<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                             -----------------------

                               Amendment No. 1 to
                                  FORM 10-QSB/A

(Mark One)

|X|   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

      For the quarter ended June 30, 2002

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

      For the transition period from to Commission File No.: 0-14213

                              U.S. MICROBICS, INC.
                 (Name of small business issuer in its charter)

            Colorado                                      84-0990371
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)

                             5922-B Farnsworth Court
                           Carlsbad, California 92008
                                 (760) 918-1860

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

Title of each class                    Name of each exchange on which registered
       None                                             None.

         Securities registered under Section 12(g) of the Exchange Act:
                    Common Stock, $0.0001 par value per share

         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 |_|

         Common Stock, $0.0001 par value per share - 42,797,481 shares
outstanding as of August 15, 2002

         Documents Incorporated by Reference: None.

Transitional Small Business Disclosure Format (check one):  Yes | |   No |X|

================================================================================
<PAGE>
<TABLE>

PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
                                     U.S. MICROBICS INC., AND SUBSIDIARIES
                                     CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
                                                                                              AS OF               AS OF
                                                                                             JUNE 30,          SEPTEMBER 30,
                                                                                               2002               2001
ASSETS                                                                                      (Unaudited)         (Audited)
                                                                                           -------------      -------------
<S>                                                                                        <C>                <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                             $     42,346       $     50,600
     Accounts receivable                                                                          5,396             22,100
     Costs and estimated profit in excess billings                                              108,410                 --
     Prepaid expenses and other assets                                                           60,744             19,900
     Inventories (Note 3)                                                                        24,888             24,900
                                                                                           -------------      -------------
          Total current assets                                                                  241,784            117,500
PROPERTY AND EQUIPMENT, NET                                                                     149,452            235,800
DEPOSITS AND PLEDGED ASSET (NOTE 5)                                                             212,990             28,700
                                                                                           -------------      -------------
          Total assets                                                                     $    604,226       $    382,000
                                                                                           =============      =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
     Accounts payable and accrued expenses                                                 $  1,406,606       $  1,196,700
     Current portion of capital lease obligation                                                     --                900
     Notes payable, related parties                                                             188,890            253,100
                                                                                           -------------      -------------
          Total current liabilities                                                           1,595,496          1,450,700


COMMITMENTS AND CONTINGENCIES (NOTE 5)                                                               --                 --

STOCKHOLDERS' DEFICIT :
     Convertible preferred stock, $.10 par value; 20,000,000 shares authorized:
          Series II; 500,000 shares authorized; 6,708 and 6,708 shares issued
               and outstanding; aggregate liquidation preference of $6,708 and $6,708               671                700
          Series B; 500,000 shares authorized; 5,522 and 5,522 shares issued
               and outstanding; aggregate liquidation preference of $5,522 and $5,522               552                600
          Series C; 50,000 shares authorized; 30,711 and 45,563 shares issued
               and outstanding; aggregate liquidation preference of $3,071,100
               and $4,556,300                                                                     3,071              4,600
          Series D; 50,000 shares authorized; 5,000 and 5,400 shares issued and
               outstanding; no liquidation preference                                                50                500
          Series E; 50,000 shares authorized; 696 and 0 shares issued and
               outstanding; no liquidation preference                                                70                 --
                                                                                           -------------      -------------
                                                                                                  4,414              6,400
     Common stock; $.0001 par value; 150,000,000 shares authorized;
          38,116,016 and 19,557,231 shares issued and outstanding                                 3,812              2,000
     Additional paid-in capital                                                              18,695,251         15,375,800
     Stock options and warrants                                                               1,136,071            943,200
     Treasury stock                                                                            (117,400)          (117,400)
     Stock subscriptions notes receivable                                                    (4,758,751)        (3,965,000)
       Deferred equity issuance costs                                                          (595,000)          (595,000)
     Accumulated deficit                                                                    (15,359,667)       (12,718,700)
                                                                                           -------------      -------------
          Total stockholders' deficit                                                          (991,270)        (1,068,700)
                                                                                           -------------      -------------
          Total liabilities and stockholders' deficit                                      $    604,226       $    382,000
                                                                                           =============      =============

                                 The notes to consolidated condensed financial
                             statements are an integral part of these statements.
</TABLE>

                                                      2
<PAGE>
<TABLE>

                                     U.S. MICROBICS INC., AND SUBSIDIARIES
                                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                                  (UNAUDITED)
<CAPTION>

                                                           FOR THE NINE                        FOR THE THREE
                                                       MONTHS ENDED JUNE 30,                MONTHS ENDED JUNE 30,
                                                       ---------------------                ---------------------
                                                       2002               2001              2002                2001
                                                       ----               ----              ----                ----
<S>                                               <C>                <C>                <C>                <C>
Revenues                                          $    152,883       $    141,971       $     79,496       $     43,630
Cost of revenues                                       137,970            160,077             77,505             52,648
                                                  -------------      -------------      -------------      -------------

Gross (loss) profit                                     14,913            (18,106)             1,991             (9,018)

Selling, general and administrative expenses         2,436,515          2,719,314            970,000          1,171,531
                                                  -------------      -------------      -------------      -------------

Loss from operations                                (2,421,602)        (2,737,420)          (968,009)        (1,180,549)

Other income (expense):

Interest income                                             16                228                 16                 --

Interest expense                                      (137,864)           (48,552)           (46,526)           (31,961)

Conversion benefit expense                             (81,500)                --            (81,500)                --
                                                  -------------      -------------      -------------      -------------

Net loss                                          $ (2,640,950)      $ (2,785,744)      $ (1,096,019)      $ (1,212,510)
                                                  =============      =============      =============      =============

Net loss per common share (basic and diluted
  (Note 4):                                       $       (.10)      $       (.23)      $       (.04)      $       (.09)

Weighted average common shares outstanding          26,694,164         12,299,445         26,694,164         12,990,320


                                The notes to consolidated condensed financial
                             statements are an integral part of these statements.
</TABLE>

                                                      3
<PAGE>
<TABLE>

                                U.S. MICROBICS INC., AND SUBSIDIARIES

                           CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                             (UNAUDITED)
<CAPTION>

                                                                            FOR THE NINE
                                                                         MONTHS ENDED JUNE 30,
                                                                         ---------------------
                                                                        2002              2001
                                                                    ------------      ------------
<S>                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                         $(2,640,950)      $(2,785,744)
   Adjustment to reconcile net loss to cash used in
        Operating activities:
   Depreciation                                                          39,768            41,957
   Loss on sale of asset                                                  4,833                --
   Stock, stock options, and warrants in exchange for services          579,334         1,292,129
   Decrease (increase) in:
          Accounts receivable                                            16,704           (41,135)
          Costs and estimated profit in excess of billings             (108,410)               --
          Prepaid expense, deposits and other                          (225,134)           16,775
          Inventory                                                          12            (6,085)
   Increase (decrease) in:
          Accounts payable and accrued expenses                         757,695          235,537
                                                                    ------------      ------------
NET CASH USED IN OPERATING ACTIVITIES                                (1,576,148)       (1,246,566)
                                                                    ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                    (3,285)               --
   Proceeds from sale of property and equipment                          45,000                --
                                                                    ------------      ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                41,715                --
                                                                    ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of preferred stock and stock options in private
         Placements                                                      50,000           561,650
   Issuance of stock and stock warrants through equity line             940,089                --
   Loans from related parties                                           661,490           527,064
   Repayment of notes payables ($59,500 from related parties)          (124,500)               --
   Repayment long-term portion of lease contract                           (900)           (4,012)
                                                                    ------------      ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                             1,526,179         1,084,702
                                                                    ------------      ------------

DECREASE IN CASH                                                         (8,254)         (161,864)
CASH AT BEGINNING OF PERIOD                                              50,600           162,900
                                                                    ------------      ------------
CASH AT END OF PERIOD                                               $    42,346       $     1,036
                                                                    ============      ============
</TABLE>

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

                                       4
<PAGE>

                      U.S. MICROBICS INC., AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                   (CONTINUED)


                                                              FOR THE NINE
                                                          MONTHS ENDED JUNE 30,
                                                          ---------------------
                                                          2002            2001
                                                          ----            ----
Supplemental disclosures of non-cash
    Investing and financing activities:

Note payable converted to common stock                 $   601,200   $        --

Accounts payable converted to common stock             $   369,029   $        --

Preferred stock issued for note receivable             $        --   $    50,000

Common stock issued in exchange for services           $        --   $   241,348

Common stock options exercised in settlement of
accrued expenses                                       $        --   $    54,690

Cash paid for:
    Interest                                           $        --   $     2,639
    Income taxes                                       $        --   $        --
    Payroll converted to common stock                  $   129,440   $        --
    Interest converted to common stock                 $    54,320   $        --
    Note receivable issued in exchange
        for exercise of stock options                  $   793,750   $        --

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


                                       5
<PAGE>

U.S. MICROBICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)



1.       BASIS OF PRESENTATION AND GOING CONCERN

The accompanying unaudited consolidated condensed financial statements of U.S.
Microbics, Inc. and Subsidiaries have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The company suggests that the
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-KSB for the
fiscal year ended September 30, 2001.

In the opinion of the Company, the accompanying unaudited consolidated condensed
financial statements contain all adjustments, consisting only of normal
recurring entries, necessary to present fairly its financial position at June
30, 2002 and the results of its operations and its cash flows for the periods
presented.

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 these estimates.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
significant recurring losses from operations and has a net stockholders' deficit
at June 30, 2002. Additionally, the Company has significant delinquent payroll
tax liabilities and the Internal Revenue Service has issued intent to levy asset
notifications. These conditions raise substantial doubt about its ability to
continue as a going concern.

Our auditors have included an explanatory paragraph relating to our ability to
continue as a going concern as of fiscal year ended September 30, 2001, in their
Report of Certified Public Accountants included in our audited financial
statements contained in our Form 10-KSB. For the year ended September 30, 2001,
we incurred a net loss of $3,527,700, negative cashflows from operations of
$1,629,900. The auditors considered that these factors raise substantial doubt
about our ability to continue as a going concern.

2.       ORGANIZATION AND RISKS AND UNCERTAINTIES

ORGANIZATION

U.S. Microbics, Inc. was organized December 7, 1984 under the laws of the State
of Colorado as a Venture Funding Corporation. The Company amended its Articles
of Incorporation in June 1993 changing its name to Global Venture Funding, Inc.
The Company amended its Articles of Incorporation in May 1998 changing its name
to U.S. Microbics, Inc. The Company has been engaged in a variety of operations
since inception.

During August 1997, the Company acquired the assets of Xyclonyx, a privately
held company founded to develop, apply and license patented toxic and hazardous
waste treatment and recovery processes as well as to license and apply
microbially enhanced oil recovery technologies and products.


                                       6
<PAGE>

U.S. MICROBICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)



The Company has five wholly-owned subsidiaries: West Coast Fermentation Center,
Sub Surface Waste Management, Inc. (SSWM), Sol Tech Corporation (d.b.a. -
Wasteline Performance Corporation), Bio-Con Microbes and Applied Microbic
Technologies, Inc. West Coast Fermentation Center's primary business is to
cultivate microbial cultures that are to be sold to other subsidiaries of the
Company. Sub Surface Waste Management's business is to assemble and sell
products using technology licensed from Xyclonyx. Sol Tech Corporation and
Bio-Con Microbes are companies formed to service the sewage treatment and
agriculture markets, respectively. Applied Microbic Technologies, Inc. intends
to (i) license customers in the United States to use microbial blends that are
specially formulated for Microbially Enhanced Oil Recovery ('MEOR") in the
United States and (ii) provide related technical support services.

On August 2, 2000 Bio-Con formed a 98% owned Mexican corporation Natura
Agricultura, de C.V. to serve as its international marketing arm for
agricultural products and services based upon naturally occurring
micro-organizms and additives. The other 2% is owned by U.S. Microbics, Inc.,
Bio-Con's parent company.

On June 7, 2002, the Company formed three 100% owned subsidiaries which were
incorporated in the State of Nevada. The three Companies, USM Capital Group,
Inc., USM Resources Development and USM Technologies Holding were formed to
merge with other corporations and "spin-off" a portion of the stock received in
the mergers to U.S. Microbics, Inc., shareholders as a dividend. USM Capital
Group Inc. will be remain a controlled subsidiary functioning as a holding
company for the stock retained in the merger "spin-off" process.

RISKS AND UNCERTAINTIES

For the nine months ended June 30, 2002 the Company has generated revenues of
$152,883. During this same period, the Company incurred a net loss of $2,640,950
and had negative cash flows from operations of $1,576,148. As of June 30, 2002,
the Company has an accumulated deficit of $15,359,667. The Company had revenue
of $50,700 during the fiscal year ended September 30, 2001, and $18,900 during
the fiscal year ended September 30, 2000,and $66,900 during the fiscal year
ended September 30, 1999, and no revenues during the fiscal years ended
September 30, 1998 and 1997. The Company incurred net losses of $3,527,700 in
fiscal 2001, and $2,550,900 in fiscal 2000, $2,932,500 in fiscal 1999 and
$1,411,800 in fiscal 1998.

                                       7
<PAGE>

U.S. MICROBICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)



To date, the Company has relied on private placements of equity and debt to fund
its operating and capital requirements. The Company intends to raise additional
working capital through the sale of common stock through its equity line,
through private placements in its subsidiaries and through issuance of preferred
stock or debt and through third party technology licensing arrangements for
niche market or specific territory use. The Company is currently developing
business opportunities and operations through its wholly-owned subsidiaries
domestically and abroad. There can be no assurance that such additional equity
financing will be available on terms acceptable to the Company, if at all or
that such business opportunities will occur as planned, if at all. Based upon
the current financial condition of the Company, additional capital will be
required in order for the Company to continue its ongoing operations. These
matters raise substantial doubt about the Company's ability to continue as a
going concern.

Subsequent to June 30, 2002, the Company has raised approximately $286,000 in
which $70,000 was from account receivable collection, $110,000 from Swartz
Equity Line, and $106,000 from sales of Restricted Common Stock.


3.       INVENTORIES:

Inventories consist of the following:

                                                            JUNE 30,
                                                              2002
                                                         ----------------
       Raw materials and supplies                        $         24,888
       Finished goods                                                 --
                                                         ----------------
                                                         $        24,888
                                                         ================


4.       NET LOSS PER SHARE

Basic and diluted net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the
reporting period. During the nine months ended June 30, 2002 and 2001, common
stock equivalents are not considered because they would be anti-dilutive.


5.       COMMITMENTS AND CONTINGENCIES

Litigation:

In December, 1999, the Company was served with a lawsuit by one of its suppliers
for nonpayment of various purchases. As of August 15, 2002, the supplier has not
pursued their lawsuit.

                                       8
<PAGE>

U.S. MICROBICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)



5.       COMMITMENTS AND CONTINGENCIES (CONTINUED):

On November 19, 2001, a lawsuit was filed against the Company by Crosby, Heafey,
Roach and May, a professional legal corporation, for unpaid legal services
provided in the amount of $93,323, including attorneys' fees and interest. The
Company was served with the lawsuit on January 7, 2002. The Company filed a
response on February 5, 2002, alleging among other things that the billings by
the law firm were excessive. In June, 2002, the Company reached a settlement
agreement with and paid the law firm $25,000 as payment in full. The lawsuit is
terminated. In connection with the negotiated settlement the Company agreed to
pay a consultant $13,665 in fees.

On June 12, 2002, the Company was served with a lawsuit by a newswire service in
the amount of $7,195 for unpaid services. The Company is currently negotiating
with the plaintiff and has tentatively reached a settlement agreement whereby
the Company would pay approximately 90% of the amount owed by the end of August,
2002.


Purchase commitment:

During the year ended September 30, 1999, the Company entered into an agreement
with suppliers to purchase certain inventories at a total cost of $194,000. The
Company made deposits totaling $29,400. The Company has not completed the
purchase transaction and the supplier has sued the Company for performance under
the purchase agreement. As of August 15, 2002, the supplier has not pursued
their lawsuit.

Asset pledged:

In May, 2002, Sub Surface Waste Management Inc., a wholly-owned subsidiary of
the Company, pledged a Certificate of Deposit in the amount of $184,211 to
Community National Bank as collateral for a Letter of Credit in the amount of
$175,000, issued by the Bank to the state of South Caroline in lieu of a
contract performance bond. Sub Surface Waste Management Inc., was the successful
bidder on a remediation contract with the state of South Carolina, Department of
Health and Environmental Control, for the remediation of hydrocarbon
contaminated soil and groundwater at the Off Ramp # 83 site. The terms of the
contract required the posting of a either performance bond or letter of credit.


6.       EQUITY TRANSACTIONS

During the nine months ended June 30, 2002, the Company received cash proceeds,
net of offering costs of $37,000, totaling $977,089 pursuant to a private
placement offering through the Swartz Equity Line.

During the three months ended June 30, 2002, the Company issued 632 shares of
convertible preferred stock series A in exchange for gross cash proceeds of
$50,000.

During the three months ended June 30, 2002, the Company issued 3,050,867 shares
of common stock in exchange for cash proceeds of $582,463 pursuant to a private
placement offering through the Swartz Equity Line.

During the three months ended June 30, 2002, the Company converted $129,440 of
accrued payroll into 658,801 shares of common stock.

During the three months ended June 30, 2002, the Company converted $54,320 of
accrued interest into 250,000 shares of common stock.

During the three months ended June 30, 2002, the Company converted $55,000 of
notes payable into 362,825 shares of common stock.

During the three months ended June 30, 2002, the Company converted 10,220 shares
of preferred stock Series C into 1,022,000 shares of common stock.

During the three months ended June 30, 2002, the Company converted issued
1,190,832 shares of common stock in exchange for services rendered of $267,963,
which represents the fair market value of the services rendered or the common
stock issued, which ever is more readily determinable.

During the three months ended June 30, 2002, the Company allowed employees to
exercise 1,575,000 of their stock options in exchange for note receivables
totaling $793,750. The note receivable is netted against equity. In addition,
the note receivable is secured by the stock.

7.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

As of June 30, 2002, consist of the following.

           Accounts payable                                        $   340,250
           Accrued payroll taxes                                     1,023,687
           Other                                                        42,669
                                                                   ------------
               Total accounts payable and accrued expenses         $ 1,406,606
                                                                   ============

The Company is delinquent in paying payroll taxes, which is approximately
$1,020,000 at June 30, 2002. The Company has received notifications from the
Internal Revenue Service (IRS) that they intend to levy certain assets of the
Company. In July, 2002, the Company was notified that the Employment Development
Department (EDD) of the state of California had levied the assets of the Company
in the amount of $82,150. Since the levy, the Company has paid the EDD $34,519
and is in the process of negotiating an installment agreement over a 12 month
period for the remaining balance. Since June 30, 2002, the Company has paid the
IRS $50,000 in back payroll taxes under an informal payment arrangement. The
Company is making timely payroll tax deposits relating to its current payroll.

8.       RECENTLY ISSUED ACCOUNTING POLICES

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations." This statement addresses financial accounting and
reporting for business combinations and supersedes Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting
for Pre-Acquistion Contingencies of Purchased Enterprises." All business
combinations in the scope of this statement are to be accounted for using one
method, the purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method for those business combinations is prohibited. This
statement also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001 or later.
This statement is not applicable to the Company.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other intangible
Assets." this statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and superseded APB Opinion No. 17,
"Intangible Assets," It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. This statement is not applicable to
the Company.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the accounting and
reporting provisions of APB No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business and amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception
to consolidation for subsidiary for which control is likely to be temporary. The
Company does not expect adoption of SFAS No. 144 to have a material impact, if
any on its financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraodinary item, net of related income tax effects. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded, SFAS No. 44 has been rescinded as it is no longer necessary, SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existig pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to the Company.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for cost associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EIFT Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. This statement is not applicable to
the Company.

                                       9
<PAGE>

                                     PART I


ITEM 2   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY
UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING
FUTURE EVENTS OR FUTURE PERFORMANCE OF THE COMPANY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH ARE ONLY
PREDICTIONS AND SPEAK ONLY AS OF THE DATE HEREOF. FORWARD-LOOKING STATEMENTS
USUALLY CONTAIN THE WORDS "ESTIMATE," "ANTICIPATE," "BELIEVE," "EXPECT," OR
SIMILAR EXPRESSIONS, AND ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY REVIEW VARIOUS RISKS AND UNCERTAINTIES IDENTIFIED BELOW, AS WELL AS
THE MATTERS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON 10-KSB FOR THE YEAR
ENDED SEPTEMBER 30, 2001 AND ITS OTHER SEC FILINGS. THESE RISKS AND
UNCERTAINTIES COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE OR PUBLICLY ANNOUNCE REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.

THE COMPANY

U.S. Microbics, Inc. (the "Company" or "USMX") is building an environmental
biotech company utilizing the proprietary microbial technology, bioremediation
patents, knowledge, processes and unique microbial culture collection developed
over 30 years by the late George M. Robinson and his daughter Mery C. Robinson
(collectively, the "Microbial Technology"). The Company creates and markets
proprietary microbial technologies that provide natural solutions to many of
today's environmental problems. The Company's microbes or "bugs" can be used to
breakdown various substances, including hydrocarbons, chlorinated solvents and
certain water and soil contaminants when combined with engineered application
solutions. The Company believes that it can build the foundation for the
international commercialization of proprietary products and services based on
the Microbial Technology for applications in the global bioremediation, water
cleanup and agricultural markets. The Company is in the process of determining
and obtaining the capital, personnel and manufacturing and distribution capacity
necessary to commercialize the Microbial Technology.

The Company's primary objective is to establish itself as a leading provider of
environmental technology and products to companies worldwide by utilizing a
"Pay-for-Performance" philosophy, specifying solutions that treat the source of
the problem, and concentrating on niche markets which offer above normal profit
potential. To achieve this objective, the Company intends to focus its strategy
on the following three elements: (i) developing core engineering and project
management services, microbe manufacturing and research and development services
that support all subsidiaries; (ii) validating the technology using actual
customer demonstration sites, approved governmental work plans, and third party
certified results showing solutions to be "better-faster-cheaper"; and (iii)
providing the technology and engineering services to direct customers or
licensing the use of the technology to third parties for use in specific niche
markets and territories.

                                       10
<PAGE>

Since September 1998 the Company has been in a development stage building its
manufacturing facility, acquiring technical and engineering staff, researching
market opportunities and validating its technology in field demonstrations.
During that time frame, the Company has raised over $13MM to finance its
operations in preparation for implementing a major paradigm shift in the soil
and groundwater cleanup market from the old 1980's philosophy of "best efforts,
time and materials billing, treat the symptoms of the problem and measure
progress over years," to the new millennium philosophy of "pay-for-performance,
eliminate the problem better-faster-cheaper -now". Customer interest in this new
philosophy runs high. Even the U.S. government is starting to adopt this new
philosophy in their contracting efforts. Field tests have shown that the
microbial technology and engineering solutions have significantly reduced the
time and cost to treat contaminated water, chlorinated solvents and MTBE from
years of little progress using 1980's technology, down to only weeks or months
using biotechnology based solutions. These results mean that parents and their
children may enjoy cleaner water, air and soil sooner rather than later and
corporations, governmental entities and taxpayers may be able to reduce the
expense of environmental cleanup in the future.

The efforts to implement the new philosophy revolve around alternate technology
validation, the politics of local jurisdictional and industry acceptance of
alternative technology for soil and groundwater cleanup and money for financing
the changeover logistics. By targeting key niche markets with high profit
potential, low changeover costs and minimal political resistance, U.S. Microbics
is becoming a revenue generating stage company in 2002 as measured by the
$815,540 of contracts awarded in the first three quarters the fiscal year. Work
has commenced on two contracts for $471,540 and performance bonds for contracts
for contract awards totaling $169,000 are being sought. Implementation has now
progressed from successful laboratory feasibility studies and customer field
demonstration and completed projects to more complex contracts with state
governments and private companies.

While these results are promising the Company's achievement of its objectives is
highly dependent, among other factors, on its ability to raise the necessary
capital to continue implementing its biotechnology solutions and obtaining
performance bonds or letters of credits where required. The Company intends to
raise additional working capital through the sale of common stock through its
equity line, through private placements in its subsidiaries, through issuance of
preferred stock or debt, through third party technology licensing arrangements
for niche market or specific territory use, and through the sale of assets
consisting of stock in merger/spin-off companies. There can be no assurance that
the Company will raise such capital on terms acceptable to the Company, if at
all. The Company's failure to obtain adequate financing may jeopardize its
existence. See "Liquidity and Capital Resources."

                                       11
<PAGE>

OVERVIEW

The Company has developed an organizational structure of multiple corporations
for the purpose of segmenting its operations into distinct units for proprietary
microbe or "bug" production, research and development ("R&D"), licensing and
patent protection and the intended sale and licensing of microbial products and
related services to specific market segments. As the public holding company, the
Company coordinates the deployment of the Microbial Technology to its
subsidiaries that in turn deliver engineered solutions to specific niche
markets.

The Company and its subsidiaries are described more fully below:



                              U.S. MICROBICS, INC.

The Company orchestrates the operations of its subsidiaries and provides
administrative functions at beneficial economies of scale. The Company continues
to raise the capital needed for successful implementation of the Microbial
technology by its subsidiaries. The Company allocates its resources among the
subsidiaries within the organizational structure. The Company provides to its
subsidiaries public relations, accounting, legal, human resources, capital
acquisition and merger and acquisition services.

In December 2001 U.S. Microbics was named one of the "Best companies to work for
in San Diego" for 2001. The San Diego Business Journal and the Ken Blanchard
Companies (One Minute Manager) made the announcement, which honors San Diego
businesses with a proven track record of providing an empowering environment to
their employees.

U.S. Microbics (BUGS) and its subsidiaries distinguished themselves as one of
the best employers in San Diego based on their ability to share power and
information throughout the organization; their employee empowerment and
involvement strategies; their altruistic vision; and their focus on customer
service and results.

BUGS' vision is to be the customer's choice for best value products and
services. The company's Pay-for-Performance strategy is an industry trendsetter
compared to the conventional time and materials, best-efforts practices of its
competitors. Another key part of its vision is to solve the customer's problem
rather than the symptoms of the problem using biotechnology solutions based upon
sound engineering practices; another first for its industry. The employees of
BUGS appreciate the opportunity in bringing a clean environment to people all
over the world.

In June of 2002, BUGS initiated an aggressive strategy of mergers/spin-offs with
environmentally oriented companies, whereby BUGS is using its dormant and newly
formed subsidiaries as a vehicle to provide new, high growth potential companies
access to public capital markets. BUGS, through its subsidiary, USM Capital
Group, Inc., will retain an equity interest in the new public companies and also
pay a dividend in stock to the shareholders of BUGS of stock in these new
entities. This strategy could provide the following benefits: 1) significant
increase in assets in the BUGS balance sheet based on the value of the stock in
the new public entities ; 2): potential for cash liquidity from the sale of
stock in these public companies 3) dividends in stock of public companies to
BUGS shareholders and 4) new spheres of business for BUGS resulting from
relationships with these new environmentally oriented companies.

                                       12
<PAGE>

In connection with its merger/spin-off strategy the Company has entered into two
merger agreements as follows:

   CAPITAL GROUP HOLDING INC. (CGHI)

         In June, 2002, BUGS entered into a Plan of Merger with CGHI whereby
         shareholders of CGHI will transfer 100% of their common stock holdings
         to a dormant subsidiary of BUGS in exchange for 88% of the outstanding
         shares of the subsidiary immediately after the transactions is
         completed. The Bugs subsidiary will change its name to Capital Group
         Holdings Inc. BUGS will then own 12% of the outstanding stock of CGHI.
         On June 14, 2002, the Board of Directors of U.S. Microbics, Inc.
         announced that it will pay a dividend in stock to its shareholders of
         some of its holdings in CGHI on the basis of one share of CGHI for
         every 18 shares of BUGS common stock held on the record date of July 3,
         2002. The dividend distribution will be made to BUGS shareholders after
         the registration statement for CGHI is filed with the United States
         Securities and Exchange Commission has become effective. The shares
         received in the dividend will be freely tradable shares of common stock
         of CGHI.

   MAJESTIC SATE-T-PRODUCTS, LTD (MSPL)

         Also in June, 2002, BUGS entered into a Plan of Merger with MSPL
         whereby shareholders of MSPL will transfer 100% of their common stock
         holdings to a another dormant subsidiary of BUGS in exchange for 70% of
         the outstanding shares of the subsidiary immediately after the
         transactions is completed. The BUGS subsidiary will change its name to
         Majestic Sate-T-Products, Ltd. BUGS will then own 30% of the
         outstanding stock of MSPL . On August 13, 2002, the Board of Directors
         of U.S. Microbics, Inc. announced that it will pay a dividend in stock
         to its shareholders of some of its holdings in MSPL on the basis of one
         share of MSPL for every 8 shares of BUGS common stock held on the
         record date of August 30, 2002. The dividend distribution will be made
         to BUGS shareholders after the registration statement for MSPL is filed
         with the United States Securities and Exchange Commission has become
         effective. The shares received in the dividend will be freely tradable
         shares of common stock of MSPL. .


                      WEST COAST FERMENTATION CENTER (WCFC)

WCFC manufactures microbial blends by using fermentation technology, powder
blending techniques and combinatorial liquefaction including microbial blends
for the Remediline(TM), Wasteline(TM) and Bi-Agra(TM) product lines.

                                       13
<PAGE>

                                    XYCLONYX

The XyclonyX mission is to research, develop, formulate, protect, apply,
acquire, license and transfer its technologies, consisting of patents,
proprietary knowledge, products, and processes for hydrocarbon impacted soil and
groundwater treatment and agricultural growth enhancement.

In May 2000 XyclonyX, at the request of its sole licensee of this technology
Sub-Surface Waste Management completed a successful pilot program that
demonstrated the efficiency of using its proprietary microbes, (in a formulation
called MTBEctomy(TM)), to treat Methyl-Tertiary-Butyl-Ether (MTBE), a chemical
compound used as a fuel additive in gasoline, which has caused widespread and
serious contamination of the nation's drinking water supplies. Sub-Surface Waste
Management's successful engineering implementation of the treatment protocol
developed by XyclonyX could help reduce the danger that MTBE poses to human
health.

While the use of MTBE as a fuel additive has helped to achieve significant
reductions in air emissions, unlike other components of gasoline, MTBE dissolves
and spreads readily in groundwater, does not degrade easily and is difficult and
costly to remove from groundwater. The U.S. Environmental Protection Agency
(EPA) is considering a limit or ban on the use of MTBE as a fuel additive. The
EPA has also endorsed the use of bioremediation for the cleanup of MTBE.

In response to the growing concerns regarding MTBE and customer requests for a
cost effective, environmentally friendly alternative for MTBE cleanup, the
XyclonyX research team under direction and supervision of Sub-Surface Waste
Management who secured groundwater samples from a confidential major west coast
retailing petroleum company's Los Angeles area Terminal operations performed a
pilot project on the client's MTBE contaminated water, fine tuning the recipe of
microbes required to treat the MTBE. The sample consisted of MTBE, Benzene,
Toluene, Ethylbenzene, and Xylene (BTEX), and gasoline with concentrations over
10,000 parts per billion. Within five days after initial microbial treatment,
non-detect (ND) levels were validated by an independent, state-certified lab.

The excellent results achieved by the research team are directly applicable
Sub-Surface Waste Management below ground cleanup of MTBE contaminated soil and
groundwater through injection of microbes and above-ground applications where
contaminated soil is processed through U.S. Microbics' patented Bio-Raptor(TM)
treatment system as well as in the patent pending bioreactivation of granular
activated carbon filtration media precluding the need for off-site thermal
reactivation treatment.

XyclonyX has recently filed a patent application for the "Treatment of
Contaminated Activated Charcoal" with the United States Patent Office authored
by this breakthrough technology lead developer Behzad Mirzayi, MS, P.E. Chief
Engineer of Sub-Surface Waste Management. The new invention relates to the
treatment of carbon filtration systems and the use of micro-organisms for
removal of contaminating hydrocarbons from such systems. The patent application
follows from development sponsored and directed by Sub-Surface Waste Management
in successful field trials using the BAC(TM) and Bio-GAC(TM) bioreactivation
treatment systems to on-site "bio-recycle" spent granular activated carbon at
Petroleum Refineries, Petro-chemical Facilities, Manufacturing Facilities and
large Superfund Project cleanups.

                                       14
<PAGE>

The BAC(TM) and Bio-GAC(TM) system was developed in response to industry demand
for an economical alternative to offsite regeneration of spent carbon. Not only
is offsite regeneration expensive, it is time consuming, ties up additional
carbon inventory, and only 50 to 75% of the original carbon is returned from the
regeneration process. With the BAC(TM) system, costs for regeneration are
typically 50% less than offsite regeneration and nearly 100% of the carbon can
be regenerated to near virgin carbon standards. Bio-GAC(TM) is a new
breakthrough technology that can extend the life of "on-line" pump and treat
systems to eliminate such compounds as MTBE and other hydrocarbons from soil and
groundwater cleanups at retail service station sites nationwide. The typical
industries with direct potential beneficial use include:

         o        Local Potable water treatment companies, boards and districts
         o        Oil and Gas production, transportation, pipeline, bulking,
                  refining, distribution, retail and gas stations
         o        Commercial and industrial facilities with waste water
                  production and/or permit requirements to treat facility
                  discharges
         o        Chemical and petrochemical facilities
         o        Groundwater remediation sites

XyclonyX sole licensee of this technology, Sub-Surface Waste Management
plans to capitalize on its patent and patent-pending technology by forming
strategic alliances and joint ventures with well-established leaders in the
environmental industry. Continued revenue streams are expected through licensing
of the technology with upfront fees, ongoing royalties, professional services
billings and microbial blend sales.

In October 2001 XyclonyX's bioaugmented granular activated carbon or Bio-GAC(TM)
was nominated for the UCSD Connect "2001 Most Innovative New Product Award".
Bio-GAC(TM) is a new breakthrough technology used to extend the life of
in-service carbon filtration systems to eliminate such compounds as MTBE and
other hydrocarbons in groundwater cleanup at retail service station sites
nationwide.


                    SUB SURFACE WASTE MANAGEMENT, INC. (SSWM)

SSWM is an environmental engineering solutions company using biotechnology to
clean up toxic waste better-faster-cheaper, and more profitably, than
conventional technology. The company competes by doing what the competition
doesn't! It eliminates the source of the contamination problem, works on a
Pay-for-Performance basis, and typically saves its customers 30 to 50% of the
cost and time to cleanup their mess.

To date SSWM has received $5MM from its parent company, U.S. Microbics. These
funds have been used for contract completion as well as identifying specific
niche markets, new business development, developing new application techniques
for bioremediation and procuring engineering resources. During their fiscal year
third quarter ended 06/30/02, SSWM was awarded cleanup contracts of $815,540.
Typical contracts range from 4 to 18 months duration and the company receives
payments as performance milestones are met. Projected contract revenue for the
12 months after projected successful completion of their $5,000,000 financing is
from $12,000,000 to $18,000,000. Over the past twelve months, 162 requests for
proposals were generated and 12 have resulted in work in progress or completions
- an award rate higher than the industry average.

                                       15
<PAGE>

SSWM management collectively has over 75 years of toxic waste cleanup and
project management experience and has been together as a team for over nine
years. At previous companies this team of professionals achieved annual revenue
rates exceeding $30MM and have also worked on projects over $100MM for several
of the major environmental consulting firms. The Company has three offices
nationwide, with employees holding advanced degreed engineers as well as a
registered geologist. They also utilize the business experience and
administration services of their parent company, U.S. Microbics.

SSWM has focused its efforts on new products for the MTBE, and dry-cleaning
fluids cleanup and carbon reactivation markets based upon the new industry
paradigm, "Pay-for-Performance" wherein the company is paid for achieving
project milestone results as opposed to industry-standard time and materials
billing where consultants are paid on a "best efforts" but no guaranteed results
basis. The industry interest for the Pay-for-Performance concept has been
greater than expected, yet SSWM still has to prove the capability of the
engineering group and the technology in specific customer applications.

Any innovative technology validation effort takes time and resources. With this
innovative biotechnology solution SSWM has achieved MTBE demonstration cleanups
in less than 30 days compared to typical industry results of over one year. SSWM
reduced dry-cleaning solvents to regulatory levels in six months compared to
years with little concentration change using conventional technology. SSWM has
also been able to reactivate spent carbon in less than a week to near virgin
levels, a first in the industry.

During 2001 SSWM performed demonstrations of the technology for confidential
Fortune 100 companies. SSWM believes those demonstrations will lead the adoption
of the new paradigm and the use of biotechnology solutions as an industry
standard for MTBE cleanup, dry cleaning fluid cleanup and carbon reactivation.
SSWM estimates the products and services sold into these markets to be greater
than $10 billion per year and SSWM is positioning itself to be a major
technology provider in this arena.

Much of the business development efforts in 2001 were dedicated to identifying
the market niches and products to serve them. SSWM considers its successful
field demonstrations and third party verification as validation of the
technology and is now ready for rollout in 2002 with additional financing which
is underway. After eighteen months the SSWM engineering group and technical
support staff and XyclonyX microbiologists have developed
"better-faster-cheaper" products, which comprise the BAC(TM) and Bio-GAC(TM)
product line. SSWM expects a bright future for this product line and its
contribution to bottom line profits.

                                       16
<PAGE>

SSWM plans to expand its revenue base by licensing it technology, know how and
patents to third party environmental cleanup contractors on a world-wide basis..
At that point, SSWM biotechnology solutions can enhance the profitability of
licensee projects by introducing improved solutions that will reduce project
cost and time and increase profitability. SSWM could realize breakeven within 12
to 18 months and profitability after 18 months of closing its current financing
efforts.

SSWM HAS LICENSED IT'S BIOREACTIVATED CARBON TREATMENT PROCESS TO A SUBSIDIARY
OF TETRA TECH, INC. FOR USE IN THE UNITED STATES AND MEXICO.

RESULTS OF OPERATIONS

FOR THE NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE NINE MONTHS ENDED JUNE
30, 2001.

The Company had revenues of $152,883 during the nine months ended June 30, 2002,
as compared to $141,971 of revenues for the same period in fiscal 2001. Revenues
for the nine months ended June 30, 2001 consisted primarily of bio-remediation
of hydro-carbons in contaminated soil for an oil company and sales of microbial
blends for grease trap remediation.

Selling, general and administrative ("SG&A") expenses for first three quarters
of fiscal year 2002 totaled $2,436,515 compared to $2,719,314 for the same
period in fiscal year 2001. SG&A expenses for the first two quarters of fiscal
year 2002 consisted of occupancy, payroll, accounting, legal, consulting, and
public relations expenses.

The Company incurred a net loss of $(2,640,950) and had negative cash flows from
operations of $(1,576,148) for the nine months ended June 30, 2002 compared to a
net loss of $(2,785,744) and negative cash flows from operations of $(1,246,566)
for the nine months ended June 30, 2001. Basic and diluted net loss per share
was $(.10) for the nine months ended June 30, 2002 compared to $(.23) for the
nine months ended June 30, 2001. The decrease was due to the increase in
weighted average shares outstanding of 26,694,164 for the nine months ended June
30, 2002 compared to 12,299,445 for the corresponding nine months ended June 30,
2001.

Although the Company is expecting to increase revenues during the last half of
fiscal 2002, based on the current financial condition of the Company, additional
capital will be required in order for the Company to maintain its ongoing
operations. In order to continue implementing the Company's strategic plan, the
Company is planning on raising up-to an additional $5,000,000 from private
placements during the fourth quarter of fiscal 2002 and first quarter of FY
2003. The funds are targeted to expand the fermentation manufacturing operation
and the staffing of sales subsidiaries. There can be no assurance that the
Company will be able to raise such capital on terms acceptable to the Company,
if at all.

The Company's operating and capital requirements during the next fiscal year and
thereafter will vary based on a number of factors, including: (i) the rate at
which microbial products and services are shipped and generate profits; (ii) the
necessary level of sales and marketing activities for environmental products;
and (iii) the level of effort needed to develop additional distribution channels
to the point of commercial viability.

                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES.
--------------------------------

Cash and cash equivalents totaled $ 42,346 and $50,600 at June 30, 2002 and
September 30, 2001, respectively. Net cash used in operations was $1,576,148 for
the nine months ended June 30, 2002, compared to $1,246,566 for the comparable
period in fiscal 2001.

During the nine months ended June 30, 2002, the Company raised $940,089 net of
placement fees of approximately $37,000, from private placements through the
Swartz Equity Line, and $50,000 from sale of Series E Preferred Stock. As of
June 30, 2002, the Company has negative working capital of $1,353,712 as
compared to negative working capital of $1,617,528 as of June 30, 2001, an
improvement of $263,816. The Company will need to continue to raise funds by
various financing methods such as private placements to maintain its operations
until such time as cash generated by operations is sufficient to meet its
operating and capital requirements. There can be no assurance that the Company
will be able to raise such capital on terms acceptable to the Company, if at
all.

To date, the Company has financed its operations principally through private
placements of equity securities and debt. Subsequent to June 30, 2002 the
Company has raised approximately $286,000 of which $70,000 was from account
receivable collection, $110,000 from Swartz Equity Line, and $106,000 from sales
of restricted Common Stock. The Company believes that cash generated from
anticipated private placements and projected revenues during the fourth quarter
of fiscal 2002 will enable it to fulfill cash needs through fiscal 2003.

On March 14, 2000, the Company entered into an investment agreement to sell up
to $35 million of the Company's common stock to Swartz Private Equity, LLC
("Swartz")

Under the terms of the investment agreement the company periodically may choose
to sell shares of its common stock to Swartz. If the company elects to sell
shares to Swartz, then the purchase price for such shares will be the lesser of
(i) ninety-two percent (92%) of the lowest closing bid price for the Company's
common stock during the thirty days following the date that the shares are
delivered to Swartz, or (ii) the market price minus $.10 per share. In no event
will the purchase price be less than the designated minimum share price set by
the Company. The number of shares that the Company can sell to Swartz is limited
by specified amounts based upon shares that have traded in the market during
specified periods prior to the sale. If the Company elects not to sell shares to
Swartz, then it may be obligated to pay fees to Swartz of up to $100,000 every
six months. If the investment agreement is terminated by the Company, then the
Company may be obligated to pay fees to Swartz of up $200,000. Each time that
the Company elects to sell shares to Swartz, the Company is obligated to issue
Swartz a warrant to purchase a number of shares equal to fifteen percent (15%)
of the shares sold in the transaction. The warrant is exercisable at one hundred
ten-percent (110%) if the market price for such shares.

                                       18
<PAGE>

In Conjunction with the agreement, the Company registered, 20,000,000 shares of
its common stock on Securities and Exchange Commission Form SB-2 Registration
Statement.

During the quarter ended June 30, 2002, the Company elected to make sales of
stock to Swartz. In total, 3,050,867 shares of common stock and warrants to
purchase 457,630 shares of common stock at prices ranging from $.09 to $.31 per
share were issued. Net proceeds to the Company were $577,964.

On April 18, 2002, the Board of Directors authorized the Company to amend its
Articles of Incorporation to issue a new class of stock designated as Series E
Preferred Stock. The new Series Preferred Stock has a par value of $.10 and is
convertible into common stock one year after purchase at the rate of 500 shares
of common stock for each share of Series E Preferred Stock. Fifty thousand
shares of Series E Preferred stock have been authorized. The company may at any
time beginning one year after issuance but not later than three years after
issuance, call for redemption the stock from the holder for one hundred fifty
(150) per cent to two hundred fifty (250) percent of the original purchase price
paid, depending on the length of time the Stock is held. The Company will pay a
cumulative dividend at the rate of 10% per annum to the holders of Series E
Preferred Stock based on the price paid. The first dividend is to be paid at the
end of the first calendar quarter following a three month holding period by the
purchaser. Subsequent to March 31, 2002, the Company realized net proceeds from
the sale of 632.455 shares of Series E Preferred stock for proceeds of $50,000
net of placement fees.

The Company will need additional capital to continue its operations and will
endeavor to raise funds through the sale of equity shares and revenues from
operations. There can be no assurance that the Company will obtain sufficient
capital or generate revenues on acceptable terms, if at all. Failure to obtain
such capital or generate such revenues would have an adverse impact on the
Company's financial position and results of operations and ability to continue
as a going concern.

During the last quarter of fiscal 2002, the Company projects expenditures for
plant and equipment of approximately $100,000 and research and development costs
of less than $100,000, assuming the Company raises the needed capital. Research
and development costs will be associated primarily with for specific engineered
field applications. The Company also plans to increase its number of employees
to approximately 20 by the end of fiscal year 2002.

The Company's operating and capital requirements during the next fiscal year and
thereafter will vary based on a number of factors, including: (i) the rate at
which microbial products are shipped and generate profits; (ii) the necessary
level of sales and marketing activities for environmental products; and (iii)
the level of effort needed to develop additional distribution channels to the
point of commercial viability.

Since September 1998, the Company has raised approximately $14,300,000
principally through private placements of equity securities and debt. The
Company believes that it can generate sufficient cash through sources listed
above to continue its operations through September 30, 2002, and anticipates
that cash generated from planned private placements and projected revenues
during the next two quarters of fiscal 2002 and fiscal 2003 will enable it to
fulfill cash needs through fiscal 2003 operations.

                                       19
<PAGE>

In June of, 2002, the Company initiated an aggressive strategy of
merger/spin-offs with new, high growth potential companies (See Overview - U.S.
Microbics Inc. above for explanation). The Company anticipates that many of its
future financing needs can be meet by selling some or all of its stock received
from these transactions. The actual proceeds, if any, received from such sale of
these securities will depend on their future market values at the time of sale.

Although financing efforts are continuing, there can be no assurance that
additional private or public financing, including debt or equity financing, will
be available as needed, or, if available, on terms favorable to the Company. Any
additional equity financing may be dilutive to shareholders and such additional
equity securities may have rights, preferences or privileges that are senior to
those of the Company's existing common or preferred stock. Furthermore, debt
financing, if available, may require payment of interest and may involve
restrictive covenants that could impose limitations on the operating flexibility
of the Company. The failure of the Company to successfully obtain additional
future funding may jeopardize the Company's ability to continue its business and
operations.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

In December, 1999, the Company was served with a lawsuit by one of its suppliers
for nonpayment of various purchases. As of August 15, 2002, the supplier has not
pursued their lawsuit.

On November 19, 2001, a lawsuit was filed against the Company by Crosby, Heafey,
Roach and May, a professional legal corporation, for unpaid legal services
provided in the amount of $93,323, including attorneys' fees and interest. The
Company was served with the lawsuit on January 7, 2002. The Company filed a
response on February 5, 2002, alleging among other things that the billings by
the law firm were excessive. In June, 2002, the Company reached a settlement
agreement with and paid the law firm $25,000 as payment in full. The lawsuit is
terminated. In connection with the negotiated settlement the Company agreed to
pay a consultant $13,665 in fees.

On June 12, 2002, the Company was served with a lawsuit by a newswire provider
in the amount of $7,195 for unpaid services. The Company is currently
negotiating with the plaintiff and has tentatively reached a settlement
agreement whereby the Company would pay approximately 90% of the amount owed by
the end of August, 2002.

                                       20
<PAGE>

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

In addition to the 3,870,204 shares issued to Swartz, to conserve cash, through
July 23, 2002, the Company pursuant to an S-8 filing has issued 1,673,506 shares
of common stock to employees in lieu of payroll and 2,339,323 shares to
consultants for services performed for the Company. Additionally, 3,787,754
shares of common stock were issued to officers in repayment of notes payable
totaling $371,200. An additional 1,003,667 shares of common stock were issued to
holders of 10,037 shares of Series C and D Preferred Stock which were converted
into common stock. Another 1,525,452 shares were issued to holders of notes
payable and 100,000 shares were issued to compensate a shareholder who provided
a letter of credit in lieu of a performance bond on a contract of
wholly-subsidiary Sub Surface Waste Management.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
         None

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .
         None

ITEM 5.  OTHER INFORMATION .

SUBSEQUENT EVENTS:

To date, the Company has financed its operations principally through private
placements of equity securities and debt. Subsequent to June 30, 2002 the
Company has raised approximately $286,000 in which $70,000 from account
receivable collection, $110,000 from Swartz Equity Line, and $106,000 from sales
of restricted Common Stock.

Subsequent to June 30, 2002, the Company has paid the Internal Revenue Service
and the Employment Development Department of the state of California, $34,519
and $50,000 respectively on delinquent payroll tax liabilities.

In connection with its merger/spin-off strategy the Company has entered into two
merger agreements as follows:

   CAPITAL GROUP HOLDING INC. (CGHI)

         In June, 2002, BUGS entered into a Plan of Merger with CGHI whereby
         shareholders of CGHI will transfer 100% of their common stock holdings
         to a dormant subsidiary of BUGS in exchange for 88% of the outstanding
         shares of the subsidiary immediately after the transactions is
         completed. The Bugs subsidiary will change its name to Capital Group
         Holdings Inc. BUGS will then own 12% of the outstanding stock of CGHI.
         On June 14, 2002, the Board of Directors of U.S. Microbics, Inc.
         announced that it will pay a dividend in stock to its shareholders of
         some of its holdings in CGHI on the basis of one share of CGHI for
         every 18 shares of BUGS common stock held on the record date of July 3,
         2002. The dividend distribution will be made to BUGS shareholders after
         the registration statement of CGHI is filed with the United States
         Securities and Exchange Commission has become effective. The shares
         received in the dividend will be freely tradable shares of common stock
         of CGHI.

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<PAGE>

   MAJESTIC SATE-T-PRODUCTS, LTD (MSPL)

         Also in June, 2002, BUGS entered into a Plan of Merger with MSPL
         whereby shareholders of MSPL will transfer 100% of their common stock
         holdings to a another dormant subsidiary of BUGS in exchange for 70% of
         the outstanding shares of the subsidiary immediately after the
         transactions is completed. The BUGS subsidiary will change its name to
         Majestic Sate-T-Products, Ltd. BUGS will then own 30% of the
         outstanding stock of MSPL . On August 13, 2002, the Board of Directors
         of U.S. Microbics, Inc. announced that it will pay a dividend in stock
         to its shareholders of some of its holdings in MSPL on the basis of one
         share of MSPL for every 8 shares of BUGS common stock held on the
         record date of August 30, 2002.. The dividend distribution will be made
         to BUGS shareholders after the registration statement of MSPL is filed
         with the United States Securities and Exchange Commission has become
         effective. The shares received in the dividend will be freely tradable
         shares of common stock of MSPL.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

The Company filed a Current Report on Form 8-K on March 21, 2002 engaging Singer
Lewak Greenbaum & Goldstein LLP as its independent certifying accountant
effective March 20, 2002 dismissing Bradshaw, Smith & Co. LLP its prior
independent certifying accountant, as of the same date. The change in
independent certifying accountant was approved by the Board of Directors of
Registrant on March 20, 2002.



                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed in its behalf by the undersigned, thereunto duly
authorized.


                                           U.S. MICROBICS, INC.


Date: August 19, 2002           By:           /s/ Robert C. Brehm
                                   ---------------------------------------------
                                          Robert C. Brehm, President and
                                          Chief Executive Officer

                                By:          /s/ Conrad Nagel
                                   ---------------------------------------------
                                          Conrad Nagel, Chief Financial Officer

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