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, 2002


                         Commission File Number 1-13012


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


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


            1420 COLUMBUS AVENUE, PORTSMOUTH, VA 23704 (757) 393-0002
    (Address, including zip code, and telephone number, including area code,
                         of issuer's executive offices)


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

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


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

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

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

State issuer's revenue for its most recent fiscal year.  $6,491,113

As of March 5, 2003,  the  aggregate  market  value of the voting  stock held by
non-affiliates  of the registrant  (7,509,532  shares) was $675,858 based on the
closing  market  price of the Common  Stock on such date as reported by the NASD
Over-The-Counter  Bulletin Board,  or OTCBB, of $0.09.  For the purposes of this
calculation,  all  officers,   directors,  and  10%  beneficial  owners  of  the
registrant are deemed to be affiliates.  Such determination should not be deemed
to be an admission that such officers,  directors, or 10% beneficial owners are,
in fact, affiliates of the registrant.

As of March 5, 2003,  there were  12,129,873  shares of Common  Stock issued and
outstanding.

Documents Incorporated by Reference: None
<PAGE>
                         H.E.R.C. PRODUCTS INCORPORATED
                          ANNUAL REPORT ON FORM 10-KSB
                       FISCAL YEAR ENDED DECEMBER 31, 2002

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I

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

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

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

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

PART II

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

  ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.........................      11

  ITEM 7.  FINANCIAL STATEMENTS.........................................      15

  ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE........................      15

PART III

  ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........      16

  ITEM 10. EXECUTIVE COMPENSATION.......................................      17

  ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................      21

  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............      22

  ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.......................      22

  ITEM 14. CONTROLS AND PROCEDURES......................................      23

SIGNATURES..............................................................      24

CERTIFICATIONS..........................................................      25

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

                 STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     PORTIONS OF THIS REPORT DESCRIBE HISTORICAL  INFORMATION,  SUCH AS THE 2001
AND 2002 OPERATING RESULTS,  AND WE BELIEVE THE DESCRIPTIONS TO BE ACCURATE.  IN
CONTRAST TO DESCRIBING THE PAST, SOME STATEMENTS IN THIS REPORT INDICATE THAT WE
BELIEVE  THAT  EVENTS OR  FINANCIAL  RESULTS  ARE LIKELY TO OCCUR IN THE FUTURE.
THESE  STATEMENTS  TYPICALLY  USE WORDS OR PHRASES  LIKE  "BELIEVE,"  "EXPECTS,"
"ANTICIPATES," "ESTIMATES," "WILL CONTINUE" AND SIMILAR EXPRESSIONS.  STATEMENTS
USING   THOSE   WORDS  OR  SIMILAR   EXPRESSIONS   ARE   INTENDED   TO  IDENTIFY
"FORWARD-LOOKING  STATEMENTS"  AS  THAT  TERM  IS  USED  IN  SECTION  27A OF THE
SECURITIES ACT OF 1933, AS AMENDED,  AND SECTION 21E OF THE SECURITIES  EXCHANGE
ACT OF 1934,  AS AMENDED.  FORWARD-LOOKING  STATEMENTS  INCLUDE  PROJECTIONS  OF
OPERATING  RESULTS FOR 2003 AND BEYOND,  EITHER CONCERNING A SPECIFIC SEGMENT OF
OUR BUSINESS, OR CONCERNING OUR COMPANY AS A WHOLE.

     ACTUAL  RESULTS,  HOWEVER,  MAY BE  MATERIALLY  DIFFERENT  FROM THE RESULTS
PROJECTED  IN THE  FORWARD-LOOKING  STATEMENTS,  DUE TO A  VARIETY  OF RISKS AND
UNCERTAINTIES.  THESE RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH IN ITEM 1,
"DESCRIPTION  OF BUSINESS," IN ITEM 6,  "MANAGEMENT'S  DISCUSSION AND ANALYSIS,"
AND ELSEWHERE IN THIS REPORT.

     THE  FORWARD-LOOKING  STATEMENTS  IN THIS REPORT ARE CURRENT ONLY AS OF THE
DATE THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. AFTER THE
FILING OF THIS REPORT,  OUR EXPECTATIONS AND BELIEFS MAY CHANGE, AND WE MAY COME
TO BELIEVE THAT CERTAIN FORWARD-LOOKING  STATEMENTS IN THIS REPORT ARE NO LONGER
ACCURATE.  WE DO NOT HAVE AN OBLIGATION TO CORRECT OR REVISE ANY FORWARD LOOKING
STATEMENTS IN THIS REPORT, EVEN IF WE BELIEVE THE FORWARD LOOKING STATEMENTS ARE
NO LONGER TRUE.
<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

OUR COMPANY

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

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

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

     Our chemical  products and chemical  cleaning  processes  were developed to
provide a more cost  effective and  efficient  means of cleaning pipe systems in
contrast to replacement,  mechanical scraping, pigging, hydro blasting, or other
pipe cleaning methods. Additionally, our chemical products and chemical cleaning
processes  are safer than many other  chemical  cleaning  methods.  Our chemical
products include the following:

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

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

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

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

     Our   company   was   incorporated   in  Arizona  in   December   1986  and
re-incorporated  in  Delaware  in  May  1994.  Our  executive  offices,  service
operations,  warehouse and manufacturing  facility for our chemical products are
located at 1420 Columbus Avenue,  Portsmouth,  Virginia and our telephone number
is (757) 393-0002.

PRODUCTS AND SERVICES

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

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<PAGE>
eventually  lead to the  plugging or fouling of the  surface,  pipe,  pump,  air
condition system, or other water exposed surface.

     The generally  accepted  cleaning methods for various water systems include
replacement,   mechanical  scraping,  hydro  blasting,   pigging,  and  chemical
cleaning.  We  offer a  method  of  chemical  cleaning  which  we  believe  is a
significant  improvement  over most  other  cleaning  methods  due to  increased
efficiency, safety, and effectiveness with less environmental impact.

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

TANK CLEANING

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

PIPE CLEANING

MARINE SERVICES

     Our marine applications focus on the cleaning of water and waste water pipe
systems on ships  including CHT, tank,  fire main, and  countermeasure  washdown
systems.  For  example,  the vacuum  waste  systems  aboard most marine  vessels
develop a scale in the pipe interiors that requires cleaning  approximately once
every 12-18 months.  The principal  customers of the pipe cleaning  division are
the United  States Coast Guard and the United States Navy. On September 20, 2002
we were  awarded a new  worldwide  five-year  agreement  with the United  States
Navy-Supervisor  of Shipbuilding,  or SupShip,  office in Portsmouth,  Virginia,
which expires  during  September  2007. Of all the firms  responding to the Navy
solicitation,  two awards were made. Under this agreement, we clean pipe systems
on board ships for indefinite  quantities of chemical cleaning services at fixed
prices.  SupShip  offices of the Atlantic and Pacific Fleets and the maintenance
office of the United States Coast Guard use this worldwide CHT contract.

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

FIRE PROTECTION

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

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

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<PAGE>
     The market for fire  protection  system pipe cleaning could grow rapidly if
insurance  companies or governmental  regulation were to require building owners
to maintain properly functioning fire protection systems inside their buildings.
We continue to consult with members of the industry on the  development  of fire
protection  system  operational  maintenance  standards.  In  addition  to  fire
protection system performance problems,  MIC causes minute leaks in water pipes,
which  results in damage to the  building  structure,  equipment,  and  business
inventory  contents.  To avoid  operational  problems and water damage, we offer
fire protection system assessment services which include:

     *    internal fire system pipe inspection and video;

     *    water content analysis;

     *    scale content analysis; and

     *    recommended remediation method.

POTABLE WATER

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

     Over time, potable water lines develop chemical and biological corrosion, a
process known as  tuberculation.  Tuberculation is the most common problem found
in potable water lines, and without proper cleaning,  the useful diameter of the
pipe will become severely restricted. It is not unusual to have a four-inch main
line with only one inch of useful  diameter  remaining.  Tuberculation  may also
cause  colored  water,  bad odors,  unpleasant  taste,  and  increased  chemical
treatment and pumping costs.

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

SPECIALTY CLEANING

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

INDUSTRIAL CHEMICALS

     Our industrial chemicals division manufactures and sells specialty chemical
products using our  proprietary  and patented  formulas for  applications in the
removal of salt,  scale,  and corrosion and in the  maintenance of process water
systems. These products are currently Well-Klean,  Line Out, and several process
water products currently manufactured under private label for DuPont.

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

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

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

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

MARKETING AND DISTRIBUTION

     We market our products and services  through our marketing and sales staff,
independent distributors, sales representatives,  and strategic partnerships and
marketing agreements.  We generate our revenue from relatively few customers and
we expect  the high  concentration  levels to improve in the future as we expand
our services.  Nonetheless,  any material delay,  cancellation,  or reduction of
orders from these customers could have a material  adverse effect on our results
of operations and financial position.

COMPETITION

     Several small regional  companies and certain larger customers compete with
us   for   our   marine   business.   Our   company   competes   directly   with
Layne-Christensen, Inc. in the market for water well cleaning. Chemicals used in
cleaning water systems have generally been  non-proprietary,  readily  available
acids produced by such major chemical companies as DuPont, Dow Chemical Company,
Hill Brothers Chemical Company and Vista Chemical  Company.  These companies are
substantially  larger and have far more  extensive  resources than we do. To the
extent that we seek to sell our water system  pipeline  rehabilitation  products
directly  to end users,  we may be  perceived  as  competing  with the  regional
contractors  to which we  might  also  seek to  market  our pipe  rehabilitation
products and technology.  While they are not as large as the chemical producers,
the contracting companies are still generally larger and more established in the
industry than our company.

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

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

MANUFACTURING AND SUPPLIES

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

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short-term contracts in the ordinary course of business. We believe that the raw
materials and other  supplies are  available  from a variety of sources and that
there are numerous companies available to formulate and package our products.

PATENT AND TRADEMARK PROTECTION

     We rely on patent protection, including the following:

     *    a  series  of  United  States  patents  for the use of our  Pipe-Klean
          technology  in the  cleaning of potable  water  distribution  and fire
          protection systems;

     *    a United States patent on the mobile  re-circulation units employed in
          the pipe cleaning process; and

     *    a series of United States patents on the core chemical technology used
          for pipe cleaning and industrial water applications.

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

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

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

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

GOVERNMENT REGULATION

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

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

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<PAGE>
certain  chemicals  contained in our products is subject to frequently  changing
federal,  state,  and local laws and substantial  regulation under these laws by
governmental  agencies,  including the EPA, the  Occupational  Health and Safety
Administration,  various state agencies, and county and local authorities acting
in conjunction with federal and state  authorities.  Among other matters,  these
regulatory bodies impose requirements

     *    to control air, soil and water pollution;

     *    to protect against occupational exposure to such chemicals,  including
          health and safety risks; and

     *    to require  notification  of the storage,  use, and release of certain
          corrosive chemicals and substances.

     We have obtained  certification  for our Pipe-Klean,  Pipe-Klean  Preblend,
Acid Klean,  and Pipe-Klean  Neutralizer  products as "pipe cleaning aids" under
ANSI/NSF  Standard 60 from NSF for use in potable  water  distribution  systems.
Additionally,  we have  obtained  ANSI/NSF  Standard  60  certification  for our
Well-Klean II Concentrate, Acid Klean, and Well-Klean Preblend products as "well
cleaning aids" for potable water wells.

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

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

RESEARCH AND DEVELOPMENT

     We estimate that we incurred  approximately  $10,000 during fiscal 2002 and
$12,000  during fiscal 2001 on research and  development  activities  related to
improving our cleaning methodologies.

EMPLOYEES

     As of March 5,  2003,  we had 67  employees.  Three  of our  employees  are
executive officers, 55 are engaged in field operations and production,  4 are in
administration,  and 5 are in marketing  and sales.  None of our  employees  are
represented by labor unions or covered by a collective bargaining agreement.  We
believe that our relationship with our employees is good.

SEASONALITY

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

                             SPECIAL CONSIDERATIONS

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

WE DEPEND ON THE UNITED STATES NAVY, WHICH REPRESENTED  APPROXIMATELY 33% OF OUR
REVENUE AND EARL INDUSTRIES,  WHICH REPRESENTED 19% OF OUR REVENUE DURING FISCAL
2002.

     The loss of a  substantial  portion or all of the  business  from either of
these  customers  could result in a material  adverse  effect on our revenue and
results of  operations.  Our  agreement  with the U.S.  Navy  currently  extends
through  September 2007. If the U.S. Navy cuts back or stops using our services,
our sales  staff may not be able to replace  this  customer  in a timely  enough
fashion for our company to continue  operations.  We do not have a contract with

                                       7
<PAGE>
Earl Industries.  In addition, the impact of a war in the Middle East could have
a significant impact upon our business,  since many of the U.S. Navy ships would
be at sea or on call rather than being in maintenance in port.

OUR COMPANY HAS NOT RECENTLY BEEN  PROFITABLE,  MAY NEED FINANCING IN THE FUTURE
AND DOES NOT HAVE ANY COMMITTED SOURCES OF FINANCING.

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

POTENTIAL COMPETITION EXISTS FOR CUSTOMERS IN THE MARINE BUSINESS.

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

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

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

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

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

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

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

A SUBSTANTIAL NUMBER OF SHARES ARE ELIGIBLE FOR FUTURE SALE.

     As of March 5, 2003, there were outstanding 12,129,873 shares of our common
stock.  Approximately  11,962,634  of these shares are freely  tradable  without
restriction or further registration under the securities laws, unless held by an
"affiliate"  of our  company,  as that  term is  defined  in Rule 144  under the
securities  laws.  Shares held by  affiliates  of our company are subject to the

                                       8
<PAGE>
resale  limitations of Rule 144. The  eligibility of these shares for resale may
have a  depressive  effect on the price of our  common  stock or may  reduce the
liquidity of our common stock.

THE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS ON MARKET PRICE AND LIQUIDITY.

     As of March 5, 2003,  we had  outstanding  options and warrants to purchase
1,522,500  shares of our common stock,  and the exercise  price of some of these
options or warrants  are equal to or less than the current  market  price of our
common stock. These options and warrants may have an adverse impact on the price
and liquidity of our common stock in the public  market.  Also,  the issuance of
these shares at prices below the market price will result in dilution to current
stockholders.

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

     Our  directors  and  executive   officers   beneficially  own  a  total  of
approximately  14.2% of the issued and  outstanding  shares of our common stock,
and one non-management  stockholder beneficially owns approximately 26.7% of the
issued  and  outstanding  shares  of our  common  stock.  As a  result  of  this
ownership,  these  persons  have the power  effectively  to control our company,
including  the election of directors,  the  determination  of matters  requiring
stockholder approval, and other matters pertaining to corporate governance. This
concentration  of ownership also may have the effect of delaying or preventing a
change in control of our company.

ENVIRONMENTAL AND OTHER REGULATORY ISSUES MAY IMPACT OUR OPERATIONS.

     Our business  operations at our facility in  Portsmouth,  Virginia  include
some  storing,  mixing and shipping of chemical  cleaning  agents that we use at
customer  sites to clean water pipe systems or sell to  customers.  Sometimes we
may  remove  liquid  product  consisting  of  approximately  90%  water  and 10%
petroleum  (diesel)  product from a customer's job site during our tank cleaning
operations and take this waste to our facility  prior to processing.  While this
residual is not classified as hazardous  waste, we are monitored by the Division
of Environmental  Quality and Hampton Roads  Sanitation  Division and subject to
various federal, state and local laws and regulations. If a spill were to occur,
we could be subject to civil liability to third parties for remediation costs or
other damages if leakage migrates onto the property of others.

ITEM 2. DESCRIPTION OF PROPERTY

     We lease approximately  10,000 square feet of office and warehouse space in
Portsmouth,  Virginia  and  approximately  3,000  square feet in National  City,
California.  We believe that these facilities will be adequate for our needs for
the foreseeable future. Our corporate headquarters were moved to the Portsmouth,
Virginia  office in December 2002 in order to be closer to our largest  customer
and to decrease operating  expenses.  The lease on the Phoenix,  Arizona offices
expired at the end of December 2002.

     Our facility in Virginia has a significant  amount of open space behind the
office/shop.  Several large  above-ground  tank  containers  are located in this
area.  Some of the  containers  may  contain a  combination  of  water,  muck or
residual from old tank cleaning jobs. Before we vacate this facility, we will be
required  to  dispose  of all  waste  properly.  We have  estimated  the cost of
clean-up and  disposal to be $114,500.  This amount has been accrued at December
31, 2002. The facility lease expires in 2004.

ITEM 3. LEGAL PROCEEDINGS

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

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

     Not applicable.

                                       9
<PAGE>
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

                                            High            Low
                                           ------         ------
2002:
  First Quarter.......................     $ 0.16         $ 0.09
  Second Quarter......................       0.19           0.09
  Third Quarter.......................       0.19           0.09
  Fourth Quarter......................       0.16           0.06

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

     As of March 5, 2003,  there were 134 record holders of our common stock. On
March 5, 2003,  the closing  sales price of our common  stock as quoted by OTCBB
was $0.09.

DIVIDEND POLICY

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

                                       10
<PAGE>
EQUITY COMPENSATION PLAN INFORMATION

     The following table sets forth information with respect to our common stock
that may be issued upon the exercise of stock options  under our 1993  Incentive
Stock Option Plan, our Performance  Equity Plan, and other  outstanding  options
and warrants as of December 31, 2002

<TABLE>
<CAPTION>
                                                                                          Number of Securities
                                                                                         Remaining Available for
                                Number of Securities to be       Weighted Average         Future Issuance Under
                                 Issued Upon Exercise of        Exercise Price of       Equity Compensation Plans
                                   Outstanding Options,        Outstanding Options,      (Excluding Securities
Plan Category                      Warrants, and Rights        Warrants, and Rights       Reflected in Column 2)
-------------                      --------------------        --------------------      ----------------------
<S>                             <C>                            <C>                      <C>
Equity Compensation Plans
Approved by Stockholders              1,055,000                       $0.22                      3,005,000

Equity Compensation Plans Not
Approved by Stockholders                467,500                       $1.39                             --

Total                                 1,522,500                       $0.58                      3,005,000
</TABLE>

RECENT SALES OF UNREGISTERED SECURITIES

     During the fourth  quarter of 2002 we issued  50,001 shares of common stock
as  compensation  to our outside  Directors.  These  shares were issued under an
exemption  from  registration  pursuant to Section 4(2) of the Securities Act of
1933.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

     We derive the  majority of our revenue from two  sources,  cleaning  vacuum
sewer  "CHT"  systems on U.S.  Navy and U.S.  Coast Guard  vessels and  cleaning
bilge, fuel, oil, catapult and CHT tanks on ships. A significant  portion of the
pipe cleaning has been performed  pursuant to a five-year contract with the U.S.
Navy (Portsmouth CHT contract).  This has subjected us to certain business risks
that have caused volatility in our revenue stream and our gross margins. We have
also been subject to the deployment and servicing  schedules of the U.S. Navy as
well as the available  maintenance  funds in the Navy budget.  These factors can
cause revenue to change dramatically from one quarter to the next. Additionally,
we have  been  required  by our  Portsmouth  CHT  contract  to  perform  work on
different  classes of ships.  Performing work on different  classes of ships can
cause our gross  margins to vary widely from one quarter to the next  because we
realize  higher  gross  margins  on  certain  classes  of ships  than on others.
Moreover,  we are often asked to perform  work on ships  outside of the state of
Virginia.  When we perform work under the Portsmouth CHT contract outside of the
state of Virginia,  we incur certain reimbursable travel costs that are included
in both revenue and cost of goods sold.  These  reimbursable  travel costs cause
gross  margins to be lower than the  margins  that  would  have  otherwise  been
recognized had the work been performed in Virginia.

     On September 20, 2002,  we were awarded a new  five-year  contract with the
U.S. Navy to use our chemical  cleaning  technology to clean CHT systems on U.S.
Navy and other military vessels on a worldwide basis. The agreement  requires us
to fulfill "indefinite  delivery indefinite  quantity" task orders for the first
year award and four option years  through the USN  Supervisor  of  Shipbuilding,
Portsmouth,  Virginia. Of all the firms responding to the Navy solicitation, two

                                       11
<PAGE>
awards were made for the contract  after careful  evaluation in accordance  with
the  solicitation  based on a  determination  of "best  value" to the Navy.  The
aggregate  contract  minimum for the two awards is $107,097  while the aggregate
contract  maximum  for the two awards is a total of  $5,948,312  for each of the
five years;  however,  the U.S. Navy will determine the allocation of the awards
between us and the other service  provider.  Historically,  we have demonstrated
the ability to obtain  additional work once we have commenced service on board a
ship.

CRITICAL ACCOUNTING POLICIES

     We  consider  the  following  accounting  policies  to  be  critical  to an
understanding of our financial  statements  because their application places the
most  significant  demands on our judgment,  with  financial  reporting  results
relying on estimates about the effect of matters that are inherently  uncertain.
Specific  risks for these  critical  accounting  policies  are  described in the
following  paragraphs.  For all of these policies, we caution that future events
rarely develop  exactly as forecast,  and the best estimates  routinely  require
adjustment.

REVENUE RECOGNITION

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

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

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

DEFERRED TAX ASSETS

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

                                       12
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS

     We  periodically  evaluate  the  carrying  value of  long-lived  assets and
intangibles.  We review  long-lived assets and certain  identifiable  intangible
assets  to be held and used in  operations  for  potential  impairment  whenever
events or circumstances indicate that the carrying amount of an asset may not be
fully  recoverable.  An impairment loss is recognized if the sum of the expected
long-term  undiscounted  cash  flows is less  than the  carrying  amount  of the
long-lived  assets being evaluated.  Future losses may be recorded if cash flows
are less than expected.

ACCRUALS

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

     Other  significant  accounting  policies,  not  involving the same level of
judgment as those  discussed  above,  are  nevertheless  important to a complete
understanding  of the  financial  statements.  Please refer to footnote 1 in the
financial   statements  for  a  more  in-depth  discussion  of  our  significant
accounting policies.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED WITH FISCAL YEAR ENDED
DECEMBER 31, 2001

     Sales for the fiscal year ended December 31, 2002 were $6,491,113  compared
with $5,966,564 during fiscal 2001--an 8.8% overall increase.

     Tank  cleaning  service  revenue  totaled  $3,142,805  in fiscal  2002,  as
compared to  $1,335,795  during  fiscal 2001,  our first year of offering  these
services. This represents a 135% increase over 2001, and accounts for 48% of our
total revenue in 2002. Pipe cleaning  service revenue was $3,176,334 in 2002, as
compared to  $4,381,089 in 2001. A total of  $2,167,234  pipe  cleaning  service
revenue was billed under the Portsmouth CHT contract with the United States Navy
in 2002,  as compared to  $2,670,958  in 2001.  Industrial  chemical  sales were
$171,974 during fiscal 2002 compared with $249,680 during fiscal 2001.

     Our sales mix during 2002 changed  significantly  from 2001.  Tank cleaning
service revenue surpassed pipe cleaning service revenue in 2002 after our second
year in the tank  cleaning  business.  Our  continued  efforts to diversify  our
revenue  base to  different  customers  and  markets  in  order  to  reduce  our
dependence on one large  customer is being  achieved.  Our CHT contract with the
U.S.  Navy  accounted  for 73% of total sales in 2000,  45% in 2001,  and 33% in
2002.

     We currently  focus  specific  sales and marketing  efforts in the areas of
marine, industrial and municipal pipe cleaning as well as in the areas of marine
and land based tank cleaning.  In the future, we plan to continue our efforts to
diversify our revenue sources and thereby our reliance on one large customer.

     Consolidated  gross margins were 42.5% during  fiscal 2002 and 2001.  Gross
margins for our tank cleaning services increased from 28.1% in 2001 in our first
year of  business  in this  area to 43.9% in 2002.  We  expect  that our  future
margins  will  remain at the level we  experienced  during  fiscal  2002.  Gross
margins for our pipe  cleaning  services were 40.5% in 2002 as compared to 44.6%
in 2001.  This  decrease  reflects  the  competitiveness  of the  pipe  cleaning
business with the U.S.  Navy. We anticipate  that future  margins will fluctuate
with changes in revenue mix and other operational factors.

     Gross profit  increased to $2,761,077  during  fiscal 2002 from  $2,555,694
during  fiscal  2001.  The  increase  in gross  profit  was the result of higher
revenue and improvement in the Tank cleaning services gross margins.

                                       13
<PAGE>
     Selling expenses  increased to $462,532 during fiscal 2002 from $291,509 in
fiscal  2001.  Selling  expenses  in our two  largest  segments,  pipe  and tank
cleaning,  declined from 2001. In 2002 pipe and tank cleaning  selling  expenses
were  $157,746  as  compared  to  $176,383  in  2001.  Selling  expenses  in our
industrial  chemical and specialty  pipe cleaning  segment were $304,786 in 2002
and $115,126 in 2001.  This  increase  reflects an  investment  in two key sales
people  and  related   sales   efforts   and  support  to  continue   our  sales
diversification  in the municipal and  manufacturing  segments of specialty pipe
cleaning and industrial chemical sales segment.

     General and  administrative  expenses increased to $2,644,771 during fiscal
2002 from  $2,365,632  during  fiscal 2001.  Almost all of this  increase can be
attributed  to three  non-recurring  items.  In December  2002 we relocated  our
corporate office from Phoenix,  Arizona to Portsmouth,  Virginia to be closer to
our current  customer base and to reduce operating  expenses.  The total cost of
this move was approximately  $87,000.  In conjunction with this move, we hired a
new Chief Financial Officer. The increase in general and administrative expenses
is also  attributable  to our decision to settle a legal dispute  during October
2002 and the  related  legal  fees.  In  addition,  the bad debt  allowance  was
increased  approximately  $100,000  at  September  30,  2002 to account  for the
extremely slow payment of a customer.  Subsequently,  we received  approximately
$20,000 from this customer,  and the reserve for this  receivable was $80,000 at
year-end.

     Other income and expense in 2002 reflects income of $142,446 versus expense
of $62,160.  On June 14, 2002,  we executed a release and  assignment  agreement
that  assigned all of our right,  title and interest in any patents,  royalties,
manufacturing  rights  or any other  rights in the  product  Chlor*Rid  (R).  In
return, we received a cash payment of $225,000 from Chlor*Rid (R) International.
This payment was accounted for as other income.

     For the year ended  December  31,  2002,  our  operating  loss was $346,226
compared to an operating  loss of $153,825 for the same period in 2001. Net loss
for fiscal 2002 was $203,780 compared to a net loss for fiscal 2001 of $163,607.

LIQUIDITY AND CAPITAL RESOURCES

     Cash was  $254,859  at December  31, 2002 and $75,759 at December  31, 2001
while working capital was $258,408 and $397,407 at those  respective  dates. Our
ability to collect accounts receivable during the year resulted in our increased
cash position at December 31, 2002.

     During 2002 we modified our factoring  agreement.  The initial payment when
the factor purchases eligible accounts receivable increased from 80% to 85%, the
total amount of the facility was  increased  from  $600,000 to  $1,000,000,  the
fixed  discount was reduced  from 1% to 0.75% of the gross face amount  payable,
and interest  payable was reduced from the lender's  Base Rate plus 2.0% to Base
Rate plus 1.5%.  Interest  on the  outstanding  balance  accrues on the basis of
actual days elapsed  from the date of the advance  until three  (decreased  from
five) days after collection of such account. Our inventory, accounts receivable,
contract rights, and other general intangibles secure the amounts factored under
the agreement.  We are required to maintain  tangible net worth of not less than
$750,000  during the term of the  agreement.  As of December  31,  2002,  we had
factored $719,132 of accounts receivable. Additionally, as of December 31, 2002,
there are certain financial covenants in relation to this factoring  arrangement
in which we are in compliance.

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

     On February 27, 2003,  we entered into a one-year  renewable  Interest Only
Non-Recourse Promissory Note and Security Agreement for $400,000 with one of our
Directors. The note can be renewed at the end of the original term by the mutual
agreement of both parties.  The proceeds will be used to expand our CHT and tank
cleaning  business on the West Coast and support  working  capital  needs in our
current operations.

     We believe  that our  current  cash and  revenue  from  operations  will be
sufficient to fund our operations for the foreseeable  future.  We may, however,
sell additional securities to raise capital. Any such sale, if necessary,  could
substantially  dilute  the  interest  of our  existing  stockholders.  We cannot
provide any  assurance  that we will be able to sell  additional  securities  at

                                       14
<PAGE>
terms  acceptable to us. We may, in the future,  make  acquisitions by utilizing
debt  financing.  Any such  acquisition and debt financing could have a material
adverse impact on our liquidity and results of operations.

ITEM 7. FINANCIAL STATEMENTS

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

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

     Not applicable.

                                       15
<PAGE>
                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

           NAME                 AGE                   POSITION
           ----                 ---                   --------
S. Steven Carl.............     46     Chairman of the Board of Directors,
                                       Chief Executive Officer and President
John Talkington............     58     Vice President, Chief Financial Officer
John A. Gulick III.........     48     Vice President, Corporate General Counsel
R. John Armstrong..........     59     Director
Robert Affholder...........     68     Director
John B. Furman.............     58     Director

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

     JOHN  TALKINGTON  joined our company in October  2002 and has served as our
Vice President,  Chief Financial  Officer since December 2002.  Prior to joining
our company, Mr. Talkington had 15 years experience as Chief Financial Officer ,
including  serving as Chief Financial  Officer at Aelix,  Inc. from June 2000 to
March 2001,  at Satellite  Communication  Systems,  Inc from  September  1999 to
December  1999, at Vision  Internet from January 1999 to August 1999,  and at C.
Lloyd Johnson Co, Inc. from August 1985 to November 1998.  During this time, Mr.
Talkington  also  served  12 years on the  Board of  Directors  of the C.  Lloyd
Johnson  Co.,  Inc.  and  one  year  on the  Board  of  Directors  of  Satellite
Communication  Systems,  Inc. Prior to serving as a Chief Financial Officer, Mr.
Talkington  held  several  financial  management  and analyst  positions  in the
manufacturing companies of Georgetown Industries, Inc. and Ford Motor Company.

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

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

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

     JOHN B.  FURMAN  has served as a Director  of our  company  since May 2002.
Since January 2000, Mr. Furman was a Crisis Management  Consultant  working with
the boards of various  Phoenix,  Arizona based publicly traded  companies.  From
November 1998 until January 2000,  Mr.  Furman was  President,  Chief  Executive
Officer,  and a Director  of Rural  Metro  Corporation,  a public  company and a
provider of emergency and fire  protection  services.  From 1983 until  November
1998,  Mr.  Furman was a Senior  Member and  Chairman  of the  business  law and

                                       16
<PAGE>
financial  services group of O'Connor,  Cavanagh,  Anderson,  Killingsworth  and
Beshears.  From April 1978 until December 1983, Mr. Furman was Associate General
Counsel for Waste Management, Inc.

BOARD OF DIRECTORS

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

     Outside  directors  receive an annual  retainer  in the amount of  $15,000,
payable as follows,  (a) $1,500 semi-annually on the first day of the second and
fourth quarters following such election,  (b) $1,000 for personal  attendance at
quarterly meetings of our board of directors, and (c) the issuance of our common
stock payable quarterly on the first day of each quarter in an amount equivalent
to $2,000 of market  value  measured on the close of trading of the last trading
day of the  prior  quarter.  We  reimburse  expenses  of our  outside  directors
incurred in connection with service to our company.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Section  16(a) of the Exchange Act requires our  directors,  officers,  and
persons who  beneficially  own more than ten percent of our common stock to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission. Officers, directors, and 10% stockholders are required to furnish us
with copies of all Section  16(a)  reports they file.  To our  knowledge,  based
solely on  review of the  copies of such  reports  furnished  to us and  written
representation  that no other  reports  were  required,  during  the year  ended
December  31,  2002,  such  persons  complied  with  all  Section  16(a)  filing
requirements.

ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth information concerning the compensation paid
or accrued to our Chief Executive Officer for the three years ended December 31,
2002.  None of our  other  executive  officers  earned  cash  salary  and  bonus
exceeding $100,000 during fiscal 2002.

<TABLE>
<CAPTION>
                                                                   LONG TERM COMPENSATION
                                                                   ----------------------
                                                                           AWARDS
                                                                   ----------------------
NAME AND                                    ANNUAL COMPENSATION          SECURITIES
                                           ---------------------         UNDERLYING              OTHER
PRINCIPAL POSITION                YEAR     SALARY (1)     BONUS          OPTIONS (2)        COMPENSATION(3)
------------------                ----     ----------     -----          -----------        ---------------
<S>                               <C>      <C>           <C>       <C>                      <C>
S. Steven Carl.................   2002      $146,939     $    --                --               $8,750
  Chairman of the Board, Chief    2001      $140,233     $25,000           125,000               $9,285
  Executive Officer, and          2000      $129,706     $21,282                --               $8,155
  President
</TABLE>

----------
(1)  Mr.  Carl also  received  certain  perquisites,  the value of which did not
     exceed 10% of his salary and bonus during fiscal 2002.
(2)  The  exercise  prices of all stock  options  granted were equal to the fair
     market value of our common stock on the date of grant.
(3)  Other  compensation  consists of 401(k) Plan matching  contributions and an
     automobile allowance.

EMPLOYMENT AGREEMENT

     During June 2002,  we entered into an employment  agreement  with S. Steven
Carl. The employment agreement had an initial term through June 14, 2003, and is
subject to automatic  renewal for successive  one-year terms unless either party
requests to renegotiate or terminates the agreement by giving the other party at
least six months' written notice.

     Mr. Carl's employment  agreement provides for him to serve as our President
and Chief Executive Officer.  The employment  agreement provides for Mr. Carl to
receive a base  salary of  $150,000.  However,  in the  event the  agreement  is
automatically renewed, the base salary will not increase without approval by the
Board of Directors. Mr. Carl is also entitled to receive annual bonuses, payable

                                       17
<PAGE>
in cash or with shares of our common  stock,  equal to 7.5% our annual  earnings
before interest,  taxes,  depreciation and amortization  before giving effect to
any  extraordinary  accounting  events or accounting  impacts from  discontinued
operations.  Mr. Carl  received a cash bonus of $25,000  during  fiscal 2002 for
2001 results.  No bonus has been accrued for 2002 results.  The value of bonuses
paid in common stock shall be based on the closing bid price of our common stock
on the last trading day of the  relevant  year to which the bonus  relates.  Our
Board of Directors  may also award Mr. Carl such other  bonuses and increases in
base salary as warranted from time to time.

     In addition, the employment agreement generally requires us to

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

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

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

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

     The employment agreement also prohibits Mr. Carl from

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

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

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

PERFORMANCE EQUITY PLAN

     During 1996, we adopted the  Performance  Equity Plan to enable our company
to  offer  to  our  key  employees,  officers,  directors,  and  consultants  an
opportunity  to acquire a proprietary  interest in our company and to link their
interests  and  efforts to the  long-term  interests  of our  stockholders.  Our
stockholders  approved the plan during July 1996 and on August 1, 2002  approved
an  amendment to the plan to increase  the  available  shares that may be issued
under this plan from 1,000,000 to 4,000,000.  The plan provides for the granting
of awards to employees, officers, directors, and consultants eligible to receive
awards under the plan. These awards may include stock options, restricted stock,
stock appreciation rights, deferred stock, stock reload options, and other stock
based  awards.  As of March 5, 2003, we have issued 80,000 shares of stock under
the plan, and there were  outstanding  options to acquire  855,000 shares of our
common stock. The plan will remain in effect until no further grants can be made
and no awards remain outstanding,  however,  incentive stock options may only be
granted through May 2006.

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

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

                                       18
<PAGE>
     The  exercise   prices,   expiration   dates,   maximum  number  of  shares
purchasable,  and the other provisions of the options will be established at the
time of grant. The exercise prices of options may not be less than 100% (110% if
the option is granted to a  stockholder  who, at the time of grant,  owns common
stock  possessing  more than 10% of the  combined  voting  power of all class of
stock of our  company) of the fair market  value of our common stock on the date
of grant.  Options  may be granted for terms  determined  by the  committee  and
become  exercisable in whole or in one or more  installments at such time as may
be  determined  upon grant of the options,  and may be waived at any time by the
committee.

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

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

1993 INCENTIVE STOCK OPTION PLAN

     During October 1993, we adopted,  and our stockholders  approved,  the 1993
Incentive  Stock  Option  Plan  to  advance  the  interests  of our  company  by
encouraging  and enabling key  employees to acquire a financial  interest in our
company and to link their  interests and efforts to the  long-term  interests of
our  stockholders.  The plan  provides for the granting of stock  options to key
employees  of our  company.  A total of  350,000  shares of common  stock may be
issued under the plan.  As of March 5, 2003,  10,000  shares of our common stock
had been issued upon exercise of options  granted under the plan, and there were
outstanding  options to acquire  200,000  shares of our common  stock  under the
plan.

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

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

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

OPTIONS AND WARRANTS

     In addition to the options under the 1993 Plan and the  Performance  Equity
Plan, as of March 5, 2003, we had outstanding the following options and warrants
to purchase an aggregate of 467,500 shares of our common stock:

     *    warrants  to  purchase  217,500  shares of common  stock at  exercises
          prices  ranging from $0.22 to $1.48 per share  issued to  consultants.
          These warrants are currently  exercisable  and expire on various dates
          through September 2005; and

     *    other  options  to  purchase  250,000  shares  of  common  stock at an
          exercise  price of $1.75 per share  issued  to an  ex-employee.  These
          options  are  currently  exercisable  and  expire on May 31,  2003 and
          December 1, 2005.

                                       19
<PAGE>
OPTION GRANTS

     The following  table provides  information on stock options  granted to our
Chief Executive Officer during the fiscal year ended December 31, 2002.

                        OPTION GRANTS IN LAST FISCAL YEAR

                                        INDIVIDUAL GRANTS
                        ------------------------------------------------------
                         NUMBER OF       PERCENT OF
                        SECURITIES     TOTAL OPTIONS
                        UNDERLYING      GRANTED TO      EXERCISE
                          OPTIONS       EMPLOYEES IN      PRICE     EXPIRATION
NAME                    GRANTED (#)     FISCAL YEAR       ($/SH)       DATE
----                    -----------     -----------       ------       ----
S. Steven Carl.......       --              --              --          --

YEAR END OPTION HOLDINGS

     The following  table provides  information  with respect to options held by
our Chief Executive Officer as of December 31, 2002. Our Chief Executive Officer
did not exercise any options during fiscal 2002.

                      OPTIONS HELD AS OF DECEMBER 31, 2002

                                   NUMBER OF SECURITIES UNDERLYING
                                        UNEXERCISED OPTIONS
                                        AT DECEMBER 31, 2002
                                   -------------------------------
NAME                               EXERCISABLE(1)    UNEXERCISABLE
---                                --------------    -------------
S. Steven Carl.......                 350,000              --

----------
(1)  None of the  exercisable  options listed had any value at fiscal  year-end,
     because the  exercise  prices of all options  were  greater  than $0.09 per
     share,  which was the closing  sales price of our common stock as quoted on
     the OTCBB on December 31, 2002.

                                       20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

     The following table sets forth certain information  regarding the shares of
our common stock beneficially owned as of March 5, 2003 by Mr. Carl, each of our
directors, each person known by us to be the beneficial owner of more than 5% of
our common stock, and all of our directors and officers as a group.

<TABLE>
<CAPTION>
                                                                               SHARES
                                                                            BENEFICIALLY
NAME OF BENEFICIAL OWNER                                                      OWNED (1)         PERCENT (2)
------------------------                                                      ---------         -----------
<S>                                                                         <C>                 <C>
DIRECTORS AND EXECUTIVE OFFICERS:
S. Steven Carl (3)..................................................            867,709            7.0%
R. John Armstrong...................................................            243,985            2.0%
Robert Affholder....................................................            161,280            1.3%
John B. Furman......................................................             61,667             *
All directors and executive officers as a group (6 persons) (4).....          1,789,641           14.2%

5% STOCKHOLDERS:
Lance Laifer (5)....................................................          3,240,000           26.7%
Norman H. Pessin (6)................................................            985,000            8.1%
Shelby A. Carl (7)..................................................            663,470            5.4%
</TABLE>

----------
*    Less than 1%
(1)  Except  as  indicated,   and  subject  to  community   property  laws  when
     applicable,  each  officer and  director  named in the table above has sole
     voting  and  investment  power with  respect to all shares of common  stock
     shown as beneficially  owned by them. Except as otherwise  indicated,  each
     director,  officer, or 5% stockholder may be reached through our offices at
     1420 Columbus Avenue, Portsmouth, VA 23704.
(2)  The percentages shown are calculated based upon 12,129,873 shares of common
     stock  outstanding  on March 4, 2003.  The  numbers and  percentages  shown
     include the shares of common stock  actually  owned as of March 1, 2003 and
     the  shares  of  common  stock  that the  person  or group had the right to
     acquire within 60 days of March 4, 2003. In  calculating  the percentage of
     ownership,  all shares of common stock that the identified  person or group
     had the right to acquire  within 60 days of March 4, 2003 upon the exercise
     of options and  warrants  are deemed to be  outstanding  for the purpose of
     computing the percentage of the shares of common stock owned by such person
     or group, but are not deemed to be outstanding for the purpose of computing
     the percentage of the shares of common stock owned by any other person.
(3)  Includes  350,000  shares of common stock  issuable  upon exercise of stock
     options.
(4)  All directors and our executive officers as a group includes two additional
     executive officers who are not listed individually in the table.
(5)  Hilltop Partners,  L.P., Laifer Capital Management,  Inc., and Lance Laifer
     are  affiliates  with  respect to each  other.  Hilltop  beneficially  owns
     1,600,000  shares  of our  common  stock,  and  Laifer  Capital  Management
     beneficially  owns 3,240,000  shares of our common stock in its capacity as
     investment  advisor to various investment  entities including Hilltop.  Mr.
     Laifer is the president, sole director, and principal stockholder of Laifer
     Capital  Management,  Inc.,  and is  deemed  to have  the  same  beneficial
     ownership  as Laifer  Capital  Management,  Inc.  The  address  for Hilltop
     Partners,  Laifer  Capital  Management,  and Lance  Laifer  are c/o  Laifer
     Capital  Management,  Inc., 450 Seventh  Avenue,  Suite 1604, New York, New
     York 10123.
(6)  Norman H. Pessin is a principal  of  Neuberger & Berman,  LLC, a registered
     broker/dealer and registered investment advisor. Mr. Pessin has sole voting
     and  dispositive  power with respect to all shares of our common stock held
     by him. The address for Mr. Pessin is c/o Neuberger & Berman LLC, 605 Third
     Avenue, New York, NY 10158-3698.
(7)  Includes  35,000  shares of common stock  issuable  upon exercise of vested
     stock options and 40,000  shares of common stock  issuable upon exercise of
     vested warrants.

                                       21
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On February 27, 2003,  we entered into a one-year  renewable  Interest Only
Non-Recourse Promissory Note and Security Agreement for $400,000 with one of our
directors. The note can be renewed at the end of the original term by the mutual
agreement of both parties.  The proceeds will be used to expand our CHT and tank
cleaning  business on the West Coast and support  working  capital  needs in our
current operations.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(s)  EXHIBITS

EXHIBIT
NUMBER                                      EXHIBIT
------                                      -------
3.1            Certificate of Incorporation of the Registrant (1)
3.2            Bylaws of the Registrant (1)
4.1            Specimen of Common Stock certificate (1)
10.1           1993 Incentive Stock Option Plan, as amended (1)
10.2           Agency  Agreement  between  the  Registrant  and  GKN  Securities
               Corporation dated March 4, 1996 (2)
10.3           Form of Purchase Option issued to GKN Securities  Corporation and
               its designees (2)
10.6           1996 Performance Equity Plan , as amended (3)
10.7           Form of Purchase Option issued to GKN Securities  Corporation and
               its designees dated June 18, 1997 (4)
10.8           Account  Transfer  and  Purchase  Agreement  by and  between  the
               Registrant,  H.E.R.C.  Consumer Products, Inc., and KBK Financial
               Incorporated dated September 22, 1997 (4)
10.11          Form of Warrant Agreement between the Registrant and Jerry Ludwig
               and Associates dated September 3, 1997 (4)
10.13          Amendment  to  Stock  Option  Agreement  by and  between  Gary S.
               Glatter and the Registrant dated March 23, 1995 (4)
10.14          Amendment No. 2 to Stock Option  Agreement by and between Gary S.
               Glatter and the Registrant dated February 1, 1997 (4)
10.15          Employment  Agreement  by and  between  S.  Steven  Carl  and the
               Registrant dated June 15, 1999 (5)
10.16          Employment  Agreement  dated June 15, 2001 between S. Steven Carl
               and the Registrant
10.17          Amendment  to Account  Transfer  and  Purchase  Agreement  by and
               between the Registrant, H.E.R.C. Consumer Products, Inc., and KBK
               Financial, Incorporated dated September 22, 1997 (6)
10.18          Employment  Agreement  dated June 15, 2002 between S. Steven Carl
               and the Registrant (7)
10.19          Solicitation,  Offer and Award Contract dated  September 30, 2002
               between  the  Supervisor  of  Shipbuilding,   C&R,  USN  and  the
               Registrant (7)*
10.20          Interest Only Nonrecourse  Promissory Note and Security Agreement
               dated  February  27,  2003  between  R.  John  Armstrong  and the
               Registrant
21             Subsidiaries of the Registrant
23.1           Consent of McGladrey & Pullen, LLP
99.1           Certification  of the Chief Executive  Officer of the Registrant,
               pursuant  to 18 U.S.C.  section  1350,  as  adopted  pursuant  to
               Section 906 of the Sarbanes-Oxley Act of 2002.
99.2           Certification  of the Chief Financial  Officer of the Registrant,
               pursuant  to 18 U.S.C.  section  1350,  as  adopted  pursuant  to
               Section 906 of the Sarbanes-Oxley Act of 2002.

                                       22
<PAGE>
----------
(1)  Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form SB-2,  (Registration  No.  33-75166),  as filed with the Commission on
     February 11, 1994.
(2)  Incorporated by reference to the Registrant's  Annual Report on Form 10-KSB
     for the fiscal year ended  December 31, 1995, as filed with the  Commission
     on April 15, 1996.
(3)  Incorporated by reference to the  Registrant's  Schedule 14A, as filed with
     the Commission on May 16, 1996, and subsequently amended by shareholders in
     August, 2002.
(4)  Incorporated by reference to the Registrant's  Annual Report on Form 10-KSB
     for the fiscal year ended  December 31, 1997, as filed with the  Commission
     on March 31, 1998.
(5)  Incorporated  by reference  to the  Registrant's  Quarterly  Report on Form
     10-QSB  for the  quarter  ended  September  30,  1999,  as  filed  with the
     Commission on November 15, 1999.
(6)  Incorporated  by reference  to the  Registrant's  Quarterly  Report on Form
     10-QSB for the  quarterly  period  ended June 30,  2002,  as filed with the
     Commission on August 14, 2002.
(7)  Incorporated  by reference  to the  Registrant's  Quarterly  Report on Form
     10-QSB for the quarterly period ended September 30, 2002, as filed with the
     Commission on November 14, 2002.

*Certain  information in this exhibit has been omitted and filed separately with
the  Securities  and  Exchange  Commission.   Confidential  treatment  has  been
requested from and granted by the SEC with respect to the omitted portions.

(b)  REPORTS ON FORM 8-K

     Not applicable.

ITEM 14. CONTROLS AND PROCEDURES

     Based upon their evaluation,  as of a date within 90 days prior to the date
of the filing of this report,  of the  effectiveness of our disclosure  controls
and  procedures,  our Chief Executive  Officer and Chief Financial  Officer have
each  concluded  that our  disclosure  controls and procedures are effective and
sufficient to ensure that we record, process,  summarize, and report information
required  to  be  disclosed  by us in  our  periodic  reports  filed  under  the
Securities  Exchange Act within the time periods specified by the Securities and
Exchange Commission's rules and forms.

     Subsequent  to the  date of  their  evaluation,  there  have  not  been any
significant  changes in our  internal  controls or in other  factors  that could
significantly affect these controls, including any corrective action with regard
to significant deficiencies and material weaknesses.

                                       23
<PAGE>
                                   SIGNATURES

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

                                      H.E.R.C. PRODUCTS INCORPORATED


                                      By: /s/ S. Steven Carl
                                          --------------------------------------
Dated: March 28, 2003                     S. Steven Carl, Chairman of the Board,
                                          Chief Executive Officer and President
                                          (Principal Executive Officer)

     In accordance  with the Exchange Act , this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

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

/s/ S. Steven Carl          Chairman of the Board, Chief          March 28, 2003
-------------------------   Executive Officer, and President
S. Steven Carl              (Principal Executive Officer)

/s/ John Talkington         Vice-President, Chief                 March 28, 2003
-------------------------   Financial Officer (Principal
John Talkington             Financial and Accounting Officer)

/s/ John A. Gulick III      Vice-President-Office of              March 28, 2003
-------------------------   General Counsel
John A. Gulick III

/s/ R. John Armstrong       Director                              March 28, 2003
-------------------------
R. John Armstrong

/s/ Robert Affholder        Director                              March 28, 2003
-------------------------
Robert Affholder

/s/ John B. Furman          Director                              March 28, 2003
-------------------------
John B. Furman

                                       24
<PAGE>
                                  CERTIFICATION

     I, S. Steven Carl, certify that:

     1. I have reviewed  this annual report on Form 10-KSB of H.E.R.C.  Products
Incorporated;

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

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

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

          a) Designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;

          b) Evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

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

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

          a) All significant deficiencies in the design or operation of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize,  and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) Any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     controls; and

     6. The registrant's other certifying  officers and I have indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003

                                        /s/ S. Steven Carl
                                        ----------------------------------------
                                        S. Steven Carl
                                        Chief Executive Officer

                                       25
<PAGE>
                                  CERTIFICATION

     I, John Talkington, certify that:

     1. I have reviewed  this annual report on Form 10-KSB of H.E.R.C.  Products
Incorporated;

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

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

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

          a) Designed  such  disclosure  controls and  procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;

          b) Evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

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

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

          a) All significant deficiencies in the design or operation of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize,  and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) Any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     controls; and

     6. The registrant's other certifying  officers and I have indicated in this
annual report whether there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003

                                        /s/ John Talkington
                                        ----------------------------------------
                                        John Talkington
                                        Chief Financial Officer

                                       26
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                ----
<S>                                                                                                             <C>
Report of Independent Public Accountants....................................................................     F-2

Financial Statements:

Consolidated Balance Sheet as of December 31, 2002..........................................................     F-3

Consolidated Statements of Operations for the years ended December 31, 2002 and 2001........................     F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002 and 2001..............     F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001........................     F-6

Notes to Consolidated Financial Statements..................................................................     F-7
</TABLE>

                                      F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
H.E.R.C. Products Incorporated
and Subsidiaries
Portsmouth, Virginia

We have audited the accompanying consolidated balance sheet of H.E.R.C. Products
Incorporated  and  Subsidiaries  as  of  December  31,  2002,  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years ended December 31, 2002 and 2001.  These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the 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, 2002, and the results of their
operations  and their cash flows for the years ended  December 31, 2002 and 2001
in conformity with accounting principles generally accepted in the United States
of America.

\s\ McGladrey & Pullen, LLP

Phoenix, Arizona
March 05, 2003

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

                           Consolidated Balance Sheet

                               December 31, 2002

                                     ASSETS

CURRENT ASSETS
  Cash and Cash Equivalents                                        $    254,859
  Trade accounts receivable, net of allowance for                       341,503
    doubtful accounts of $100,996 (NOTE 9)
  Inventories                                                            46,304
  Costs of uncompleted contracts                                        110,243
  Other receivables, includes unbilled amounts of $156,893              170,203
  Prepaid expenses                                                       47,191
                                                                   ------------
    Total current assets                                                970,303
                                                                   ------------
PROPERTY AND EQUIPMENT (NOTE 2)
  Property and equipment                                              1,505,129
  Less: accumulated depreciation                                     (1,119,917)
                                                                   ------------
    Net property and equipment                                          385,212
                                                                   ------------
OTHER ASSETS
  Patents, net of accumulated amortization of $121,963                  102,172
  Patents pending                                                       126,871
  Refundable deposits and other assets                                    9,892
                                                                   ------------
    Total other assets                                                  238,935
                                                                   ------------
                                                                   $  1,594,450
                                                                   ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                 $    312,960
  Accrued wages                                                          48,524
  Notes payable (NOTE 2)                                                 13,189
  Accrued waste disposal                                                114,500
  Other accrued expenses                                                222,722
                                                                   ------------
    Total current liabilities                                           711,895
                                                                   ------------
COMMITMENTS AND CONTINGENCIES (NOTES 7 and 11)

STOCKHOLDERS' EQUITY (NOTE 4)
  Preferred stock, $0.01 par value, authorized 1,000,000                     --
    shares; issued and oustanding zero shares
  Common stock, $0.01 par value, authorized 40,000,000
    shares; issued and oustanding 12,054,873 shares                     120,549
  Additional paid-in capital                                         14,030,564
  Accumulated deficit                                               (13,268,558)
                                                                   ------------
    Total stockholders' equity                                          882,555
                                                                   ------------
                                                                   $  1,594,450
                                                                   ============

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

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

                      Consolidated Statements of Operations


                                                    Years Ended December 31,
                                                  ----------------------------
                                                      2002            2001
                                                  ------------    ------------
SALES                                             $  6,491,113    $  5,966,564
COST OF SALES                                        3,730,036       3,463,248
                                                  ------------    ------------
GROSS PROFIT                                         2,761,077       2,503,316
SELLING EXPENSES                                       462,532         291,509
GENERAL AND ADMINISTRATIVE EXPENSES                  2,644,771       2,365,632
                                                  ------------    ------------
OPERATING LOSS                                        (346,226)       (153,825)
                                                  ------------    ------------
OTHER INCOME (EXPENSE)
  Interest expense                                     (83,549)        (68,335)
  Gain on sale of equipment                                 --          52,378
  Miscellaneous (2002 gain on Chlor-Rid rights)        225,995           6,175
                                                  ------------    ------------
    Total other income (expense)                       142,446          (9,782)
                                                  ------------    ------------
NET LOSS BEFORE INCOME TAXES                          (203,780)       (163,607)
  Income tax provision                                      --              --
                                                  ------------    ------------
NET LOSS                                          $   (203,780)   $   (163,607)
                                                  ============    ============

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

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC                                               11,977,859      11,792,950
                                                  ============    ============
DILUTED                                             11,977,859      11,792,950
                                                  ============    ============

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

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

                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
                                            Common Stock            Additional
                                     ---------------------------      Paid-in     Accumulated
                                        Shares         Amount         Capital        Deficit         Total
                                     ------------   ------------   ------------   ------------    ------------
<S>                                  <C>            <C>            <C>            <C>             <C>
BALANCE,
  DECEMBER 31, 2000                    11,702,728   $    117,027   $ 13,990,085   $(12,901,171)   $  1,205,941

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

Issuance of shares of common stock        162,144          1,622         22,379             --          24,001
                                     ------------   ------------   ------------   ------------    ------------

BALANCE,
  DECEMBER 31, 2001                    11,864,872        118,649     14,012,464    (13,064,778)      1,066,335

Net loss                                       --             --             --       (203,780)       (203,780)

Issuance of shares of common stock        190,001          1,900         18,100             --          20,000
                                     ------------   ------------   ------------   ------------    ------------

BALANCE,
  DECEMBER 31, 2002                    12,054,873   $    120,549   $ 14,030,564   $(13,268,558)   $    882,555
                                     ============   ============   ============   ============    ============
</TABLE>

                 The accompanying notes are an integral part of
                    these 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,
                                                                     ------------------------
                                                                         2002         2001
                                                                      ---------    ---------
<S>                                                                   <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                            $(203,780)   $(163,607)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities
    Depreciation and amortization                                       250,257      258,379
    Loss on sale of disposal of equipment                                 2,518      (52,378)
    Gain on sale of Chlor-Rid rights                                   (225,000)          --
    Common stock issued for services                                     20,000       24,001
    Change in working capital components
      Trade accounts receivable                                         260,965     (274,691)
      Inventories                                                       (19,243)      11,070
      Costs of uncompleted contracts                                     40,287      (77,633)
      Costs and estimated earnings in excess of
        billings on uncompleted contracts                                74,289      (74,289)
      Other receivables                                                (104,091)     (55,761)
      Prepaid expenses                                                    3,817       33,228
      Refundable deposits and other assets                                   48       12,913
      Accounts payable                                                   25,701      182,032
      Accrued wages and other accrued expenses                           43,129      164,453
      Customer deposits                                                      --      (42,617)
                                                                      ---------    ---------
          Net cash provided by (used in) operating activities           168,897      (54,900)
                                                                      ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                                 (178,015)    (120,032)
  Cash received from the sale of equipment                                   --      135,000
  Cash received from the sale of Chlor-Rid rights                       225,000           --
  Expenditures related to patents and patents pending                   (27,457)     (45,530)
                                                                      ---------    ---------
          Net cash provided by (used in )investing activities            19,528      (30,562)
                                                                      ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of notes payable and long-term debt            369,114      198,262
  Principal payments under notes payable                               (378,439)    (339,433)
                                                                      ---------    ---------
          Net cash used in financing activities                          (9,325)    (141,171)
                                                                      ---------    ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    179,100     (226,633)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                           75,759      302,392
                                                                      ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                              $ 254,859    $  75,759
                                                                      =========    =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for interest                                $  83,549    $  68,335
                                                                      =========    =========
Cash paid during the year for income taxes                            $      --    $      --
                                                                      =========    =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES

Prepaid insurance financed with notes payable                         $ 369,114    $      --
                                                                      =========    =========
Purchase of assets through assumption of debt                         $      --    $ 150,517
                                                                      =========    =========
</TABLE>

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

                                      F-6
<PAGE>
                 H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2002 AND 2001

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The  Company's  strategy  has  involved  concentrating  its efforts on providing
pipeline rehabilitation and other system cleaning services to a diverse group of
customers.  The Company has  undertaken  and continues to undertake  substantial
efforts to diversify its customer base and expand its markets. In 2002 and 2001,
sales to the U.S.  Navy  under the  Portsmouth  CIS  contract  were 33% and 45%,
respectively,  of consolidated sales. The 5-year U.S. Navy contract is renewable
each year at the option of the U.S. Navy. On September 20, 2002, the Company was
awarded a new five-year contract with the U.S. Navy. Of all the firms responding
to the Navy  solicitation,  two awards were made for the contract  after careful
evaluation in accordance with the solicitation based on a determination of "best
value"  to the  Navy.  The  aggregate  contract  minimum  for the two  awards is
$107,097,  while  the  contract  maximum  for  the  two  awards  is a  total  of
$5,948,312.  The 5-year U.S.  Navy  contract  expires in September  2007. We are
unable to determine  how much of this  contract  will be awarded to the Company.
Included in accounts  receivable  at December  31, 2002 is $232,956 for the U.S.
Navy.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions  have been eliminated in  consolidation.  All references to the
Company herein refer to the Company and its subsidiaries.

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

                                      F-7
<PAGE>
INCOME TAXES

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

CASH AND CASH EQUIVALENTS

The company  considers all highly liquid  short-term  investments  with original
maturities of three months or less to be cash equivalents.

STOCK-BASED COMPENSATION

Statement of Financial  Accounting  Standards  (SFAS) No. 123,  "Accounting  for
Stock-Based   Compensation,"  as  amended  by  SFAS  No.  148,  "Accounting  for
Stock-Based Compensation - Transition and Disclosure," prescribes accounting and
reporting standards for all stock-based  compensation plans,  including employee
stock  option  plans.  As allowed by SFAS No.  123,  the  Company has elected to
continue to account for its  employee  stock-based  compensation  plan using the
intrinsic  value method in accordance  with  Accounting  Principles  Board (APB)
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees,"  and  related
Interpretations,  which does not  require  compensation  to be  recorded  if the
consideration  to be  received is at least equal to the fair value of the common
stock to be received at the measurement date. Under the requirements of SFAS No.
123, non-employee  stock-based  transactions require compensation to be recorded
based on the fair  value of the  securities  issued  or the  services  received,
whichever is more reliably measurable.

EMPLOYEE STOCK PLANS

At December 31, 2002, the Company has two stock-based  compensation plans, which
are described  more fully in Note 5. The Company  accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, ACCOUNTING FOR
STOCK  ISSUED  TO  EMPLOYEES,  and  related  interpretations.   Accordingly,  no
stock-based  employee  compensation  cost has been  recognized,  as all  options
granted under those plans had an exercise price equal to the market value of the
underlying  common stock on the date of grant.  The following table  illustrates
the effect on net loss and loss per share had  compensation  cost for all of the

                                      F-8
<PAGE>
stock-based  compensation  plans  been  determined  based on the grant date fair
values of awards (the method described in FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION):

<TABLE>
<CAPTION>
                                                            Years Ended December 31,
                                                           --------------------------
                                                              2002           2001
                                                           -----------    -----------
<S>                                                        <C>            <C>
Net income:
  As reported                                              $  (203,780)   $  (163,607)

  Deduct total stock-based employee compensation expense
    determined under fair value based method for all
    awards, net of related tax effects                         (12,302)       (41,857)
                                                           -----------    -----------
  Pro forma                                                $  (216,082)   $  (205,464)
                                                           -----------    -----------
Basic loss per share:
  As reported                                              $      (.02)   $      (.01)
  Pro forma                                                $      (.02)   $      (.02)

Diluted loss per share:
  As reported                                              $      (.02)   $      (.01)
  Pro forma                                                $      (.02)   $      (.02)
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

INVENTORIES

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

CONCENTRATIONS OF CREDIT RISK

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

The Company routinely assesses the financial strength of its customers, and as a
consequence, believes that its trade receivable credit risk exposure is limited.
Trade  receivables are carried at original  invoice amount less an estimate made
for  doubtful  receivables  based on a review of all  outstanding  amounts  on a
monthly  basis.  A valuation  allowance  is provided  for known and  anticipated
credited  losses,  as  determined  by  management  in the  course  of  regularly
evaluating  individual customer  receivables.  Trade receivables are written off
when deemed  uncollectible.  Recoveries of trade receivables  previously written
off are recorded when received. No interest is charged on customer accounts.

                                      F-9
<PAGE>
COMPREHENSIVE INCOME

For the years ended December 31, 2002 and 2001, the Company had no components of
comprehensive  income  and,  therefore,  net  income  is equal to  comprehensive
income.

PROPERTY, EQUIPMENT AND DEPRECIATION

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

Property and equipment at December 31, 2002 are:
    Equipment                                                       $ 1,325,738
    Office furniture, computers and leasehold improvements              179,391
                                                                    -----------
                                                                      1,505,129
    Less accumulated depreciation                                    (1,119,917)
                                                                    -----------
    Net property and equipment                                      $   385,212
                                                                    ===========

The useful lives of property and equipment for computing depreciation range from
three to ten years. Depreciation expense was $226,523 and $237,603 for the years
ended  December 31, 2002 and 2001,  respectively.  The  depreciation  expense on
assets  acquired  under capital lease is included with  depreciation  expense on
owned  assets.   Assets   acquired  under  capital  leases  totaled  $9,723  and
accumulated depreciation on these assets totaled $2,917 at December 31, 2002.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangible assets to be held and used
in  operations  are  reviewed  for  potential   impairment  whenever  events  or
circumstances  indicate  that the  carrying  amount of an asset may not be fully
recoverable.  An  impairment  loss  is  recognized  if the  sum of the  expected
long-term  undiscounted  cash  flows is less  than the  carrying  amount  of the
long-lived  assets being evaluated.  Future losses may be recorded if cash flows
are  less  than  expected.  Management  has  determined  that no  impairment  of
long-lived assets currently exist.

PATENTS AND PATENTS PENDING

Patents issued are stated at cost and amortized on the straight-line  basis over
10 years.  Costs for patents pending are amortized when the patents are awarded.
Unamortized costs for patents that are denied or have no continuing  application
to the Company's  ongoing  businesses as well as maintenance costs are expensed.
Such expenses were approximately $2,000 and $12,000 for the years ended 2002 and
2001, respectively.

                                      F-10
<PAGE>
ACCOUNTS RECEIVABLE

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

REVENUE RECOGNITION

For chemical product sales, the Company  recognizes revenue at the time products
are shipped to  customers.  For most service  projects,  the Company  recognizes
revenue and costs when the services are completed.  For fixed price contracts in
excess  of 3  month  duration,  revenue  is  recognized  on  the  percentage  of
completion  method,  measured  by the  percentage  of cost  incurred  to date to
estimated total cost for each contract.  This method is used because  management
considers  total  cost to be the best  available  measure of  progress  on these
contracts.  During 2001 the Company was awarded a contract  that was expected to
have a duration that was longer than normal.

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

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

RESEARCH AND DEVELOPMENT

Research and development  costs are expensed as incurred.  The Company estimates
that it spent  approximately  $10,000 and $12,000 on  research  and  development
activities during fiscal 2002 and 2001, respectively.

OFF-BALANCE SHEET FINANCINGS AND LIABILITIES

Other than lease commitments,  legal contingencies incurred in the normal course
of business,  and employment  contracts for key employees,  the Company does not
have any off-balance  sheet financing  arrangements or liabilities.  The Company
does  not  have  any  majority-owned   subsidiaries  or  any  interests  in,  or
relationships  with,  any  material  variable  interest  entities  that  are not
included in the consolidated financial statements.

                                      F-11
<PAGE>
LOSS PER SHARE

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

A reconciliation  of the basic and diluted loss per share (EPS)  computation for
the years ended December 31, 2002 and 2001 is as follows:

                                               Year Ended December 31, 2002
                                         ---------------------------------------
                                           Net Loss        Shares      Per Share
                                         (Numerator)    (Denominator)   Amount
                                         -----------    ------------   ---------
Basic EPS                                $  (203,780)     11,977,859    $(0.02)
                                                                        ======
Effect of stock options and warrants              --              --
                                         -----------     -----------
Diluted EPS                              $  (203,780)     11,977,859    $(0.02)
                                         ===========     ===========    ======

                                               Year Ended December 31, 2001
                                         ---------------------------------------
                                           Net Loss        Shares      Per Share
                                         (Numerator)    (Denominator)   Amount
                                         -----------    ------------   ---------
Basic EPS                                $  (163,607)     11,792,950    $(0.01)
                                                                        ======
Effect of stock options and warrants              --              --
                                         -----------     -----------
Diluted EPS                              $  (163,607)     11,792,950    $(0.01)
                                         ===========     ===========    ======

At December 31, 2002,  there were 50,000  options  outstanding  with an exercise
price of $0.09 per  share.  These  options  would be  dilutive  if there was net
income. These options have not been included in the calculation since they would
be anti-dilutive.

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003,  the Financial  Accounting  Standards  Board (FASB) issued FASB
Interpretation  No. 46,  "Consolidation of Variable Interest Entities" (FIN 46).
This  interpretation  clarifies  existing  accounting  principles related to the
preparation of consolidated financial statements when the equity investors in an
entity do not have the  characteristics  of a controlling  financial interest or
when  the  equity  at risk is not  sufficient  for the  entity  to  finance  its
activities without additional subordinated financial support from other parties.
FIN 46  requires a company to evaluate  all  existing  arrangements  to identify
situations  where  a  company  has a  "variable  interest"  (commonly  a  thinly
capitalized entity) and further determine when such variable interests require a
company to consolidate the variable interest entities' financial statements with
its own. The Company is required to perform  this  assessment  by September  30,
2003 and consolidate any variable  interest  entities for which it will absorb a
majority of the entities'  expected losses or receive a majority of the expected
residual gains. Management has not yet performed this assessment,  however it is
not aware of any material  variable  interest  entity that it may be required to
consolidate.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with  Exit  or  Disposal  of  Activities."  SFAS  No.  146  addresses  financial
accounting and reporting for costs associated with exit or disposal  activities.
The  provisions of SFAS No. 146 are  effective  for exit or disposal  activities

                                      F-12
<PAGE>
initiated  after December 31, 2002.  Adoption of SFAS No. 146 is not expected to
have a material effect on the Company's financial position or operating results.

In June 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible  long-lived assets and the associated
asset retirement  costs.  This statement is effective for the Company  beginning
January 1, 2003.  Management does not expect that adoption of this standard will
have a material impact on the Company's financial statements.

2. LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Long term debt and other  financing  arrangements  consist of the  following  at
December 31, 2002:

Equipment financing                                     $  2,571
Insurance financing                                       10,618
                                                        --------
Total financing                                           13,189
Less current portion                                     (13,189)
                                                        --------
Total long term debt                                    $    -0-
                                                        ========

3. INCOME TAXES

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

The components of deferred taxes as of December 31, 2002, are as follows:

     Current deferred tax assets:
       Accruals not currently deductible for tax                    $   144,500
       Current portion of valuation allowance                          (144,500)
                                                                    -----------
                                                                    $        --
                                                                    ===========
     Non-current deferred tax assets:
       Equipment                                                    $    50,700
       Net operating loss carry forwards for federal
         and state purposes                                           3,244,700
       Non-current portion of valuation allowance                    (3,295,400)
                                                                    -----------
                                                                    $        --
                                                                    ===========

The Company was in a consolidated tax loss position for the years ended December
31, 2002 and December 31, 2001, and therefore had no current  federal income tax
expense. Deferred tax assets as of December 31, 2002 arising primarily from loss
carry  forward  benefits have not been recorded  because of the  uncertainty  of
realizing such benefits.

Because the Company has no prior year carry-back  taxable  income,  the expected
tax benefit  from the 2002 and 2001  operating  losses  results in deferred  tax
assets which have been fully reserved

                                      F-13
<PAGE>
Net operating loss carry forwards for federal tax purposes totaled approximately
$9,274,424  at December 31, 2002.  Net operating  loss carry  forwards for state
income tax purposes totaled approximately $1,523,000 at December 31, 2002. These
losses are available for carry forward  against  future years'  taxable  income,
subject to certain  limitations,  and expire in various  years from 2008 through
2022.

4. STOCKHOLDERS' EQUITY

COMMON STOCK

During 2002 and 2001,  the Company  issued  190,001 and 162,144 shares of Common
Stock,  respectively,  to its  outside  directors  as a  part  of  their  annual
compensation   in  the  amount  of  $20,000  and  $24,001  for  2002  and  2001,
respectively.  These  amounts were valued at the closing stock price on the last
day of the year.

In April 1996, the Company completed the private placement of 3,214,902 units at
a price of $.85 per unit and received net proceeds of approximately  $2,277,000.
Each unit consisted of one share of Common Stock and one warrant, which entitled
the  holder to  purchase  one share of Common  Stock at a price of $2 per share,
subject to adjustment,  until April 3, 1999. All 3,214,902  warrants  expired on
April 3, 1999. In addition, the placement agent was granted a warrant to acquire
321,490 units at $.9375 per unit which consists of one share of Common Stock and
one  warrant to acquire  one share of Common  Stock at $2.00 per share.  In June
1997, the placement  agent  partially  exercised the units and acquired  150,000
shares of common  stock and 150,000  warrants.  Such  warrants  expired June 18,
2002. The remaining  171,490 units expired April 3, 2001. In connection with the
partial  exercise,  the Company  granted  warrants to purchase an  aggregate  of
150,000 shares of Common Stock at $1.3125 per share to the placement agent. Such
warrants expired June 18, 2002.

WARRANTS

As of December 31, 2002,  outstanding warrants issued for the purchase of shares
of Common Stock to various  consultants at exercise prices ranging from $0.22 to
$1.48 per share totaled 217,500.  The Company valued the warrants at the date of
grant using a  Black-Scholes  model and is amortizing the costs over the service
period. All such warrants are currently exercisable within the above price range
and expire at various dates through September 2005.

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

                                      F-14
<PAGE>
5. STOCK BASED COMPENSATION

In October 1993, the Company  adopted an incentive stock option plan for 350,000
shares of Common Stock that may be granted to employees.  The Company adopted an
additional  plan in 1996 for  1,000,000  shares  of  Common  Stock  for grant to
employees,  officers,  directors and  consultants  of the Company.  In 2002, the
stockholders  approved an increase to 4,000,000  shares of eligible Common Stock
under the 1996 plan.  The exercise price per share may not be less than the fair
market value on the date of the grant.  Generally,  options  granted vest over a
period up to five years and expire over varying periods through 2012.

In  addition  to the above  plans,  the Company  granted:  (1) a former  officer
options to purchase 250,000 shares of Common Stock at an exercise price of $1.75
per share.  The  options  are  currently  exercisable  and expire not later than
December 31, 2005; (2) various key employees  options to purchase 140,000 shares
of Common  Stock at an  exercise  price of  $0.3125  per share.  Of the  140,000
options granted through 1995,  40,000 expired in December 2001 and the remaining
100,000 expired December 2002.

Overall activity in the Company's stock options:

<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                    ----------------------------------------------------
                                              2002                        2001
                                    ------------------------    ------------------------
                                                   Weighted                    Weighted
                                                    Average                     Average
                                                   Exercise                    Exercise
                                     Options         Price       Options         Price
                                    ----------    ----------    ----------    ----------
<S>                                 <C>           <C>           <C>           <C>
Outstanding, at beginning of year    1,498,700    $     0.52     1,104,500    $     0.67
Granted                                125,000          0.11       482,000          0.14
Exercised                                   --            --            --            --
Canceled/Expired                      (318,700)        (0.39)      (87,800)        (0.33)
                                    ----------    ----------    ----------    ----------
Outstanding at end of year           1,305,000          0.51     1,498,700          0.52
                                    ----------    ----------    ----------    ----------
Exercisable at end of year           1,055,800          0.60     1,227,500          0.60
                                    ----------    ----------    ----------    ----------
</TABLE>

Details regarding the options outstanding at December 31, 2002:

                  Outstanding                                  Exercisable
----------------------------------------------------     ----------------------
                               Weighted     Weighted                   Weighted
   Exercise                     Average      Average                    Average
    Price                      Remaining    Exercise                   Exercise
    Range          Number        Life         Price        Number        Price
-------------    ----------    ---------    --------     ----------    --------
$0.09 - $0.10       365,000      9.02         $0.10         208,000      $0.10
$0.16 - $0.25       217,000      7.66         $0.19         143,400      $0.19
$0.30 - $0.32       448,000      2.02         $0.31         436,400      $0.31
$0.38 - $0.40        15,000      5.39         $0.39           8,000      $0.39
$1.00 - $1.75       260,000      1.38         $1.72         260,000      $1.72
                 ----------                              ----------
                  1,305,000                               1,055,800
                 ==========                              ==========

                                      F-15
<PAGE>
The weighted-average grant-date fair value of stock options granted to employees
during  the years  and the  weighted  average  significant  assumptions  used to
determine those fair values using a Black-Scholes  option pricing model, and the
pro forma  effect on earnings  of the fair value  accounting  for stock  options
under SFAS No. 123 are:

                                                  Years ended December 31,
                                                 --------------------------
                                                    2002            2001
                                                 ----------      ----------
Weighted average grant-date fair value           $     0.10      $     0.13

Significant assumptions (weighted average)
  Risk-free interest rate at grant date           4.03-5.08%      4.65-5.16%
  Expected stock price volatility                    100.00%         100.00%
  Expected dividend payout                                --             --
  Expected option life                               5 years        5 years
  Forfeiture rate                                         5%              5%

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

6. SEGMENT INFORMATION

For the years ended  December 31, 2002 and 2001,  the Company's  major  business
segments are pipe  cleaning  services,  tank  cleaning  services and  industrial
chemical sales.

Information by segment for the year ended December 31, 2002:

<TABLE>
<CAPTION>
                                               Pipe          Tank      Industrial
                                             Cleaning      Cleaning     Chemical
                                             Services      Services       Sales       Corporate     Consolidated
                                           -----------   -----------   -----------   -----------    ------------
<S>                                        <C>           <C>           <C>           <C>            <C>
Sales                                      $ 3,176,334   $ 3,142,805   $   171,974   $       -0-     $ 6,491,113
Income (loss) from continuing operations       386,329       900,328       108,301    (1,598,738)      (203,780)
Total assets                                   514,372       432,133        83,114       564,831      1,594,450
Depreciation and amortization                  145,149        37,539        10,010        57,559        250,257
Capital expenditures                            57,342       104,221           -0-        16,452        178,015
</TABLE>

                                      F-16
<PAGE>
Information by segment for the year ended December 31, 2001:

<TABLE>
<CAPTION>
                                               Pipe          Tank      Industrial
                                             Cleaning      Cleaning     Chemical
                                             Services      Services       Sales       Corporate     Consolidated
                                           -----------   -----------   -----------   -----------    ------------
<S>                                        <C>           <C>           <C>           <C>            <C>
Sales                                      $ 4,381,089   $ 1,335,795   $   249,680   $       -0-     $ 5,966,564
Income (loss) from continuing operations     1,076,740        24,950       128,212    (1,393,509)       (163,607)
Total assets                                   747,195       533,768        34,278       403,484       1,718,725
Depreciation and amortization                  186,223        18,427         6,723        47,006         258,379
Capital expenditures                            64,002       189,973         2,485        14,089         270,549
</TABLE>

Segment profitability is determined before allocation of corporate overhead.

7. COMMITMENTS AND CONTINGENCIES

WASTE DISPOSAL LIABILITY

The Company has a facility in Virginia  that is  currently  used to store waste.
Before the lease of this  facility  expires,  the  Company  will be  required to
properly dispose of all waste.  Management has estimated the cost of disposal to
be $114,500.  This amount has been  accrued at December  31, 2002.  The facility
lease expires in 2004.

LEASE COMMITMENTS

The  Company  has  operating  leases,  expiring  through  2004,  for  office and
warehouse facilities in Portsmouth,  Virginia and National City,  California and
for office and other  equipment.  Rental expense  associated  with all operating
leases was $101,199 and $163,056 for the years ended December 31, 2002 and 2001,
respectively.

Future minimum payments under operating leases,  exclusive of any subleases,  as
of December 31, 2002 are:

Years Ending
December 31,                         Amount
------------                        --------
2003                                $ 49,525
2004                                   3,700
                                    --------
                                    $ 53,225
                                    ========

8. RELATED PARTY TRANSACTIONS

The Company has entered into transactions  with a subcontractor  whose President
is a  member  of the  Company's  Board of  Directors.  Under  the  terms of this
agreement,  the  subcontractor  has the right of first refusal for subcontractor
work in certain  territories.  In exchange,  the  subcontractor  will notify the
Company of any business opportunities in these territories.  Amounts paid to the
subcontractor pursuant to this contract were $-0- and $20,944 in 2002, and 2001,

                                      F-17
<PAGE>
respectively. The Company also paid a commissioned sales representative,  who is
also a greater  than 5%  stockholder,  $9,443 and  $26,250 in the years 2002 and
2001 for sales commissions, respectively.

9. AGREEMENT WITH FACTOR

The  Company has an  arrangement  for a  factoring  facility  whereby the factor
purchases  eligible  receivables and advances 85% (80% in 2001) of the purchased
amount to the Company. Purchased receivables may not exceed $1,000,000 ($600,000
in 2001) at any one time.  Either party may cancel the arrangement  with 30 days
notice.  At December  31,  2002,  there was  $719,132  of  factored  receivables
($416,976 at December 31, 2001) of which the Company has received  $611,262 from
the  factor.  This  $611,261  and $5,393 in  interest  expense  are not shown as
receivables. This arrangement is accounted for as a sale of receivables on which
the factor has recourse to the 15% residual of aggregate  receivables  purchased
and outstanding.  Interest payable by the Company to the factor is calculated as
a fixed discount fee equal to 0.75% (1% in 2001) of the amount of the receivable
factored plus a variable (1.5% above the institutions  base rate, with a minimum
of 7%) discount fee computed on the amount  advanced to the Company and accruing
on the basis of actual days  elapsed  from the date of the 85%  advance  until 3
days after  collection  of such account  receivable by the factor at a per annum
rate equal to an internal rate set by the factor.  The rate at December 31, 2002
was 7%. In connection with this  agreement,  the Company is required to maintain
certain  financial  covenants.  In the  event  of a  breach  of  representation,
warranty or agreement,  the institution has a security interest in the Company's
assets.

10. 401(K) PROFIT SHARING PLAN

The Company has a 401(k) profit sharing plan available to all eligible employees
who are age 21 (twenty-one) and have completed six months of service.  The Board
approved an employer matching  contribution of 25% totaling $25,067 for 2002 and
$28,349 for 2001.

11. EMPLOYMENT AGREEMENTS

In connection with certain  employment  agreements there were no bonuses awarded
to any officers for the year ended  December 31, 2002.  Each  agreement is for a
term of  one-year.  One of the  contracts  has  renewed  under its  terms.  Each
agreement  includes a non-compete  clause upon  termination  of employment and a
certain agreement provides for an auto allowance or company car. One non-officer
employee was granted 50,000 stock options under the 1996 Performance Equity Plan
upon execution of that employee's agreement.

12. SUBSEQUENT EVENT

On  February  27,  2003,  we entered  into a one-year  renewable  Interest  Only
Non-Recourse Promissory Note and Security Agreement for $400,000 with one of our
Directors. The note can be renewed at the end of the original term by the mutual
agreement  of both  parties.  This note  bears  interest  at 8% and has a second
position  in the same  assets  pledged to the factor  noted in  footnote  9. The
proceeds will be used to expand our CHT and tank  cleaning  business on the West
Coast and support working capital needs in our current operations.

                                      F-18