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

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

                                   FORM 10-QSB
(Mark One)

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

      For the quarter ended December 31, 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 - 65,145,345 shares
outstanding as of February 15, 2003

                   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
                                     CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                         AS OF              AS OF
                                                                                     DECEMBER 31,       SEPTEMBER 30,
                                                                                         2002               2002
ASSETS                                                                                (Unaudited)         (Audited)
                                                                                     -------------      -------------
<S>                                                                                  <C>                <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                       $     50,922       $     44,520
     Accounts receivable                                                                   61,459              4,989
     Cost and Estimated Profit in Excess of Billing                                         9,347              3,818
     Contract Receivable                                                                   35,559             80,612
     Prepaid expenses and other assets                                                     76,412             58,951
                                                                                     -------------      -------------
          Total current assets                                                            233,699            192,890
PLANT, PROPERTY AND EQUIPMENT:
     Office Furniture and Equipment                                                       137,836            134,390
     Leasehold Improvement                                                                 14,376             14,376
     Production Equipment                                                                 159,630            159,630
                                                                                     -------------      -------------
                                                                                          311,842            308,396
     Less:  Accumulated Depreciation                                                     (189,163)          (176,497)
                                                                                     -------------      -------------
                                                                                          122,679            131,899
OTHER ASSETS:
     Restricted Cash                                                                      252,156            251,796
     Deposit                                                                               24,179             28,779
                                                                                     -------------      -------------
                                                                                          276,335            280,575
                                                                                     -------------      -------------
TOTAL ASSETS                                                                         $    632,713       $    605,364
                                                                                     =============      =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
     Accounts payable and accrued expenses                                           $  1,448,516       $  1,602,034
     Current portion of capital lease obligation                                               --                 --
     Notes payable, related parties                                                        53,010             38,010
                                                                                     -------------      -------------
          Total current liabilities                                                     1,501,526          1,640,044

NOTES PAYABLE TO RELATED PARTIES, LONG-TERM PORTION                                        63,930             63,930

COMMITMENTS AND CONTINGENCIES                                                                  --                 --

MINORITY INTEREST                                                                         231,916             60,345

DEFICIENCY IN STOCKHOLDERS' EQUITY:
     Convertible preferred stock, $.10 par value; 20,000,000 shares authorized:
          Series II; 500,000 shares authorized; 6,244 and 6,458 shares issued
               and outstanding at December 31, 2002 and September 30, 2002,
respectively; aggregate liquidation preference of $6,244 and $6,458                           625                646
          Series B; 500,000 shares authorized; 5,522 shares issued
               and outstanding at December 31, 2002 and September 30, 2002,
respectively; aggregate liquidation preference of $5,522 and $5,522                           552                552
          Series C; 50,000 shares authorized; 17,071 and 23,521 shares issued
               and outstanding at December 31, 2002 and September 30, 2002,
respectively; aggregate liquidation preference of $1,707,100 and $2,352,100                 1,707              2,352
          Series D; 50,000 shares authorized; 10,300 shares issued and
               outstanding at December 31, 2002 and September 30, 2002,
respectively; no liquidation preference                                                     1,030              1,030
          Series E; 50,000 shares authorized; 696 shares issued and
               outstanding at December 31, 2002 and September 30, 2002,
respectively; aggregate liquidation preference of $69,600                                      70                 70
                                                                                     -------------      -------------
                                                                                            3,984              4,650

                                       1





<PAGE>

                                     U.S. MICROBICS INC. AND SUBSIDIARIES
                                 CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

     Common stock; $.0001 par value; 150,000,000 shares authorized; 62,730,444
          and 47,579,111 shares issued and outstanding at December 31,
2002 and September 30, 2002, respectively                                                   6,273              4,758
     Additional paid-in capital                                                        20,926,189         19,703,702
     Dividend Payable                                                                      (5,749)            (3,777)
     Discount on Preferred Stock                                                          (44,625)           (47,542)
     Treasury Stock                                                                      (117,400)          (117,400)
     Stock Subscriptions                                                               (3,818,750)        (3,818,750)
     Deferred Financing Costs                                                            (166,540)          (166,540)
     Accumulated Deficit                                                              (17,948,041)       (16,718,056)
                                                                                     -------------      -------------
          Total stockholders' Deficit                                                  (1,164,659)        (1,158,955)
                                                                                     -------------      -------------
          Total Liabilities and Deficiency in Stockholders' Equity                   $    632,713       $    605,364
                                                                                     =============      =============

                           See accompanying footnotes to the unaudited condensed
                                    consolidated financial statements.
</TABLE>

                                                      2





<PAGE>

                      U.S. MICROBICS INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
                                   (UNAUDITED)

                                                        FOR THE THREE
                                                   MONTHS ENDED DECEMBER 31,
                                                    2002                2001
                                                -------------      -------------
Revenues                                        $    183,098       $     14,776
Cost of revenues                                      95,282             57,657
                                                -------------      -------------
Gross income (loss)                                   87,816            (42,881)

Selling, general and administrative expenses       1,389,086            716,916
                                                -------------      -------------
Loss from operations                              (1,301,270)          (759,797)

Other income (expense):
Interest (expense), net                               (7,749)          (107,055)
Realized Gain (loss) on Sale of Securities           100,000                 --
                                                -------------      -------------
                                                      92,251           (107,055)

Net Loss Before Income Taxes                      (1,209,019)          (866,852)

Minority Interest                                     21,518                 --

Net loss                                        $ (1,187,501)      $   (866,852)
                                                =============      =============
                                                $      (0.02)      $      (0.04)
Net loss per common share (basic and diluted)

Weighted average common shares outstanding        52,287,910         20,427,725

              See accompanying footnotes to the unaudited condensed
                       consolidated financial statements.

                                       3





<PAGE>
<TABLE>

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

                                                                             FOR THE THREE
                                                                        MONTHS ENDED DECEMBER 31,
                                                                         2002              2001
                                                                     ------------      ------------
<S>                                                                  <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                          $(1,187,501)      $  (866,852)
   Adjustment to reconcile net loss to cash used in
        operating activities:
   Depreciation                                                           12,667            14,122
   Gain on sales of investment                                          (100,000)               --
   Minority interest                                                     (21,518)               --
   Beneficial conversion feature                                          20,375                --
   Miscellaneous adjustment                                              (40,000)               --
   Stock, stock options, and warrants in exchange for services         1,099,835           189,115
   Decrease (increase) in:
          Accounts receivable                                            (56,470)            7,149
          Prepaid expenses deposits, and other assets                     22,423             3,847
   Increase (decrease) in:
         Accounts payable and accrued expenses                          (153,518)          194,454
         Dividends payable                                                (3,945)               --
                                                                     ------------      ------------
NET CASH USED IN OPERATING ACTIVITIES                                   (407,652)         (458,165)
                                                                     ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                     (3,446)           (3,285)
   Proceeds from sales of investments                                    100,000                --
                                                                     ------------      ------------
NET CASH USED IN INVESTING ACTIVITIES                                     96,554            (3,285)
                                                                     ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of common stock in private placements                         73,000                --
   Issuance of subsidiaries' common stock in private placements          229,500                --
   Issuance of stock and warrants through equity line                         --           187,850
   Loans from related parties                                             15,000           223,900
   Repayment of capital lease obligation                                      --              (900)
                                                                     ------------      ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                317,500           410,850
                                                                     ------------      ------------

DECREASE IN CASH AND CASH EQUIVALENTS                                      6,402           (50,600)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                          44,520            50,600
                                                                     ------------      ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                           $    50,922       $        --
                                                                     ============      ============
</TABLE>

                        See accompanying footnotes to the unaudited condensed
                                 consolidated financial statements.

                                                 4





<PAGE>
<TABLE>

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

                                                                    FOR THE THREE
                                                               MONTHS ENDED DECEMBER 31,
                                                                2002             2001
                                                             ------------    ------------
<S>                                                          <C>             <C>
Supplemental disclosures of non-cash
     Investing and financing activities:

Common stock issued in exchange for services                 $1,099,835      $  189,115

Cash paid for:
    Interest                                                 $       --      $       --
    Income taxes                                             $       --      $       --

</TABLE>

              See accompanying footnotes to the unaudited condensed
                       consolidated financial statements.

                                       5





<PAGE>

                      U.S. MICROBICS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
                                   (UNAUDITED)

NOTE A - SUMMARY OF ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements of U.S.
Microbics, Inc. and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-QSB, and therefore, do not include
all the information necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America for a complete set of
financial statements.

In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results for the three-month period ended December 31, 2002 are not necessarily
indicative of the results that may be expected for the year ended September 30,
2003. The unaudited condensed consolidated financial statements should be read
in conjunction with the September 30, 2002 financial statements and footnotes
thereto included in the Company's Securities and Exchange Commission Form
10K-SB.

Business and Basis of Presentation
----------------------------------

U.S. Microbics, Inc. was organized on December 7, 1984 under the laws of the
State of Colorado as 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 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.

The Company has seven subsidiaries: West Coast Fermentation Center, Sub Surface
Waste Management of Delaware, Inc. ("SSWM"), Sol Tech Corporation (d.b.a. -
Wasteline Performance Corporation), Bio-Con Microbes, USM Capital Group, Inc.,
USM Technologies, Inc., USM Resources Development and USM Financial Solutions,
Inc. West Coast Fermentation Center's primary business is to manufacture
microbial cultures that are to be sold to other subsidiaries of the Company. Sub
Surface Waste Management's business is to use the microbial technology to
provide engineered solutions for soil and groundwater cleanup. Sol Tech
Corporation and Bio-Con Microbes are companies formed to service the wastewater
treatment and agriculture markets, respectively.

On August 2, 2000 Bio-Con Microbes 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 microorganisms
and additives. The other 2% is owned by U.S. Microbics, Inc., Bio-Con Microbes's
parent company.

In June of 2002, the Company formed USM Capital Group, Inc. (a Nevada
Corporation) as a wholly-owned subsidiary. USM Capital Group, Inc., was formed
to be the financial services division of U.S. Microbics, Inc. USM Capital Group,
Inc. provides an array of financial services for private and publicly traded
companies. For fiscal year 2003, USM Capital Group, Inc. is assisting more than
five clients to go public through its Partner Program. The Company's mission is
to build shareholder value through the successful deployment of financial
services in taking companies public and supporting them thereafter.

                                       6





<PAGE>

                      U.S. MICROBICS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
                                   (UNAUDITED)

Also in June of 2002, the Company formed USM Technologies, Inc., ("USMTI") as a
possible merger candidate for clients of USM Capital Group, Inc. USMTI is 60%
owned by USM Capital Group, Inc. and 40% owned by U.S. Microbics, Inc.

On June 14, 2002, the Board of Directors of the Company approved the merger of
its wholly-owned subsidiary, Applied Microbic Technology, Inc., with Capitol
Group Holdings Corporation ("CGHC"), a Nevada Corporation. Pursuant to the stock
exchange agreement, U.S. Microbics Inc. and USM Capital Group, Inc. received
2,400,000 and 2,350,000 shares of CGHC common stock, respectively. U.S.
Microbics, Inc. has declared a dividend to shareholders of record as of July
3, 2002, of approximately 2,175,000 shares of CGHC common stock.

On August 8, 2002 the shareholders of USMTI approved a plan of merger with
Majestic Safe-T-Products, LTD ("Majestic"), a Maryland corporation. On September
19, 2002, USM Capital Group, Inc., and U.S. Microbics, Inc. (collectively, the
"Sellers") entered into a Capital Stock Exchange Agreement with Majestic,
whereby the sellers agreed to exchange 100% of their stock holdings in USMTI for
15,000,000 common shares of Majestic. Pursuant to the Agreement, on September
19, 2002, U.S. Microbics, Inc. and USM Capital Group, Inc. received 6,000,000
and 9,000,000 shares of Majestic common stock, respectively. The 15,000,000
common shares represent a 30.15 % ownership in Majestic. U.S. Microbics, Inc.
has announced a "spin-off" of approximately 5,884,000 shares of common stock in
Majestic to shareholders of record on August 30, 2002.

On September 17, 2002, the Company formed USM Financial Solutions, Inc.
("USMFSI") as another possible merger candidate for clients of USM Capital
Group, Inc. USMFSI is 60% owned by USM Capital Group, Inc. and 40% owned by U.S.
Microbics, Inc.

On September 24, 2002, the shareholders of USMFSI approved a plan of merger with
Commerce Development Corporation, LTD, ("CDC"), a Maryland corporation. Also on
September 24, 2002, USM Capital Group, Inc. and U.S. Microbics, Inc.,
(collectively, the "Sellers") entered into a Capital Stock Exchange Agreement
with CDC, whereby the sellers agreed to exchange 100% of their stock holdings in
USMFI for 800,000 common shares of CDC. Pursuant to the Agreement on September
30, 2002, U.S. Microbics, Inc. and USM Capital Group, Inc. received 320,000
and 480,000 shares of CDC common stock, respectively. The 800,000 common shares
represent a 3.89 % ownership in CDC. U.S. Microbics, Inc. has announced a
"spin-off" of approximately 400,000 of its shares to shareholders of record on
October 28, 2002. To accomplish the "spin-off" USM Capital Group, Inc.
transferred 100,000 shares of CDC stock to U.S. Microbics, Inc.

NOTE B - CAPITAL STOCK EXCHANGE

On October 21, 2002, the sole officer and director of Covingham Capital
Corporation ("CCC") entered into an agreement to sell 2,100,000 of the 2,573,800
shares he owned in CCC to USM Capital Group, Inc. In continued efforts to locate
an acquisition or merger candidate, CCC also entered into a consulting agreement
with Sol Tech Corporation whereby the Company issued 800,000 shares of
restricted common stock at the price of $0.05 per share. The result was that CCC
became a 56.3% owned subsidiary of U.S. Microbics, Inc., the parent Company of
both USM Capital Group, Inc. and Sol Tech Corporation.

                                       7





<PAGE>

                      U.S. MICROBICS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
                                   (UNAUDITED)

On December 5, 2002, the Company filed an SEC Form S-8 to register 500,000
shares of common stock to be issued at $0.10 per share as part of the Employee
Stock Incentive Plan for the year ended 2002 and the Non-employee Directors and
Consultants Retainer Stock Plan for fiscal year 2002. Subsequent to September
30, 2002, the Company issued all of the shares for services valued at $50,000
which represent the fair value of the services received which did not differ
materially from the value of the stock issued.

On December 10, 2002, the Board of Directors of Covingham Capital Corporation
("CCC") authorized a change in CCC's Articles of Incorporation to change from a
fiscal period ending on December 31 to September 30. Also, the Articles of
Incorporation were amended to change CCC's name to Sub Surface Waste Management
of Delaware, Inc. and is now authorized to issue 300,000,000 shares of common
stock, par value $0.001 per share, and 50,000,000 shares of preferred stock, par
value $0.001 per share.

On December 13, 2002, Sub Surface Waste Management of Delaware, Inc. ("SSWM
Delaware"), entered into a Capital Stock Exchange Agreement with the
stockholders of Sub Surface Waste Management, Inc. ("SSWM Stockholders"), a
majority-owned subsidiary of U.S. Microbics, Inc. The SSWM Stockholders include
the owners of all shares of the issued and outstanding common stock of SSWM and
holders of options to purchase the Series A preferred stock of SSWM. The SSWM
Stockholders agreed to transfer 10,744,000 shares of SSWM common stock and
5,360,000 shares of SSWM preferred stock in exchange for 10,744,000 shares of
SSWM Delaware's common stock and 5,360,000 shares of the SSWM Delaware's
preferred stock. Additionally, the SSWM holders of options to purchase Series A
preferred stock of SSWM will exchange their options for options to purchase the
Series A preferred stock of SSWM Delaware.

On December 13, 2002, pursuant to the Capital Stock Exchange Agreement, Sub
Surface Waste Management Inc. became a wholly owned subsidiary of Sub Surface
Waste Management of Delaware, Inc.

NOTE C - CAPITAL STOCK

Preferred Stock
---------------

The Company has reserved 42,500,000 shares of its $.0001 par value common stock
for conversion of preferred stock issuances. As of December 31, 2002, there were
6,244 shares of Series A (II) preferred stock, 5,522 shares of Series B
preferred stock, 17,071 shares of Series C preferred stock, 10,300 shares of
Series D preferred stock, and 696 shares of Series E preferred stock issued and
outstanding. Conversion of all issued and outstanding convertible preferred
stock to common stock would result in an additional 3,202,760 shares of common
stock. As of December 31, 2002, the Company accrued $1,972 in dividends for the
Series E preferred stock.

                                       8





<PAGE>

                      U.S. MICROBICS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
                                   (UNAUDITED)

Common Stock
------------

The Company is authorized to issue 150,000,000 shares of common stock with a par
value of $.0001 per share. As of December 31, 2002 the Company has issued and
outstanding 62,730,444 shares of common stock. All valuations of common stock
issued for services were based upon the value of the services rendered, which
did not differ materially from the fair value of the Company's common stock
during the period the services were rendered and charged to the statement of
losses.

For the three months ended December 31, 2002, the Company issued a total of
1,300,000 shares of common stock in exchange for $73,000, net of costs and fees,
in a private placement.

For the three months ended December 31, 2002, the Company issued an aggregate of
10,967,701 shares of common stock to consultants in exchange for a total of
$939,323 of services and expenses rendered. These shares were valued at a
weighted average of $.09 per share.

For the three months ended December 31, 2002, the Company issued an aggregate of
2,236,495 shares of common stock to employees in exchange for a total of
$160,512 of services rendered. These shares were valued at a weighted average of
$.07 per share.

For the three months ended December 31, 2002, certain Series A (II) preferred
stockholders exercised their preferred stock conversion rights and the Company
issued 2,137 shares of common stock in exchange for cancellation of 214 shares
of Series II preferred stock. In addition, certain Series C preferred
stockholders exercised their preferred stock conversion rights and the Company
issued 647,137 shares of common stock in exchange for cancellation of 6,450
shares of Series C preferred stock.

NOTE D - MINORITY INTEREST

The Company's majority-owned subsidiary, USM Capital Group, Inc., issued 200,000
shares of common stock to private investors at $0.50 per share for total
proceeds of $100,000. This transaction resulted in a minority interest of
$100,000, increasing the minority interest from 22% to 23%, which reflects the
original investment by the minority shareholders of USM Capital Group, Inc. As
of December 31, 2002, the minority shareholders' share of the earnings of USM
Capital Group, Inc. is $26,072.

The Company's majority-owned subsidiary, Sub Surface Waste Management, Inc.
("SSWM"), issued 274,000 shares of common stock to private investors at $0.50
per share for total proceeds of $129,500, net of offering costs. Sub Surface
Waste Management, Inc. issued 98,000 shares of common stock to the Company's
employees for bonus compensation at $0.10 per share, which represents the fair
value of the stock issued, which did not differ materially from the value of the
services rendered. Of the shares issued for employee bonus compensation, 40,000
shares were issued to two principal shareholders of the Company and those shares
have been reflected as part of the Company's investment in SSWM. Sub Surface
Waste Management, Inc. issued 402,000 shares of common stock to consultants for
Services rendered. These shares were valued at $0.10 per share, which represents
the fair value of the stock issued, which did not differ materially from the
value of the

                                       9


<PAGE>

                      U.S. MICROBICS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
                                   (UNAUDITED)

services rendered. Sub Surface Waste Management, Inc. also issued 360,000 shares
of Series A preferred stock with no voting rights to consultants for services at
$0.05 per share, which represents the fair value of the stock issued, which did
not differ materially from the value of the services rendered. Subsequent to the
Capital Stock Exchange Agreement with Sub Surface Waste Management, Inc. of
Delaware, these transactions resulted in a minority interest of $51,148,
increasing the minority interest from 5% to 21%, which reflects the original
investment by the minority shareholders of Sub Surface Waste Management, Inc. As
of December 31, 2002, the minority shareholders' share of the loss of Sub
Surface Waste Management, Inc. is $48,736.

As of December 31, 2002, the minority shareholder's share of the earnings of Sol
Tech Corporation is $1,146.

NOTE E - COMMITMENTS AND CONTINGENCIES

Litigation
----------

During the year ended September 30, 1999, the Company entered into an agreement
with a supplier to purchase certain equipment at a total cost of $194,000. The
Company has made deposits totaling $29,400. The Company has not completed the
purchase transaction and the supplier has sued the Company for performance under
the agreement. While there has not been a formal settlement regarding the
lawsuit, the supplier has not pursued the lawsuit in the past year after
discussions with the Company's management.

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 $88,864, including attorneys' fees. The lawsuit was
settled during fiscal year 2002 by a payment of $25,000 to the law firm. A
consulting firm earned a fee of approximately $13,500, of which $2,600 is
outstanding as of December 31, 2002.

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 negotiated a settlement
and has paid approximately 90% of the amount specified in the lawsuit.

The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on it financial position,
results of operations or liquidity.

NOTE F - SUBSEQUENT EVENTS

On February 4, 2003, the Company through its majority-owned subsidiary, borrowed
$47,500 net of discounts and placement fees by issuing a note payable to an
investor. The note bears interest at the rate of 10% per annum and is due 90
days from February 4, 2003 for the principal amount of $55,000 plus accrued
interest. At the option of the Company, the note can be extended for an
additional 90 day term with an additional fee of $5,000 to be paid to the

                                       10





<PAGE>

                      U.S. MICROBICS, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                  THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
                                   (UNAUDITED)

investor. The note is to be collateralized by stock held for investment or sale
by the Company. The note holder has the option of converting the note into
restricted common stock of the Company based on the trading value of the common
stock.

On February 10, 2003, the Company borrowed $20,000 from a related party for
working capital purposes.

On February 19, 2003, the Internal Revenue Service ("IRS") filed a notice of
Federal Tax lien for payroll taxes against the Company in the amount of $458,050
and is included in the accompanying condensed consolidated financial statements.
The Company is in the process of negotiating an installment payment agreement
with the IRS.

                                       11

<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, 2002 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.

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.

                                       12





<PAGE>

During that time frame, the Company has raised over $13,000,000 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 2003 as measured by the
$815,540 of contracts awarded in the first three quarters the fiscal year 2002.
Work has commenced on two contracts for $714,107 and a performance bond for a
contract award totaling $101,000 is 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."

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:

                                       13





<PAGE>

                              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
income from the sale of stock in newly formed public companies ; 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.

                      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.

                                    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.

                                       14





<PAGE>

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.

 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

                                       15





<PAGE>

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)

Sub Surface Waste Management, Inc., prior to July 1, 2002, was wholly owned by
U.S. Microbics, Inc. However, on December 13, 2002, the SSWM entered into a
Capital Stock Exchange Agreement with the stockholders of Covingham Capital
Corporation's ("CCC") The SSWM stockholders include the owners of all shares of
the issued and outstanding common stock of SSWM and holders of options to
purchase the Series A preferred stock of SSWM. The SSWM stockholders agree to
transfer 10,744,000 shares of SSWM common stock and 5,360,000 shares of SSWM
preferred stock in exchange for 10,744,000 shares of the Company's common stock
and 5,360,000 shares of the Company's preferred stock. Additionally, the SSWM
holders of options to purchase Series A preferred stock of SSWM will exchange
their options for options to purchase the Series A preferred stock of the
Company. As a result of this exchange agreement, SSWM became a wholly-owned
subsidiary of CCC. There has been no change in the operations or management of
SSWM.

In prior transactions U.S. Microbics, Inc. and subsidiaries had gained a 56.29%
controlling interest in CCC. Covingham Capital Corporation has changed its name
to Sub Surface Waste Management of Delaware of Inc. As of December 31, 2002,
U.S. Microbics, Inc., affiliates and subsidiaries owned approximately 79% of Sub
Surface Waste Management of Delaware, Inc.

On December 16, 2002, Robert C. Brehm resigned as President of CCC. On that same
date Bruce S. Beattie was elected as President and Chief Executive Officer of
the Sub Surface Waste Management of Delaware, Inc.

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 $6,000,000 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 ended September 30, 2002, SSWM was awarded cleanup contracts of
$815,540. Typical contracts range from 12 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
Private Placement Memorandum 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.

                                       16

<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. While employed at previous companies this team of professionals achieved
annual revenue rates exceeding $30MM and have also worked on projects over
$100,000,000 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 fiscal 2002 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 2002 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 2003 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.

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 its bioreactivated carbon treatment process to a subsidiary of
Tetra Tech, Inc. for use in the United States and Mexico.

                                       17





<PAGE>

Results of Operations

FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2001.

The Company had revenues of $183,098 during the three months ended December 31,
2002, as compared to $14,776 of revenues for the same period in fiscal 2001.
Revenues for the three months ended December 31, 2002 and 2001 consisted
primarily of contracts for bio-remediation of hydrocarbons in contaminated soil
and ground water. Signed contract backlog, consisting of awarded contracts not
yet started, was approximately $101,000 as of 12/31/02. The cost of revenues was
$95,282 on December 31, 2002 compared to $57,657 on December 31, 2001.

For the quarter ended December 31, 2002, the Company has gross income of $87,816
(47% of revenue) compared to a gross loss of $42,881 for the quarter ended
December 31, 2001. The marked improvement is due to higher levels of revenue
being spread over fixed stand-by costs related to field work. Revenue is
recognized under the percentage of completion method, based on estimated costs
to complete.

Selling, general and administrative ("SG&A") expenses for the first quarter of
fiscal year 2003 totaled $1,389,086 compared to $716,916 for the same period in
fiscal year 2002. SG&A expenses for the first quarter of fiscal year 2003
consisted of occupancy, payroll, accounting, and legal, consulting, and public
relations expenses.

The Company incurred a net loss of $1,187,501 and had negative cash flows from
operations of $407,652 for the three months ended December 31, 2002 compared to
a net loss of $866,852 and negative cash flows from operations of $458,165 for
the three months ended December 31, 2001. The increase in net loss of $311,279
from the quarter ended December 31, 2002 compared to December 31, 2001, was
primarily due to common stock issued to consultants for services and increased
payroll costs. Basic and diluted net loss per share was $(.02) for the three
months ended December 31, 2002 compared to $(.04) for the three months ended
December 31, 2001. The decrease was due to the increase in average shares
outstanding of 52,287,910 for the three months ended December 31, 2002 compared
to 20,427,725 for the corresponding three months ended December 31, 2001.

Although the Company is expecting to increase revenues during the next three
quarters of fiscal year ended September 30, 2003, and for the fiscal year ended
2004, 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 $5,000,000 from a private placement through
its subsidiary Sub Surface Waste Management of Delaware, Inc. during the second
and third quarters of fiscal 2003. The funds are targeted primarily for funding
contract costs, expansion of the marketing effort and for the acquisition of
companies that will increase revenues, cash flow and profits. There can be no
assurance that the Company or SSWM will be able to raise such capital on
acceptable terms. 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.

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.

                                       18


<PAGE>

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

Cash and cash equivalents totaled $50,922 and $44,520 at December 31, 2002 and
September 30, 2002, respectively. Net cash used in operations was $407,652 for
the three months ended December 31, 2002, compared to $458,165 for the
comparable period in the prior fiscal year.

During the three months ended December 31, 2002, the Company raised $302,500 net
of placement fees of approximately $25,000, from issuance of common stock
through private placements and $15,000 from loans from related parties. As of
December 31, 2002, the Company has negative working capital of $1,267,827 as
compared to negative working capital of $1,447,154 as of September 30, 2001. The
Company is delinquent on the payment of payroll taxes in the amount of
approximately $550,000. The Company has received notification from the Internal
Revenue Service that they have put a lien on assets of the Company. 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.

Of the $1,448,516 in accounts payable and accrued expenses, approximately
$800,000 is over 6 months past due. There is a possibility that trade vendors
may file lawsuits for non-payment. If such lawsuits were filed, management
resources and funds would be diverted from operating activities.

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"). In conjunction with the agreement, the Company registered 20,000,000
shares of its common stock on the Securities and Exchange Commission Form SB-2
Registration Statement. During the quarter ended December 31, 2001, the Company
elected not to make sales of stock to Swartz.

Since September 1998, the Company has raised approximately $15,000,000
principally through private placements of equity securities and debt. Subsequent
to December 31, 2002 the Company through a subsidiary borrowed $47,500 net of
discounts and placement fees by issuing a note payable to an investor. The note
bears interest at the rate of 10% per annum and is due 90 days from February 4,
2003 for the principal amount of $55,000 plus accrued interest. At the option of
the Company the note can be extended for an additional 90 day term with an
additional fee of $5,000 to be paid to the investor. The note is collateralized
by stock held for investment or sale by the Company. The note holder has the
option of converting the note into restricted common stock of the Company based
on the trading value of the common stock.

With the establishment of USM Capital Group, Inc. and it efforts toward
consulting and acquisitions and mergers, the Company expects to raise additional
working capital during the remaining nine months of its fiscal year by obtaining
consulting contracts and by the sale of stock received in its merger program. To
date the Company has received cash proceeds of $30,000 from consulting contracts
and $220,000 from the sale of stock received under consulting contracts.

The Company believes that it can generate sufficient cash through sources listed
above to continue its operations through September 30, 2003, and anticipates
that cash generated from planned private placements and projected revenues for
consulting and during the next three quarters of fiscal 2003 will enable it to
fulfill cash needs through fiscal 2004 operations.

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.

                                       19





<PAGE>

The effect of inflation on the Company's revenue and operating results was not
significant. The Company's operations are located in North America and there are
no seasonal aspects that would have a material effect on the Company's financial
condition or results of operations.

The Company's independent certified public accountant has stated in their report
included in the Company's September 30, 2002 Form 10-KSB, that the Company is
having difficulties generating suficient cash flows to meet its obligations and
that the Company is dependent upon management's ability to develop profitable
operations. These factors among others may raise substantial doubt about the
Company's ability to continue as a going concern.

RISKS AND UNCERTAINTIES

For the three months ended December 31, 2002 the Company has generated revenues
of $183,098. During this same period, the Company incurred a net loss of
$1,187,501 and had negative cash flows from operations of $407,652. As of
December 31, 2002, the Company has an accumulated deficit of $17,948,041. While
reorganizing its operations from prior business operations, the Company had
revenues during the fiscal years ended September 30, 2002 and 2001 of $228,317
and $50,700 respectively. During the Company's Development Stage operation, when
it was building its manufacturing facility, acquiring technical and engineering
staff, researching market opportunities and validating its technology in field
demonstrations, it incurred net losses of $3,527,700 in fiscal 2001 and
$2,550,900 in fiscal 2000.

The Company is currently developing business opportunities and operations
through its wholly-owned subsidiary, Sub-Surface Waste Management (SSWM). This
company concentrates on worldwide soil and groundwater cleanup opportunities.
SSWM is currently field-testing applications in several key markets. There can
be no guarantee that such markets will provide profitable results in the future.

To date, the Company has relied on private placements of equity and debt to fund
its operating and capital requirements. The Company is planning on raising
additional capital through the issuance of stock in private placements or a
public offering. 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.

                                       20





<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS.

During the year ended September 30, 1999, the Company entered into an agreement
with a supplier to purchase certain equipment at a total cost of $194,000. The
Company has made deposits totaling $29,400. The Company has not completed the
purchase transaction and the supplier has sued the Company for performance under
the agreement. While there has not been a formal settlement regarding the
lawsuit, the supplier after discussions with the Company's management has not
pursued the lawsuit in the past year.

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 $88,864, including attorneys' fees. The lawsuit was
settled during fiscal 2002 by a payment of $25,000 to the law firm. A consulting
firm earned a fee of approximately $13,500, of which $2,600 is outstanding as of
December 31, 2002.

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 negotiated a settlement
and has paid approximately 90% of the amount specified in the lawsuit.

In the ordinary course of business, the Company has become subject to litigation
and claims on various matters. There exists the possibility that the Company
will not prevail in all cases. However, barring unanticipated adverse final
determination in this litigation and claims, the Company does not believe that
such litigation and claims will have a material adverse effect on its financial
condition.

ITEM 2.           CHANGES IN UNREGISTERED SECURITIES AND USE OF PROCEEDS.

During the quarter the Company issued 647,137 shares of common stock from the
conversion of approximately 6,450 shares of Series C restricted convertible
preferred stock and 214 of Series II restricted convertible preferred stock.
These conversions were valued at par value. In addition the Company issued
1,150,000 shares of restricted common stock in private placements. These sales
were valued at approximately $0.05 to $0.06 per share. The proceeds from the
private placements were used for contract costs and general working capital. The
issuance is considered exempt from registration by reason of Section 4(2) of the
Securities Act of 1933.

The Company also issued 134,500 shares of restricted common stock to consultants
in exchange for services. These transactions were valued at approximately $0.07
to $0.10 per share. The issuance is considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES.

                           None

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

                           None

                                       21





<PAGE>

ITEM 5.           OTHER INFORMATION.

                           None

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

Reports on From 8-K:

                  None

         Exhibits:

                  Exhibit 99.1 - Certification of Robert C. Brehm pursuant to 18
                  U.S.C. Section 1350, as adopted to section 906 of the
                  Sarbanes-Oxley Act of 2002

                  Exhibit 99.2 - Certification of Conrad Nagel pursuant to 18
                  U.S.C. Section 1350, as adopted to section 906 of the
                  Sarbanes-Oxley Act of 2002

                  Exhibit 99.3 - Certification of Robert C. Brehm pursuant to 18
                  U.S.C. Section 1350, as adopted to section 302 of the
                  Sarbanes-Oxley Act of 2002

                  Exhibit 99.4 - Certification of Conrad Nagel pursuant to 18
                  U.S.C. Section 1350, as adopted to section 302 of the
                  Sarbanes-Oxley Act of 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: February 28, 2003   By:         /s/ Robert C. Brehm
                             ---------------------------------------------------
                                      Robert C. Brehm, President and
                                      Chief Executive Officer

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

                                       22