate  mortgages,  or  securities of persons  primarily  engaged in real estate
activities. However, the Company currently holds no such investments.

Item 3.  Legal Proceedings

         On  December  19,  1997,  in the  Commonwealth  Court  in the  state of
Virginia,  a former  employee of the  Company  filed a civil  claim,  thereafter
removed  to the  federal  District  Court of  Virginia,  alleging  breach  of an
employment contract action for sales commissions and seeking monetary damages of
$33,355 and anticipatory damages. The Company has substantially denied liability
for the claim and filed a counterclaim alleging conversion and indemnity seeking
monetary damages of $5,088.

         On  January  22,  1998,  Resource  Technology  Group,  Inc.  filed  for
arbitration with the American Arbitration Association of Arizona under a license
agreement  with the Company for the transfer and use of the  Company's  patented
technology,  claiming  breach of  contract  and  misrepresentation  and  seeking
monetary  damages  of  $200,000.  The  Company  denied  the  claim  and  filed a
counterclaim  for  failure  of  performance  seeking  damages  of not less  than
$50,000.

         On March 3, 1998,  Bibeau Water System  Reclamation,  Inc. filed in the
Superior  Court of Arizona a civil  action  claiming  breaches of  contract  and
warranty,  and  alleging  misrepresentation   concerning  a  technology  license
agreement with the Company similar to that of Resource  Technology Group,  Inc.,
seeking  damages in the amount of $200,000.  The Company  intends to  vigorously
contest the complaint and to pursue meritorious counterclaims.

         Although the  resolution of these matters is not known,  management and
its  legal   counsel   believe  the  Company  has   meritorious   defenses   and
counterclaims,  and  believes  the outcome  will have no material  effect on the
Company's operating results and financial position.


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

         No matters were submitted to a vote of the Company's  security  holders
through  solicitation  of proxies or otherwise  during the fourth quarter of the
year ended December 31, 1997.

Part II

Item 5.  Market for Common Equity and Related Stockholder Matters

Trading Markets

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

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

1996                                                 High               Low
----                                                 ----               ---
                                                                          Page 8
<PAGE>
First Quarter                                      $   1.813         $   0.625
Second Quarter                                         2.125             0.750
Third Quarter                                          2.906             1.188
Fourth Quarter                                         3.125             1.500


1997                                                 High               Low
----                                                 ----               ---
First Quarter                                      $   2.500         $   1.250
Second Quarter                                         1.875             1.188
Third Quarter                                          1.719             0.969
Fourth Quarter                                         1.156             0.250


         On March 19, 1998 the last  reported  bid price for the Common Stock as
quoted by Nasdaq was $0.3125.

Holders

         As of March 20,  1998,  there were 74 record  holders of the  Company's
Common Stock. The Company believes that as of such date there were approximately
1,575 beneficial holders of the Common Stock.

Dividends

         To date,  the  Company  has not paid any cash  dividends  on its Common
Stock,  and it does not anticipate  paying any cash dividends in the foreseeable
future.  Until such time as the Company's  term loan is repaid,  the Company may
not pay any  dividends  or make any  other  distributions  with  respect  to its
capital stock without the consent of the lender.

Recent Sales or Grants of Unregistered Securities

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

<TABLE>
<CAPTION>
                                                     Consideration received
                                                       and description of      Exemption      Terms of
Date of        Title of              Amount           underwriting or other      from        conversion
 grant         security                                discounts to market   registration        or
                                                        price afforded to       claimed       exercise
                                                           purchasers
-----------------------------------------------------------------------------------------------------------
<S>        <C>               <C>                        <C>                     <C>       <C>

/6/97 -    Preferred Stock      170,000 shares of         Conversion of         Section    75% of five day
5/12/97     converted into       Preferred Stock         Preferred Stock         4(2)      average closing
             Common Stock        converted into                                              bid price of
                             1,714,101 Common Stock                                        share of Common
                                                                                                Stock
                                                                                             immediately
                                                                                               prior to
                                                                                              conversion

6/18/97      Warrants to             150,000                  None              Section     Exercisable at
           purchase Common                                                       4(2)       $1.312 through
                Stock                                                                          8/18/02

6/21/97 -    Warrants to             130,000               Consulting           Section     Exercisable at
9/30/97    purchase Common                                  Services             4(2)         prices of
                Stock                                                                        $1.00-$2.00
                                                                                               through
                                                                                              to 9/3/04
</TABLE>
                                                                          Page 9
<PAGE>
<TABLE>
<S>        <C>                       <C>                  <C>                   <C>        <C>
9/15/97      Warrants to             125,000              Grant of loan         Section     Exercisable at
           purchase Common                                                       4(2)         prices of
                Stock                                                                        $1.18-$1.47
                                                                                             from 9/1/98
                                                                                              to 8/31/03
</TABLE>

Item 6: Management's  Discussion and Analysis of Financial Condition and Results
of Operations

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

Results of Operations

1997 Compared with 1996

         CCT  results  are not  included in the  following  discussion  as these
results  are  accounted  for  as  a  discontinued   operation  (see  Note  3  to
accompanying financial statements).

         Sales from  continuing  operations for the year ended December 31, 1997
were  $3,163,000  compared  to  $1,224,000  in 1996.  Consolidation  of H.E.R.C.
Consumer  Products  for the full year in 1997 (vs.  only the final six months in
1996 - see Note 4 to accompanying  financial  statements) and higher  Industrial
revenue  from  additional  municipal  and  marine  projects  accounted  for  the
increase.

         Consumer  product  sales in 1997 were  $1,758,000  of which  $1,008,000
occurred  during the six months  ended June 30,  1997.  The increase of $103,000
over full year sales of $1,655,000  in 1996 is attributed to wider  distribution
of  Eliminate  Shower Tub & Tile  Cleaner  offset  somewhat  by certain  product
allowances  granted  during the first  quarter of 1997.  Shipments  of Eliminate
Shower Tub & Tile  Cleaner  accounted  for 98% of Consumer  Products  revenue in
1997;  aggregate  shipments to The Home Depot,  Inc.  accounted  for 84% of such
revenues.

         Industrial  sales in 1997 were  $1,405,000  compared  with  $330,000 in
1996.  Marine Ship Board Pipe Line  Chemical  Cleaning  contracts  accounted for
$707,000 in 1997 of which  $562,000 was realized from work for the U.S. Navy. In
September  1997 the Company  signed a five year  contract with the U.S. Navy for
cleaning  projects with annual revenue  ranging from a minimum of  approximately
$100,000 to an estimate of $1,200,000. Pipe rehabilitation services through both
chemical and mechanical  cleaning produced $400,000 in revenues in 1997 compared
with $87,000 in 1996.

         Consolidated  gross  margins  were 24% in 1997 and 9% in 1996.  Despite
product allowances on certain first quarter shipments,  consumer product margins
improved to 27% for the year 1997 from 22% for the six months ended December 31,
1996 when the  Company  absorbed  certain one time  product  and  freight  costs
associated  with  inventory  acquired  from Conair  (see Note 4 to  accompanying
financial  statements).  Industrial gross margin of 21% was depressed because of
staging  costs in September  1997 for the Navy contract and cost overruns on two
municipal  projects  during  the second  quarter  when the  Company  encountered
weather delays and other unanticipated  interruptions.  However, the 1997 margin
improved  over a negative 18% in 1996 when the Company  incurred  start up costs
associated with initial pipeline  rehabilitation projects and wrote down certain
equipment used in the water system treatment process.

         Although  gross profit  increased  from $105,000 in 1996 to $758,000 in
1997, loss from continuing  operations was $2,628,000  compared to $2,102,000 in
1996,  primarily  because of an increase of  $1,179,000  in  aggregate  selling,
                                                                         Page 10
<PAGE>
general and  administrative  expenses.  Consolidation  of Consumer  Products and
write  down of certain  unamoritized  patent  costs (see Note 1 to  accompanying
financial  statements)  accounted  for $312,000  and  $276,000 of the  increase,
respectively.  The  balance is  attributable  to  additional  selling  and other
personnel related support costs,  professional services (including consideration
of  warrants to acquire  the  Company's  Common  Stock) and an  expenditure  for
technological  development.  Increases in these costs were somewhat mitigated by
the  Company's  cost  containment  efforts which began to take effect during the
third quarter of 1997.

Liquidity and Capital Resources

         Cash and cash  equivalents  were  $1,370,000  at December  31, 1996 and
$135,000 at December 31, 1997 while working capital was $1,926,000 and a deficit
of $834,000 at those respective  dates. Cash and working capital at December 31,
1996 are a  function  of the  private  equity  offering  of  Preferred  Stock in
December 1996 (see Note 10 to accompanying financial statements). The decline in
cash and working  capital during 1997 is a function of the loss from  continuing
operations  with the  impact on cash  somewhat  mitigated  by  depreciation  and
amortization,  the term loan of $250,000 and factoring  arrangement described in
Note 8 to accompanying financial statements.

         As of  December  31,  1997 and March 27,  1998,  the  Company is not in
compliance  with certain  covenants  pertaining to the term loan.  However,  all
payments  required to service the debt have been made on a timely  basis and the
lender has taken no action to accelerate repayment of principal.

         The  conversion  during  1997 of all  Preferred  Stock  outstanding  at
December 31, 1996 into Common  Stock had no impact on cash and cash  equivalents
or working capital.

         For the two months ended  February 28,  1998,  the Company  sustained a
cash drain of approximately $70,000. To continue as a going concern, the Company
must achieve  consistently  profitable  operations  during the second quarter of
1998 and generate adequate  financial  resources.  The Company continues to seek
buyers for certain assets as well as for certain of its  businesses  (see Note 3
to accompanying financial statements).  Also, cash outlays for ongoing operating
expenses have been reduced through the Company's cost containment program.

         The Company does not  consider  additional  debt  financing a realistic
possibility  in the  near  future.  Another  offering  of the  Company's  equity
securities is a possible  source of capital but would  substantially  dilute the
interest of the Company's  existing  stockholders.  Further,  the success of any
additional  equity offering could be adversely  impacted if the Company's Common
Stock is  delisted by the Nasdaq.  As of March 27,  1998,  the Company is not in
compliance with Nasdaq Standards required to maintain listing.

         In the event future cash resources are not realized through  additional
asset sales,  operating  results or other sources,  the Company will not be able
to continue as a going concern.

Other Matters

         The Company has  received  notification  from its provider of financial
and accounting software that such software is structured to accommodate the year
2000 and beyond.

         In June 1997, SFAS No. 130, "Reporting  Comprehensive Income," and SFAS
No. 131,  "Disclosure about Segments of an Enterprise and Related  Information,"
were issued.  No. 130 specifies  presentation  of  comprehensive  income and its
components;  No.  131  requires  certain  additional  information  on  operating
segments,   products  and  services,   geographic  areas  and  major  customers.
Implementation  of both  statements,  which are  effective  for 1998 and  future
years, will have no material impact on the Company's financial statements.

Item 7.   Financial Statements

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

Item 8.   Changes  in  and  Disagreements  With  Accountants  on  Accounting and
Financial Disclosure
          Not Applicable
                                                                         Page 11
<PAGE>
Part III.

Item 9. Directors, Executive Officers, Promoters and Control Persons; compliance
with Section 16(a) of the Exchange Act

Name                       Age                      Position
----                       ---                      --------

S. Steven Carl             40              Chairman of  the Board of  Directors,
                                           Chief Executive Officer and President

Kristi A. Cordray          32              Vice President of Administration

John P. Johnson            56              Chief Financial Officer

Salvatore DiMascio         58              Director

Robert M. Leopold          72              Director

Dr. Jerome H. Ludwig       65              Director

Robert J. Spane            57              Director

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

Kristi A. Cordray has been Vice President of Administration  since May 1996. She
was also named General Manager of HERC Consumer Products, Inc. in June 1997. Ms.
Cordray  joined the Company in December 1991 and has held  positions as Director
of Operations, Marketing Manager and Purchasing Manager.

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

Salvatore  DiMascio has been a Director of the Company since  September 3, 1996.
Since 1986, Mr. DiMascio has been President of DiMascio  Venture  Management,  a
management  and  investment  consulting  firm.  From June 1994 to June 1997, Mr.
DiMascio was  Executive  Vice  President and Chief  Financial  Officer of Anchor
Gaming, a public company.  Among other executive level positions held during his
30 year career,  Mr.  DiMascio  was Senior Vice  President  and Chief  Financial
Officer of Conair  Corporation.  In addition,  he has  experience  in industrial
products manufacturing,  distribution and other service industries. Mr. DiMascio
is  currently a Director of U.S.  Communications  Inc. and  Fotoball  USA,  both
public companies. Mr. DiMascio is a Certified Public Accountant.

Robert M.  Leopold has been a Director of the  Company  since June 5, 1996.  Mr.
Leopold has been the President of Huguenot Associates,  a financial and business
consulting  firms since  1977,  and the  Chairman of the Board of  International
Asset Management Group, Inc. since 1983. During 1997,  Huguenot Associates was a
consultant to the Company.  From June 1982 to December  1990,  Mr.  Leopold held
various  positions  with  Insituform  of North  America,  Inc.,  including  Vice
Chairman (1982-1986), Chief Executive Officer (1986-1989),  Chairman (1986-1987)
and  Advisor to the  Chairman  (1989-1990).  Mr.  Leopold was also a director of
Insituform  Mid-America,  Inc.  Mr.
                                                                         Page 12
<PAGE>
Leopold is a Director of Infodata Systems,  Inc., Dental Services of America and
Standard Security Life Insurance Company of New York, a wholly-owned  subsidiary
of Independence Holding Company.

Dr. Jerome Ludwig has been a Director of the Company since June 1993. He retired
in September  1997 as Executive  Vice  President and Secretary of the Company to
which  positions  he was  elected  in  June  1993.  Dr.  Ludwig  continues  as a
consultant to the Company.  For more than five years prior to 1993, he served as
a scientific  consultant  to the Company and also was engaged as an  independent
business  broker.  Dr.  Ludwig has spent over 40 years in marketing  and product
development in the chemical, plastics and pharmaceutical industries and holds 17
United States patents.

Vice Admiral Robert J. Spane USN (Ret.) has been a Director of the Company since
May 1997.  He has been  Chairman,  Chief  Executive  Officer  and  President  of
Vanguard  Airlines  since 1997.  Mr. Spane served in the U.S. Navy for 35 years,
where  his  last  position  was  Commander,  Naval  Air  Force  Pacific.  He was
responsible for all the finances, training, logistics and the material condition
of all aircraft  carriers,  aircraft and naval air stations in the Pacific.  Mr.
Spane  retired from the Navy in February 1996 and is a 1962 graduate of the U.S.
Naval  Academy.  Mr.  Spane is a director  of  Kangward  Airlines  and Air South
Corporation.

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

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

         The Audit Committee,  currently comprised of Messrs. DiMascio, Leopold,
and Spane, has been formed to: (i) recommend  annually to the Board of Directors
the appointment of the independent auditors of the Company; (ii) review with the
independent auditors the scope of the annual audit and review their final report
relating thereto;  (iii) review with the independent auditors overall accounting
practices,  policies, and accounting and financial controls of the Company; (iv)
be available to the independent  auditors during the year for  consultation  and
(v) review  related  party  transactions  by the Company on an ongoing basis and
review potential conflicts of interest  situations where appropriate.  The Audit
Committee held three meetings during the year ended December 31, 1997.

         The  Compensation  Committee,  currently  comprised  of  Messrs.  Carl,
DiMascio,  Spane  and  Leopold,  has been  formed to  review  overall  executive
compensation  and review the Company's  employee benefit plans. The Compensation
Committee held two meetings during the year ended December 31, 1997.

         The Company is  obligated  through May 1999,  if so  requested by Whale
Securities Co., L.P.  ("Whale"),  the underwriter of its initial public offering
in May 1994, to nominate and use its best efforts to elect Whale's designee as a
director of the Company,  or at Whale's option,  as a non-voting  advisor to the
Board. Whale has not exercised its right to designate such a person.

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

         The Company is obligated , if so  requested  by Inter Equity  Partners,
LLP  ("Inter  Equity"),  to  nominate  and use its best  offers  to elect  Inter
Equity's  designee as a director of the Company.  Alternatively,  Inter  Equity,
which has an outstanding  term loan to the Company,  may send an observer to the
Company's  Board meetings.  Inter Equity,  which has not designated such people,
may  exercise  its right  until  such time as the loan is  prepaid or matures in
2002.

         The Board held four meetings during the year ended December 31, 1997.

Compliance With Section 16(a) of the Exchange Act

         Section  16(a) of the  Securities  Exchanges  Act of 1934,  as amended,
requires the Company's  directors and officers and persons who  beneficially own
more than ten percent of the Company's  Common Stock to file with the Securities
and Exchange Commission ("SEC"), the Nasdaq SmallCap Market and the Boston Stock
Exchange initial
                                                                         Page 13
<PAGE>
reports of ownership of Common Stock in the  Company.  Officers,  directors  and
greater-than-ten  percent of  shareholders  are  required by SEC  regulation  to
furnish the Company with copies of all Section 16(a) reports they filed.  To the
Company's  knowledge,  based  solely  on review  of the  copies of such  reports
furnished to the Company and written  representation  that no other reports were
required,  during the year ended December 31, 1997,  such persons  complied with
all Section 16(a) filing requirements.

Item 10.  Executive Compensation

         Set forth in the following  table is  information as to the salary paid
or accrued to each  officer  and  director  receiving  compensation  of at least
$100,000, and the Chief Executive Officer,  (collectively,  the "Named Executive
Officers") for the three years ended December 31, 1997.
                                                                         Page 14
<PAGE>
Name & Principal Position                                  Year       Salary
--------------------------------------------------------------------------------

S. Steven Carl             Chairman of the Board,          1997        $100,100
                           Chief Executive Officer         1996        $115,500
                           and Director (1)                1995        $ 74,690

Gary S. Glatter            President,                      1997        $191,160
                           Chief Operating Officer and     1996        $152,000
                           Treasurer  (2) (3)              1995        $143,000

(1)  Mr. Carl has served as the Chief Executive Officer since August 1995.
(2)  Mr. Glatter  served as Chief  Operating  Officer  from  August  1996  until
     December 31, 1996.
(3)  In addition,  Mr. Glatter served as President from January 1997 until March
     1997, at which time he resigned and the Company bought  out his  employment
     agreement.

Employment Agreements

         CCT  Corporation  has an  employment  contract  with Mr. S. Steven Carl
which expires May 1, 1999 and provides for an annual base salary of $135,000 per
year,  commencing January 1, 1998. CCT also has an employment  contract with Mr.
Gilbert Crowell which expires May 1, 1999 and provides for an annual base salary
of $100,000 commencing January 1, 1998. Both agreements include  confidentiality
and non-disclosure provisions.

Stock Option Plans

         In 1993,  the Board of Directors of the Company  adopted a Stock Option
Plan  ("1993  Plan")  pursuant  to which  350,000  shares of Common  Stock  were
reserved for issuance to key employees,  including  officers.  Key employees are
persons whose  efforts,  knowledge and expertise are integral to the  operations
and  success  of the  Company.  The 1993  Plan is  administered  by the Board of
Directors,  but the Board of  Directors  may appoint a  committee  to act on its
behalf.  Such options can be incentive stock options ("ISOs") within the meaning
of the Internal  Revenue Code of 1986, as amended,  or options not qualifying as
ISOs  ("Non-qualified  options").  The exercise  price of any ISO cannot be less
than 100% of the fair  market  value  per  share of Common  Stock on the date of
grant (110% of such fair market value if the grantee owns stock  possessing more
than 10% of the combined voting power of all classes of the Company's stock). No
options may be granted after the year 2003. As of February 18, 1998, the Company
had issued under the 1993 Plan 290,000 ISO's, exercisable at prices ranging from
$1.00 to $5.00 per share.

         In 1996, the Board of Directors of the Company  adopted the 1996 Equity
Performance  Plan ("1996  Plan")  pursuant to which  1,000,000  shares of Common
Stock were  reserved  for issuance to key  employees,  officers,  directors  and
consultants of the Company and its subsidiaries,  as both ISOs and non-qualified
options and other equity based awards. Holders of these awards are persons whose
efforts,  knowledge and expertise are integral to the  operations and success of
the Company.  The 1996 Plan is administered  by the Board of Directors,  but the
Board of Directors  may appoint a committee  to act on its behalf.  The exercise
price of any ISO cannot be less than 100% of the fair market  value per share of
Common Stock on the last trading day before the date of grant (110% of such fair
market  value if the grantee  owns stock  possessing  more than 10% of the total
combined voting power of all classes of the Company's stock). The exercise price
of a Non-qualified  Option may not be less than 100% of the fair market value on
the last trading day before the date of grant.  No ISOs may be granted after the
year 2006. As of February 18, 1998 the Company had issued options under the 1996
Plan to acquire  475,400  shares of Common Stock,  exercisable at prices ranging
from $1.00 to $2.50 per  share,  405,400 of which were ISO's and 70,000 of which
were non-qualified options.

Other Options and Warrants

         In addition to the options  under the 1993 Plan and the 1996 Plan,  the
Company  currently  has  outstanding  the following  options and  warrants:  (i)
warrants to purchase  85,000 shares of Common Stock at $3.00 per share issued to
Perrin,  Holden & Davenport  Capital  Corporation in connection with its private
placement in December 1996,  (ii) warrants to purchase an aggregate of 3,214,902
shares of Common  Stock at $2.00 per share issued to investors in the April 1996
private  placement,  (iii) an  option  to  purchase  171,490  units,  each  unit
consisting of one share of Common Stock and one warrant to purchase one share of
Common Stock at $2.00 per share,  issued to GKN and its  designees in connection
with the private  placement  in April  1996,  (iv)  warrants  issued to original
insiders and a consultant  to purchase an aggregate of 100,000  shares of Common
Stock at $5.00 per share,  (v)  warrants  to purchase  an  aggregate  of 130,000
shares of Common
                                                                         Page 15
<PAGE>
Stock at $6.50 per  share  issued to Whale,  the  underwriter  of the  Company's
initial  public  offering,  (vi) warrants  issued to original  bridge  financing
investors and  consultants to purchase  684,000 shares of Common Stock at prices
ranging from $1.06 to $2.75 per share,  (vii) other options  issued to employees
and a former  director  to  purchase  556,000  shares of Common  Stock at prices
ranging  from $1.00 to $4.00 per share,  (viii)  warrants  to  purchase  300,000
shares of Common Stock at prices  ranging from $1.31 to $2.00 per share,  issued
to GKN and its  designees in  connection  with the exercise of 150,000  units in
June 1997 and (ix) warrants to purchase 125,000 shares of Common Stock at prices
ranging from $1.18 to $1.47 issued to  InterEquity  in connection  with the term
loan in September 1997. All of the foregoing  securities are exercisable into an
aggregate of 6,303,282 shares of Common Stock.

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

Options Granted in Last Fiscal Year
<TABLE>
<CAPTION>
                                      % of Total Options
                        Options      Granted to Employees                      Date    Expiration
Name                    Granted         in Fiscal Year       Exercise Price   Vested       Date
-------------------------------------------------------------------------------------------------
<S>                      <C>                <C>                  <C>           <C>         <C>
S. Steven Carl           12,500             1%                   $1.00         1997        2001
                         12,500             1%                   $1.00         1997        2002
                         12,500             1%                   $1.00         1998        2003
                         12,500             1%                   $1.00         1999        2004
                         20,000             2%                   $1.00         1997        2002
                         20,000             2%                   $1.00         1998        2002
                         20,000             2%                   $1.00         1999        2002
                         20,000             2%                   $1.00         2000        2002
                         20,000             2%                   $1.00         2001        2002


Gary S. Glatter         150,000            14%                   $1.75         1997        2003
                        100,000            10%                   $1.75         1997        2005
</TABLE>
Aggregate Year-End Option Values

<TABLE>
<CAPTION>
                           Number of Unexercised Options           Value of Unexercised in-the-money
                              at December 31, 1997                   Options at December 31, 1997
                              --------------------                   ----------------------------
Name                       Exercisable  Unexercisable               Exercisable        Unexercisable
-----------------------------------------------------------------------------------------------------
<S>                           <C>          <C>                          <C>                <C>
Gary S. Glatter               250,000        -0-                        0 (1)              0 (1)

S. Steven Carl                 45,000      105,000                      0 (1)              0 (1)
</TABLE>

(1) The market  value at December 31, 1997 of the Common  Stock  underlying  the
    options was $0.34 per share. The options are  exercisable at prices of $1.00
    or more.

Item 11.   Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth as of March 18, 1998 certain information
regarding the beneficial  ownership of shares of Common Stock by (i) each person
who is known by the Company to beneficially own 5% or more of the
                                                                         Page 16
<PAGE>
outstanding  shares of Common Stock; (ii) each of the Company's  directors;  and
(iii) all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
Name and Address of  Beneficial Owner             Amount and Nature        Percentage of Outstanding
                                                    of Beneficial              Common Stock Owned
                                                     Ownership (1)               Beneficially

<S>                                                  <C>                              <C>
S. Steven Carl (2)(3)                                   874,851                       10.1

Shelby A. Carl (2)(4)                                   743,653                        8.8

Norman H. Pessin (2)                                    422,500                        5.1

Gary S. Glatter (2)(5)                                  250,000                        2.9

Jerome H. Ludwig (2)(6)                                 151,581                        1.8

Robert M. Leopold (2)(7)                                 36,000                          *

Salvatore T. DiMascio (2)(8)                             10,000                          *

Robert J. Spane (2)(9)                                        -                          8

All executive officers and directors                  2,107,585                       22.6
as a group (10) (ten persons)
</TABLE>


*        Less than 1.

(1)      A person is deemed to be the beneficial owner of securities that can be
         acquired  by such  person  within 60 days from March 18,  1998 upon the
         exercise  of  options  and  warrants  or  conversion   of   convertible
         securities.  Each beneficial owner's percentage ownership is determined
         by assuming that options,  warrants and convertible securities that are
         held by such  person  (but not held by any other  person)  and that are
         exercisable or convertible within 60 days from March 18, 1998 have been
         exercised or converted.  Except as otherwise indicated,  and subject to
         applicable  community  property and similar  laws,  each of the persons
         named has sole voting and  investment  power with respect to the shares
         shown as beneficially owned.

(2)      The address  for  Messrs.  S.  Steven  Carl,  Shelby A. Carl,  Glatter,
         Leopold,   Spane,  Ludwig  and  DiMascio  is  c/o  H.E.R.C.   Products,
         Incorporated,  2202 W. Lone Cactus Drive #15,  Phoenix,  Arizona 85027.
         The address for Norman H. Pessin is c/o  Neuberger & Berman,  LLC,  605
         Third Avenue, New York, NY 10158.

(3)      Includes  410,442 shares issuable  pursuant to immediately  exercisable
         options and warrants.  Excludes 92,500 shares issuable on options which
         become exercisable in the future.

(4)      Includes  (i)  186,771   shares   issuable   pursuant  to   immediately
         exercisable  options and warrants,  (ii) 288,553 shares owned of record
         by the Shelby A. Carl Trust, the trustee of which is Mr. Shelby A. Carl
         for the benefit of his wife,  Mrs.  Margaret  Carl,  (iii) 5,623 shares
         owned of record by Shelby A. Carl IRA for the benefit of Mr.  Shelby A.
         Carl and (iv) 29,412 shares owned of record and 29,412 shares  issuable
         upon exercise of  immediately  exercisable  warrants  owned by Margaret
         Carl Sep IRA for the benefit of Margaret  Carl,  the wife of Mr. Shelby
         A. Carl.  Excludes  20,000  shares  issuable  on options  which  become
         exercisable in the future.

(5)      Shares issuable pursuant to immediately exercisable options.

(6)      Includes  150,083 shares issuable  pursuant to immediately  exercisable
         options and warrants. Excludes 20,000 shares issuable on warrants which
         become exercisable in the future.

(7)      Includes  35,000 shares  issuable  pursuant to immediately  exercisable
         options and warrants.  Excludes 10,000 shares issuable on options which
         become exercisable in the future.

(8)      Shares  issuable  pursuant  to  immediately   exercisable  options  and
         warrants.  Excludes  10,000  shares  issuable on options  which  become
         exercisable in the future.

(9)      Excludes 10,000 shares issuable on options which become  exercisable in
         the future.
                                                                         Page 17
<PAGE>
(10)     Includes  shares  referred to as being included in notes (3), (4), (5),
         (6), (7) and (8) and 41,500  shares  issuable  pursuant to  immediately
         exercisable  options.  Excludes shares referred to as being excluded in
         note (3), (4), (5), (6), (7), (8) and (9) and 38,500 shares issuable on
         options which become exercisable in the future.

Item 12.   Certain Relationships and Related Transactions

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

Item 13.  Exhibits and Reports on form 8-K

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

<S>      <C>                                                                               <C>
(3) (1)  Certificate of Incorporation of the Company,
         filed as Exhibit 3.1 to the Company's Registration
         Statement (No. 33-75166).

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

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

(4) (1)  Specimen of Common Stock certificate, (reference also made to exhibit
         3.1 and 3.2), filed as Exhibit 4.1 to the Company's Registration
         Statement (No. 33-75166).

(4) (2)  Form of Underwriter's Warrant Agreement and Warrant
         Certificate, filed as Exhibit 4.2 to the Company's Registration Statement
         (No. 33-75166).

(4) (3)  Form of Subscription Agreement between the Company and
         purchasers of the Series A Preferred Stock, filed as Exhibit 4.1
         of Form 8-K dated December 17, 1996.

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

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

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

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

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

(10) (4) Employment Agreement With Shelby Carl dated March 1994,
         filed as Exhibit 10.4 to the Company's Registration Statement
</TABLE>
                                                                         Page 18
<PAGE>
<TABLE>
<S>      <C>                                                                               <C>
         No. 33-75166.

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

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

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

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

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

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

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

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

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

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

(10)(15) Form of Purchase Option issued to GKN Securities Corporation and its designees
         dated June 18, 1997.

(10)(16) Amendment number two to Employment Agreement by and between Gary S. Glatter and
         the Company dated March 28, 1997.

(10)(17) Amendment number three to Employment Agreement by and between Gary S. Glatter and
         the Company dated October 31, 1997.

(10)(18) Term loan between the Company and InterEquity Partners, LLP dated September 15, 1997.

(10)(19) Account Transfer and Purchase Agreement by and between the Company, H.E.R.C.
         Consumer Products, Inc., and KBK Financial Incorporated dated September 22, 1997.

(10)(20) Agreement by and between the Company and the U.S. Navy dated August 8, 1997.

(10)(21) Lease by and between the Company and Roger Buttrum dated May 14, 1996.
</TABLE>
                                                                         Page 20
<PAGE>
<TABLE>
<S>      <C>                                                                               <C>
(10)(22) Form of Warrant Agreement between the Company and Jerry Ludwig and Associates
         dated September 3, 1997.

(10)(23) Form of Warrant Agreement between the Company and Shelby Carl dated September
         3, 1997.

(10)(24) Amendment to Stock Option Agreement by and between Gary S. Glatter dated
         and the company dated March 23, 1995.

(10)(25) Amendment Number two to Stock Option Agreement by and between Gary S. Glatter
         and the Company dated February 1, 1997.

(21)     Subsidiaries

(23)     Consent of Independent Certified Public Accountants

(27)     Financial Data Schedule

(b)      Reports on Form 8-K:   None.
</TABLE>
                                                                         Page 20
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                                                                        Page No.
                   Index to Consolidated Financial Statements


Report of Independent Certified Public Accountants                        F-2
Financial Statements:
         Consolidated Balance Sheet
                  December 31, 1997                                       F-3
         Consolidated Statements of Operations
                  Years Ended December 31, 1997 and 1996                  F-4
         Consolidated Statements of Stockholders' Equity
                  Years Ended December 31, 1997 and 1996                  F-5
         Consolidated Statements of Cash Flows
                  Years Ended December 31, 1997 and 1996                  F-6

         Notes to Consolidated Financial Statements                       F-7


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



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

We have audited the accompanying consolidated balance sheet of H.E.R.C. Products
Incorporated  and  subsidiaries  as  of  December  31,  1997,  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of H.E.R.C.  Products
Incorporated  and subsidiaries as of December 31, 1997, and the results of their
operations  and their cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements,  the Company has suffered recurring losses from operations
and  has a net  working  capital  deficiency  as of  December  31,  1997.  These
conditions raise  substantial doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2. The financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.


                                           \s\   BDO Seidman, LLP



Chicago, Illinois
January 31, 1998
                                                                             F-2
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                           Consolidated Balance Sheet

                                December 31, 1997

<TABLE>
<S>                                                                              <C>
Assets (Note 8)
Current Assets
     Cash and cash equivalents                                                   $    135,396
     Trade accounts receivable, net of allowance for
           doubtful accounts of $36,205                                               166,751
     Inventories, principally finished goods                                           87,738
     Other receivables                                                                 11,963
     Prepaid expenses                                                                  98,757
                                                                                 ------------
           Total Current Assets                                                       500,605
                                                                                 ------------

Property and Equipment (Note 6)
     Property and equipment                                                         1,057,470
           Less accumulated depreciation                                              235,253
                                                                                 ------------
           Net Property and Equipment                                                 822,217
                                                                                 ------------

Other Assets
     Patents, net of accumulated amortization of $93,789 (Note 1)                      62,642
     Patents pending                                                                   71,146
     Refundable deposits and other assets                                              93,021
     Goodwill, net of accumulated amortization of $8,150 (Notes 1, 3, and 4)          100,519
                                                                                 ------------
            Total Other Assets                                                        327,328
                                                                                 ------------
                                                                                 $  1,650,150
                                                                                 ============

Liabilities and Stockholders' Equity
Current Liabilities
     Accounts payable                                                            $    583,571
     Accrued wages                                                                     91,450
     Current portion of notes payable (Note 8)                                        287,856
     Liabilities of discontinued operation (Note 3)                                   261,272
     Other accrued expenses                                                           110,928
                                                                                 ------------
            Total Current Liabilities                                               1,335,077
                                                                                 ------------

Long-Term Liabilities
     Notes payable, net of current portion (Note 8)                                    66,938
                                                                                 ------------
            Total Liabilities                                                       1,402,015
                                                                                 ------------

Stockholders' Equity (Notes 8, 10 and 12)
     Common Stock, $0.01 par value; authorized 40,000,000 shares;
            issued and outstanding 8,230,588 shares                                    82,306
     Additional paid-in capital                                                    12,947,406
     Accumulated deficit                                                          (12,781,577)
                                                                                 ------------
            Total Stockholders' Equity                                                248,135
                                                                                 ------------
                                                                                 $  1,650,150
                                                                                 ============
</TABLE>
          See accompanying notes to consolidated financial statements
                                                                             F-3
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                                   ------------------------
                                                                  1997                  1996
                                                                  ----                  ----
                                                                                       (Note 3)
                                                                                    -----------

<S>                                                            <C>                  <C>
Sales                                                          $ 3,162,846          $ 1,223,557
Cost of Sales                                                    2,404,864            1,118,513
                                                               -----------          -----------
Gross Profit                                                       757,982              105,044
Selling Expenses                                                   807,955              731,047
General and Administrative Expenses                              2,577,819            1,476,203
                                                               -----------          -----------
Loss from Continuing Operations Before Taxes on Income          (2,627,792)          (2,102,206)
Taxes on Income (Note 7)                                              --                   --
                                                               -----------          -----------
Loss from Continuing Operations                                 (2,627,792)          (2,102,206)
                                                               -----------          -----------
Discontinued Operation (Note 3):
     Operating Loss                                                (94,073)            (300,735)
     Provision for Loss on Disposition                          (1,740,000)                --
                                                               -----------          -----------
Loss from Discontinued Operation                                (1,834,073)            (300,735)
                                                               -----------          -----------
Loss Before Extraordinary Item                                  (4,461,865)          (2,402,941)
Extraordinary Gain on Extinguishment of Debt (Note 5)                 --                137,912
                                                               -----------          -----------
Net Loss                                                        (4,461,865)          (2,265,029)
Non-Cash Dividend on Preferred Stock (Note 11)                      62,842              566,667
                                                               -----------          -----------
Net Loss Allocable to Common Stockholders                      $(4,524,707)         $(2,831,696)
                                                               ===========          ===========

Loss Per Common Share - Basic & Diluted (Note 11)

Loss from Continuing Operations                                $     (0.34)         $     (0.50)
Loss from Discontinued Operations                                    (0.24)               (0.05)
                                                               -----------          -----------
Loss before Extraordinary Item                                       (0.58)               (0.55)
Gain on Extraordinary Item                                            --                   0.02
                                                               -----------          -----------
Net Loss Per Common Share                                      $     (0.58)         $     (0.53)
                                                               ===========          ===========

Weighted Average Common Shares Outstanding                       7,773,951            5,364,420
                                                               ===========          ===========
</TABLE>
          See accompanying notes to consolidated financial statements
                                                                             F-4
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                 Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
                                            Preferred Stock           Common Stock         Additional
                                                                                            Paid-in      Accumulated
                                          Shares      Amount       Shares       Amount      Capital        Deficit         Total
                                          ------      ------       ------       ------      -------        -------         -----
<S>                                     <C>       <C>             <C>         <C>        <C>            <C>             <C>
Balance,
January 1, 1996                             --            --      2,928,441   $ 29,284   $  7,812,619   $ (5,425,174)   $ 2,416,729

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

Issuance of shares of Common
Stock (Notes 5 and 10)                      --            --      3,428,046     34,281      2,767,234           --        2,801,515

Issuance of shares of Preferred
Stock (Note 10)                          170,000  $  1,480,000         --         --             --             --        1,480,000

Company expenses satisfied
by stockholders                             --            --           --         --           29,073           --           29,073

Warrants issued to prepay future
year's expenses (Note 10)                   --            --           --         --           48,000           --           48,000

Imputed dividend on Preferred
Stock (Note 11)                             --            --           --         --          566,667       (566,667)          --
                                        --------  ------------   ----------   --------   ------------   ------------    -----------

Balance,
December 31, 1996                        170,000     1,480,000    6,356,487     63,565     11,223,593     (8,256,870)     4,510,288
                                        --------  ------------   ----------   --------   ------------   ------------    -----------


Net loss                                    --            --           --         --             --       (4,461,865)    (4,461,865)

Conversion of Preferred
Stock to Common Stock (Note 10)         (170,000)   (1,480,000)   1,714,101     17,141      1,462,859           --             --

Exercise of stock options (Note 10)         --            --         10,000        100         19,275           --           19,375

Exercise of warrant (Note 10)               --            --        150,000      1,500        138,750           --          140,250

Costs associated with Preferred Stock       --            --           --         --          (34,813)          --          (34,813)

Warrants issued to prepay future
year's expenses (Note 10)                   --            --           --         --           74,900           --           74,900

Dividend on Preferred Stock payable in
Common Stock upon conversion (Note 11)      --            --           --         --           62,842        (62,842)          --
                                        --------  ------------   ----------   --------   ------------   ------------    -----------
                                                                                                                        -----------
Balance,
December 31, 1997                           --    $       --      8,230,588   $ 82,306   $ 12,947,406   $(12,781,577)   $   248,135
                                        ========  ============   ==========   ========   ============   ============    ===========
</TABLE>
          See accompanying notes to consolidated financial statements
                                                                             F-5
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                                    1997              1996
                                                                                    ----              ----
<S>                                                                             <C>               <C>
Cash Flows From Operating Activities
         Net Loss                                                               $(4,461,865)      $(2,265,029)
                                                                                -----------       -----------
         Adjustments to reconcile net loss to net cash
             used in operating activities
            Depreciation and amortization                                           524,152           195,058
            Provision for loss on discontinued operation                          1,740,000              --
            Change in net liabilities of discontinued operation                     404,890              --
            Expenses paid by stockholders and Common Stock
               and warrants issued for services                                      34,592            45,733
            Extraordinary item, before tax                                             --            (137,912)
            (Gain) loss on sale or disposal of equipment                              5,032           (11,606)
            (Increase) decrease in assets
                Trade accounts receivable                                            59,175             8,313
                Inventories                                                          73,194             7,540
                Other receivables                                                    10,104           (24,620)
                Prepaid expenses                                                     14,241           (19,074)
                Other assets                                                        (44,108)          (39,915)
            Increase (decrease) in liabilities
                Accounts payable                                                    305,268          (153,462)
                Accrued expenses                                                      8,969           126,462
                                                                                -----------       -----------
                    Total adjustments                                             3,135,509            (3,483)
                                                                                -----------       -----------
                         Net cash used in operating activities                   (1,326,356)       (2,268,512)
                                                                                -----------       -----------
Cash Flows From Investing Activities
        Capital expenditures                                                       (311,645)         (124,913)
        Cash received from the sale of equipment                                     12,969            32,475
        Cash paid in acquisition of subsidiary, net of cash acquired                   --            (218,929)
        Proceeds from redemption of certificates of deposit                            --              75,628
        Expenditures related to patents and patents pending                         (99,021)          (77,544)
                                                                                -----------       -----------
                         Net cash used in investing activities                     (397,697)         (313,283)
                                                                                -----------       -----------
Cash Flows From Financing Activities
        Proceeds from issuance of Common Stock                                         --           2,083,720
        (Expenses) proceeds from issuance of Preferred Stock                        (34,813)        1,480,000
        Proceeds from exercise of stock options                                      19,375              --
        Proceeds from exercise of warrant                                           140,250              --
        Proceeds from issuance of notes payable,
          including consideration for warrants                                      393,583           336,000
        Principal payments under long-term debt                                     (28,789)         (279,683)
                                                                                -----------       -----------
                         Net cash provided by financing activities                  489,606         3,620,037
                                                                                -----------       -----------
Net increase (decrease) in cash and cash equivalents                             (1,234,447)        1,038,242
Cash and cash equivalents at beginning of period                                  1,369,843           331,601
                                                                                -----------       -----------
Cash and cash equivalents at end of period                                      $   135,396       $ 1,369,843
                                                                                ===========       ===========

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest                                        $    35,919       $    18,331

During 1996, notes payable to shareholder of $325,000 were repaid through the issuance of common stock.
During 1996 and 1997, inventory of $230,175 and $211,685 respectively was reclassified to property and equipment.
During 1996,  note  payable of  $237,912  was paid in full by issuing  common  stock  with a market  value of  $100,000
     resulting in an extraordinary gain.
In conjunction with  the 1996 acquisition of H.E.R.C.  Consumer Products Company,  the Company  acquired current assets
     of $469,807,  goodwill of $131,342 and current liabilities of $367,795. During 1997, certain adjustments were made
     to assets and liabilities acquired and, accordingly, goodwill was reduced by $22,673.
During 1996 and 1997, the value attributed to warrants issued to prepay future years' expenses was $48,000 and $74,900,
     respectively.
During 1997, 1,714,101 shares of Common Stock were issued upon the conversion of 170,000 shares of Preferred Stock.
</TABLE>
          See accompanying notes to consolidated financial statements
                                                                             F-6
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Nature of Business and Summary of Significant Accounting Policies

H.E.R.C.  Products Incorporated (the "Company")  manufactures consumer and other
water treatment chemicals and provides water pipeline  rehabilitation  services.
The Company markets its consumer products through wholesale and retail customers
and  directs its other  products  and  services  toward  industrial,  marine and
municipal customers.  Through 1997, all sales were within the United States. The
Company's wholly owned subsidiary,  CCT Corporation  ("CCT") which  manufactured
and  distributed  proprietary  agricultural  products,  is  accounted  for  as a
discontinued operation - Note 3.

The Company  historically has had a concentration of significant  customers with
which it considers its commercial  relationships to be good.  However, a loss of
these  customers,  or a  significant  decrease in purchases by these  customers,
would have an adverse effect on the Company's operations.  In 1997, sales to The
Home Depot, Inc. and the U.S. Navy were 47% and 18% respectively of consolidated
sales from  continuing  operations.  Sales to The Home Depot,  Inc.  were 64% of
consolidated sales from continuing operations in 1996.

Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.  CCT is accounted for as
a  discontinued  operation - Note 3; certain 1996 amounts have been  restated to
conform with 1997 presentation.

Patents and Patents Pending

Patents issued are stated at cost which is amortized on the straight-line  basis
over 10 years.  Costs for  patents  pending are  amortized  when the patents are
awarded.  Unamortized  costs for patents  which are denied or have no continuing
application  to the Company's  ongoing  product base are expensed  ($276,000 and
$10,000 in 1997 and 1996 respectively).
                                                                             F-7
<PAGE>
Inventories

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

Goodwill

Goodwill  represents the excess price over the fair value of net assets acquired
and is amortized on a straight-line  basis over 20 years. The Company  evaluates
the   recoverability   and  measures  any  impairment  of  goodwill  based  upon
expectations of future undiscounted cash flows - Note 3.

Property, Equipment and Depreciation

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

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

Taxes on Income

At December 31, 1997,  unused net operating losses of  approximately  $6,700,000
are available for  carryforward  against future years' taxable income and expire
in various years through 2018.

The Company's ability to utilize its net operating loss carryforwards is subject
to an annual  limitation in future  periods due to the 1996 change in ownership,
pursuant to Section 382 of the Internal  Revenue Code of 1986, as amended - Note
10.  Utilization  of  net  operating  loss  carryforwards  will  be  limited  to
approximately  $170,000 annually plus approximately  $2,700,000 in net operating
loss  carryforwards   generated  subsequent  to  the  aforementioned  change  in
ownership.

Statements of Cash Flows

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

Recent Accounting Pronouncements

In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
"Accounting for Stock-Based  Compensation."  SFAS No. 123,  encourages (but does
not  require)  adoption  of  the  fair  method  of  accounting  for  stock-based
compensation  plans.  The  Company  has not  adopted  the fair value  method but
provides the required pro forma disclosures. (Note 12).

The  provisions of SFAS No. 128,  "Earnings  per Share",  are  antidilutive  and
therefore  do not enter into the  determination  of loss per share  shown in the
accompanying financial statements and notes thereto.
                                                                             F-8
<PAGE>
In June 1997, SFAS No. 130, "Reporting  Comprehensive Income," and SFAS No. 131,
"Disclosure  about  Segments of an  Enterprise  and Related  Information,"  were
issued.  No.  130  specifies   presentation  of  comprehensive  income  and  its
components;  No.  131  requires  certain  additional  information  on  operating
segments,   products  and  services,   geographic  areas  and  major  customers.
Implementation  of both  statements,  which are  effective  for 1998 and  future
years, will have no material impact on the Company's financial statements.

Use of Estimates

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported assets and liabilities at December 31,
1997 and the amounts of revenue and expenses during the years ended December 31,
1997 and 1996. Actual results could differ from those estimates.

2.  Basis of Financial Presentation

The  accompanying  financial  statements  have been prepared on a  going-concern
basis which  contemplates  the  realization  of assets and the  satisfaction  of
liabilities  in the  normal  course  of  business.  The  Company  has  sustained
operating  losses  in each of the  years  1994-1997  and has a  working  capital
deficiency of $834,000 at December 31, 1997.  The Company's  ability to continue
as a going concern in the long term is dependent  upon  consistently  profitable
operations  and generation of adequate  financial  resources.  The  accompanying
financial  statements  do not include any  adjustments  that may be necessary if
these results are not achieved.

To raise  additional  cash,  the  Company  continues  to seek buyers for certain
assets as well as for certain of its operating businesses.  The Company has also
implemented a cost containment program to reduce ongoing operating expenses.

In the event  future  cash  resources  are not  realized  through  asset  sales,
operating results or other sources,  the Company will not be able to continue as
a going concern.

3.  Discontinued Operation

During the fourth quarter of 1997, the Company determined that it would exit the
agricultural  business and commenced efforts to dispose of its investment in CCT
which is accounted for as a discontinued operation in the accompanying financial
statements.  Accordingly the  Consolidated  Statement of Operations for the year
ended December 31, 1996 is reclassified.
                                                                             F-9
<PAGE>
The Company is actively  seeking a buyer for CCT, but there is no assurance that
a sale will be concluded.  The Company believes the charge of $1,740,000 ($ 0.22
per share) recorded in the 1997 Consolidated Statement of Operations is adequate
to cover the loss associated  with the  discontinuation  of CCT's business.  The
charge  consists  of a write  off  ($1,478,000)  of  goodwill  arising  from the
Company's  acquisition  of CCT in 1995 and operating  losses and other wind down
expenses in 1998 of $262,000.

CCT operating results were:
                                                   Years Ended December 31,
                                                   ------------------------
                                                         1997           1996
                                                         ----           ----
Sales                                             $ 1,662,318    $ 1,377,085
Expenses                                            1,756,391      1,677,820
                                                  -----------    -----------
Loss from discontinued operation ($0.01 and
     $0.05 per Common Share respectively)         $   (94,073)   $  (300,735)
                                                  ===========    ===========

Liabilities  of  CCT  at  December  31,  1997  consist  of  trade  payables  and
miscellaneous accrued expenses.

4.  Acquisition:

On July 1, 1996,  the Company  acquired  the 50%  interest of H.E.R.C.  Consumer
Products ("LLC") owned by Conair Corporation ("Conair") for $601,149,  including
liabilities assumed. Prior to that date the Company and Conair equally owned the
LLC which was formed to produce and market the Company's consumer products.  The
Company had  accounted for its 50%  investment in the LLC by the equity  method,
and  accordingly,  sales of the LLC prior to July 1, 1996 were not  reported  as
sales of the Company.  Also no amount of the cumulative  losses of the LLC prior
to July 1, 1996 was  recognized by the Company  since its  investment in the LLC
was zero.  The  Company  accounted  for the  acquisition  of the  remaining  50%
interest as a purchase which resulted in $108,669 in goodwill.

Pro forma  results for the year ended  December 31, 1996 are  unaudited and were
prepared as if the aforementioned acquisition had occurred at January 1, 1996:

Sales from continuing operations                                 $1,984,803
Loss from continuing operations before extraordinary item        (2,011,718)
Net loss                                                         (2,174,541)
Loss per common share before extraordinary item                       (0.53)
Net loss per common share                                             (0.51)
                                                                            F-10
<PAGE>
5.  Extraordinary Item

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

6.  Property and Equipment

Property and equipment for continuing operations at December 31, 1997 are:
         Equipment                          $    945,606
         Office furniture and fixtures           111,864
                                            ------------
                                               1,057,470
         Less accumulated depreciation           235,253
                                            ------------
         Net property and equipment         $    822,217
                                            ============

7.  Income Taxes

The Company was in a consolidated loss position for the years ended December 31,
1997 and 1996 and therefore had no federal income tax expense.

Deferred tax assets of approximately  $2,600,000 from loss carryforward benefits
have not been recorded because of the uncertainty of realizing such benefits.

8. Long Term Debt and Other  Financing  Arrangements  Long term debt consists of
the following:

Term loan (less original issue discount of $10,000)         $ 240,000 (a)
Other financing, primarily equipment                          114,794 (b)
                                                            ---------
                                                              354,794
Less current portion                                          287,856
                                                            ---------
                                                            $  66,938
                                                            =========

a.   In September  1997 the Company closed on a five year term loan and borrowed
     $250,000.  Interest is payable monthly at an annual rate of 14%;  principal
     repayments  are over 54  months  and  begin 6 months  after  take-down.  In
     connection with the closing, the Company issued two warrants to the lender,
     each to purchase  62,500  shares of Common Stock at $1.18  (market price at
     closing)   and  $1.475  (25%   premium   over  market  price  at  closing),
     respectively. The Company may prepay the loan; certain fees and conditions,
     including issue of two identical warrants,  apply if prepayment is not made
     within two years of takedown.  At December 31, 1997,  the Company is not in
     compliance with certain  covenants in the loan  agreement;  accordingly the
     total indebtedness is classified as a current liability in the accompanying
     Consolidated Balance Sheet.
                                                                            F-11
<PAGE>
b.   Equipment  financings  are  payable in monthly  installments  over  varying
     periods  through  November 2001.  Interest rates range from 11.5% to 20.0%.
     Principal  payments are $47,856 in 1998,  $43,496 in 1999,  $19,095 in 2000
     and $4,347 in 2001.

c.   In October  1997,  the Company  concluded  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. The arrangement may be canceled by either
     party with 30 days notice. If the Company cancels, certain penalties apply.
     At December 31,  1997,  80% of factored  receivables  amounted to $126,302.
     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.

Substantially  all of the Company's  assets are pledged as security  pursuant to
the arrangements described in subsections a, b and c above.

9.  Lease Commitments

The  Company  has  operating  leases,  expiring  through  2001,  for  office and
warehouse facilities in Phoenix, Arizona and Portsmouth, Virginia and for office
equipment.  Rental expense  associated  with all operating  leases of continuing
operations  was $167,761  and $91,617 for the years ended  December 31, 1997 and
1996, respectively.

Future minimum payments under operating leases as of December 31, 1997 are:

Years Ending

December 31,                                          Amount
------------                                          ------
1998                                                $ 163,405
1999                                                  122,405
2000                                                  126,256
2001                                                   77,487
                                                    ---------
                                                    $ 489,553
                                                    =========

10.  Stockholders' Equity
     --------------------
Convertible Preferred Stock

In December  1996 the Company  completed  a private  equity  offering of 170,000
shares of Class A  Preferred  Stock  ("Preferred  Stock")  for $10 per share and
received net proceeds of  $1,480,000.  The Preferred  Stock had a par and stated
value of $.01 and $10, respectively.
                                                                            F-12
<PAGE>
The holders of the Preferred Stock were entitled to receive  dividends of 10% of
the stated  value per annum from the date of issuance  through  the  "Conversion
Date," as defined,  payable solely in shares of the Company's  Common Stock. The
Preferred Stock and accrued  dividends thereon through the Conversion Date, were
converted  into  1,714,101  shares of Common  Stock  during the first and second
quarters of 1997.  Such amount was  determined  by dividing the aggregate of the
stated value of the  Preferred  Stock plus accrued  dividends by 75% of the five
day average closing bid price of the shares of Common Stock immediately prior to
conversion.

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 entitles
the holder to  purchase  one share of Common  Stock at a price of $2 per share ,
subject to adjustment,  until April 3, 1999.  The placement  agent was granted a
warrant to acquire 321,490 units at .935 per unit which consists of one share of
Common  Stock and one warrant to acquire one share of Common  Stock at $2.00 per
share.  In May 1997,  the placement  agent  partially  exercised the warrant and
acquired  150,000 units. The remaining  171,490 units are currently  exercisable
and expire April 3, 2001. In connection with the partial  exercise,  the Company
granted warrants for purchase of an aggregate  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.

Included in the April 1996 private  placement  were 382,353 units to satisfy the
Company's  obligation to S. Steven Carl and his father,  the Chairman  Emeritus,
who had advanced $325,000 to the Company.

During 1996:

a.   Various  consultants  were paid for services through the issuance of 19,625
     shares of Common  Stock,  and $29,932  was charged to expense  based on the
     market price at the measurement dates.
b.   Warrants were  exercised to acquire 66,000 shares of Common Stock at $2 per
     share.
c.   37,210 shares of Common Stock were issued in  satisfaction  of certain debt
     obligations. See Note 5.

During 1997,  employee stock options were exercised to purchase 10,000 shares of
Common Stock at $1.9375 per share.
                                                                            F-13
<PAGE>
Warrants

In May and September  1993 and January  1994,  the Company  issued  warrants for
600,000 shares of Common Stock.  The warrants became  exercisable in May 1994 at
$2.50 per share and expire at various  dates  through 1999. At December 31, 1997
such warrants for 212,500 shares of Common Stock remain  outstanding  and expire
in 1999.

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

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

Through 1997, the Company issued  warrants for the purchase of 587,500 shares of
Common Stock to various  consultants at exercise prices ranging from $1.06 to $5
per share.  During 1996,  66,000 warrants were exercised at $2 per share. Of the
521,500 warrants outstanding, 409,000 are currently exercisable within the above
price range and expire at various dates through September 2003.

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

Warrants for the purchase of 125,000 shares were issued to a lender in September
1997 - Note 8. Such warrants are  exercisable  September 1998 through  September
2003.

11.  Loss Per Share of Common Stock

Loss per share of Common Stock is based on the weighted average number of shares
of Common Stock  outstanding  during each year.  Shares of Common Stock issuable
upon  exercise of  outstanding  options and warrants are  anti-dilutive  and are
excluded from the computation of shares outstanding.  Similarly, shares issuable
upon  conversion  of  preferred  stock  (Note  10) were  anti-dilutive  and were
therefore  excluded from the computation of shares outstanding in 1996. Loss per
share of Common Stock for the year ended  December 31, 1996  reflects the amount
of  specified  discount  to the  market  price of Common  Stock  into  which the
Preferred Stock was convertible. Accordingly, the net loss applicable to common
                                                                            F-14
<PAGE>
stockholders  was increased by $566,667 for an imputed  Preferred Stock dividend
equivalent to the  conversion  discount,  and loss per share of Common Stock was
increased by $0.11.

The  Preferred  Stock  dividend in 1997 was paid in Common  Stock at the time of
conversion of the Preferred  Stock and was  determined  according to the formula
set forth in Note 10.

12. Stock Based Compensation

In October 1993, the Company  adopted an incentive stock option plan for 350,000
shares of Common Stock which may be granted to employees. The Company adopted an
additional  plan in 1996 for  1,000,000  shares  of  Common  Stock  for grant to
employees,   officers,   directors  and  consultants  of  the  Company  and  its
wholly-owned subsidiaries. The exercise price per share may not be less than the
fair  market  value per share on the date the options  are  granted.  Generally,
options  granted  vest over a period up to five  years and expire  over  varying
periods through 2007.

In addition to the above plans, the Company granted:
a.   an  officer/director  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.
b.   a former  Director  options to purchase  100,000  shares of Common Stock at
     exercise prices ranging from $2.50 to $4.00 per share. The options, granted
     in 1995, are currently exercisable and expire in December 1999.
c.   various key employees options to purchase 290,000 shares of Common Stock at
     exercise prices ranging from $1.00 to $2.50 per share. The options, granted
     through 1997, are exercisable from 1997 to 2001 and expire in various years
     through  2001. At December 31, 1997,  206,000  options are  outstanding  of
     which 186,000 options are exercisable.
                                                                            F-15
<PAGE>
Overall activity in the Company's stock options:
<TABLE>
<CAPTION>
                                                         Years ended December 31,
                                                         ------------------------
                                                 1997                              1996
                                     -------------------------------    ------------------------------
                                                          Weighted-                          Weighted-
                                                           Average                            Average
                                                          Exercise                           Exercise
                                         Shares             Price         Shares               Price
                                         ------             -----         ------               -----
<S>                                   <C>               <C>             <C>                <C>
Outstanding, at beginning of year      1,547,000        $    2.54       1,117,000          $    3.23
Granted                                1,042,500             1.34         575,000               1.75
Exercised                                (10,000)            1.94             --                  --
Canceled                              (1,228,100)            2.35        (145,000)              4.76
                                      ----------                         --------

Outstanding at end of year            1,351,400              1.79       1,547,000               2.54
                                      =========                         =========

Exercisable at end of year              889,000              1.52         595,000               2.79
                                      =========                         =========
</TABLE>

Details regarding the options outstanding at December 31, 1997:

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

 $0.50 - $1.50       669,182     0.70         $1.05        536,971      $1.05
 $1.50 - $2.50       295,483     1.31          1.77        132,011       1.81
 $2.50 - $5.00       386,735     0.53          3.06        220,018       2.50
                   ---------                               -------
                   1,351,400                               889,000
                   =========                               =======

The weighted-average grant-date fair value of stock options granted to employees
during  the  year  and the  weighted  average  significant  assumptions  used to
determine those fair values using a modified Black-
                                                                            F-16
<PAGE>
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,
                                                      ------------------------
                                                       1997               1996
                                                       ----               ----
Grant-date fair value per options                     $1.42              $1.51

Significant assumptions (weighted average)
     Risk-free interest rate at grant date            5.51%              5.67%
     Expected stock price volatility                   134%               236%
     Expected dividend payout                          -                   -
     Expected option life*                        1.2 years          2.7 years
Net loss
     As reported                               $(4,461,865)       $(2,265,029)
     Pro forma                                  (5,279,252)        (2,567,641)
Net loss per share of Common Stock
     As reported                                    $(0.58)            $(0.53)
     Pro forma                                       (0.69)             (0.59)

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

13.  Segment Information

The company's major business segments included in continuing  operations are the
manufacture and distribution of:

a.    Consumer water treatment and related products
b.    Industrial water treatment and related products

Segment  information  for  agricultural  products is not  provided  since CCT is
accounted  for as a  discontinued  operation  in the  accompanying  consolidated
financial statements.

Information by segment for the year ended December 31, 1997:
<TABLE>
<CAPTION>
                                             Consumer     Industrial
                                             Products      Products      Corporate     Consolidated
                                             --------      --------      ---------     ------------
<S>                                        <C>           <C>            <C>            <C>
Sales to unaffiliated customers            $ 1,758,205   $ 1,404,641           --      $ 3,162,846
Income (loss) from continuing operations        11,227      (668,176)   $(1,970,843)    (2,627,792)
Identifiable assets                            265,388       894,381        490,381      1,650,150
Depreciation and amortization                    4,867       366,978        152,307        524,152
Capital expenditures                              --         294,600         17,045        311,645
</TABLE>
                                                                            F-17
<PAGE>
Information by segment for the year ended December 31, 1996:

<TABLE>
<CAPTION>
                                    Consumer      Industrial
                                    Products       Products      Corporate     Consolidated
                                    --------       --------      ---------     ------------
                                    (Note 3)
<S>                               <C>            <C>            <C>            <C>
Sales to unaffiliated customers   $   893,754    $   329,803           --      $ 1,223,557
Loss from continuing operations      (117,896)      (838,892)   $(1,145,418)    (2,102,206)
Identifiable assets                   491,425        883,764      1,672,412      3,047,601
Depreciation and amortization           3,284         41,845         57,458        102,587
Capital expenditures                     --           51,352         45,347         96,699
</TABLE>

14.  Commitments and Contingencies

The Company is a defendant in various legal  actions and claims  incident to the
conduct of its  business.  Although the ultimate  resolution of these matters is
not known,  management and its legal counsel believe the Company has meritorious
defenses and the outcome will have no material effect on the Company's operating
results and financial position.

CCT has an employment contract with Mr. S. Steven Carl which expires May 1, 1999
and provides for an annual base salary of $135,000 per year,  commencing January
1, 1998.  CCT also has an  employment  contract with Mr.  Gilbert  Crowell which
expires  May 1,  1999  and  provides  for an  annual  base  salary  of  $100,000
commencing January 1, 1998.

Management  believes  the  Company  is in  compliance  with  federal  and  state
environmental regulations which pertain to the sale and use of its products.
                                                                            F-18
<PAGE>
                                   SIGNATURES


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


                                           H.E.R.C. PRODUCTS INCORPORATED


                                           By: /s/ S. Steven Carl
                                             -----------------------------------
Dated:  March 27, 1998                      S. Steven Carl, President and Chief
                                            Executive Officer

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

<TABLE>
<CAPTION>
Name                                Title                                               Date
----                                -----                                               ----
<S>                                 <C>                                                 <C>
/s/ S. Steven Carl                  Chairman of the Board, Chief Executive Officer      March 27, 1998
-----------------------------       and President
S. Steven Carl

/s/ Jerome H. Ludwig                Director                                            March 27, 1998
-----------------------------
Jerome H. Ludwig

/s/ Robert M. Leopold               Director                                            March 27, 1998
-----------------------------
Robert M. Leopold

/s/ Salvatore DiMascio              Director                                            March 27, 1998
-----------------------------
Salvatore DiMascio

/s/ Robert Spane                    Director                                            March 27, 1998
-----------------------------
Robert Spane

/s/ John P. Johnson                 Chief Financial Officer (Principal Financial and    March 27, 1998
-----------------------------       Accounting Officer)
John P. Johnson
</TABLE>
                                                                         Page 39