Ultrastrip Systems Inc · 10KSB · For 12/31/01

Filed On 12/27/02 2:21pm ET   ·   SEC File 0-25663   ·   Accession Number 1116502-2-2053

Annual Report -- Small Business   ·   Form 10-KSB
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Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report                                         83    430K 
 2: EX-10.18    Sterner Consulting Agreement                          10     51K 

10KSB   ·   Annual Report
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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT 
OF 1934                                                       

 For the fiscal year ended December 31, 2001

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES          
EXCHANGE ACT OF 1934                                          

 For the transition period from ________ to __________

Commission file number 000-25663
                       ---------

UltraStrip Systems, Inc.
--------------------------------------------------------------------------------
(Name of small business issuer in its charter)

    Florida                                               65-0841549
--------------------------------------------------------------------------------
(State or other jurisdiction of                               (I.R.S. Employer  
incorporation or organization)                               Identification No.)

3515 S.E. Lionel Terrace, Stuart, Florida                          34997        
--------------------------------------------------------------------------------
(Address of principal executive offices)                         (Zip Code)     

Issuer's telephone number       (772) 287-4846                                  
-----------------------   

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

Title of each class                    Name of each exchange on which registered

------------------------------         --------------------------------------   

Securities registered under Section 12(g) of the Exchange Act:                  

Common Stock $0.01 par value
--------------------------------------------------------------------------------
(Title of class)

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 No X .            

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Check if there is no disclosure of delinquent filers in response to Item 405 of 
Regulation S-B is not contained in this form, and no disclosure will be         
contained, to the best of registrant's knowledge, in definitive proxy or        
information statements incorporated by reference in Part III of the Form 10-KSB 
or any amendment to this Form 10-KSB. [ ]                                       

State issuer's revenues for its most recent fiscal year.  $1,708,077            

The aggregate market value of the voting and nonvoting common equity of the     
issuer held by non-affiliates was $24,928,899(1).                               

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 42,542,394 shares of Common Stock,   
$0.01 par value, as of September 30, 2002.                                      

 DOCUMENTS INCORPORATED BY REFERENCE

None.                                                                           

Transitional Small Business Disclosure Form (check one):                        

Yes       No X                                                                  
----    ----                                                            

(1) The aggregate market value was computed by reference to the price at which  
Common Stock was sold by the Company in June and September 2002, the only       
Company sales of Common Stock in 2002, and which was the same price of Common   
Stock as reflected in the fair value analysis prepared by the Company as of June
15, 2002. The Company's Common Stock is not listed on any public exchange or    
established trading market.                                                     

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PART I

ITEM 1.  DESCRIPTION OF BUSINESS.                                               

COMPANY OVERVIEW                                                                
----------------                                                                

UltraStrip Systems, Inc., (the "Company") a Florida corporation with executive  
and sales offices in Stuart, Florida, was incorporated in April 1998. The       
Company designs, develops and assembles an innovative automated hydro-blasting  
system that uses ultra-high water pressure to remove coatings from steel        
surfaces, such as the hulls of large cruise and cargo ships and the exterior    
surfaces of above-ground storage tanks. The system consists of a robotic vehicle
that magnetically attaches to steel surfaces, an ultra-high pressure pump, a    
vacuum system designed to aid in the capture and containment of waste, and a    
waste filtration system.                                                        

The Company believes that this proprietary system, the subject of two U.S.      
patents, offers benefits over existing coatings removal methods, including      
increased efficiency and speed, as well as facilitating environmental compliance
by the Company's customers. The Company believes that hydro-blasting is a       
commercially viable alternative to grit blasting, the current industry standard,
and over time can become the primary method for coating and rust removal for    
steel surfaces.                                                                 

The Company initially has targeted the ship maintenance and repair market,      
including shipyards with major dry-docking and repair facilities, and the       
above-ground storage tank maintenance market, specifically storage tank farms in
close proximity to major petroleum refineries. The Company believes that its    
current automated technology also may have potential applications for use in    
other markets, including automotive coatings removal.                           

COMMERCIALIZATION STEPS IN 2001. During 2001, the Company recognized revenues   
significantly higher than those recognized in prior years since its formation   
through equipment sales and service contracts:                                  

    Equipment Sales. In September 2001, the Company signed a five-year
         distribution agreement with Robotic Environmental Services, LLC ("RES")
         for the sale of the Company's patented automated hydro-blasting systems
        in Louisiana and Texas. In connection with the distribution agreement,
     RES purchased its first UltraStrip automated hydro-blasting system,
which was delivered to RES in September 2001.                 

        Service Contracts. The Company performed three major service contracts
      involving ship surface preparation during 2001 including work on the
       USS EISENHOWER, a U.S. Navy Nimitz-class aircraft carrier, dry-docked
in Norfolk, Virginia, the USS COLE, a U.S. Navy guided missile
        destroyer, dry-docked in Pascagoula, Mississippi, and multiple vessels
dry-docked at the Lisnave shipyard.                           

 From February 26, 2001 to March 16, 2001, the Company performed
 subcontractor services for Corrosion Engineering Services, Inc.
     whereby it removed the non-skid coating from the flight deck of the
      USS EISENHOWER. During August 2001, the Company removed the coatings
        from approximately 16,000 square feet of the hull and sides of the USS
      COLE. The USS COLE, which was attacked in Yemen in October 2000, was
  under repair at the Ingalls Shipbuilding facility in Pascagoula,
Mississippi.                                                  

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  During 2001, the Company also entered into a contract with Tecor
      - Tecnologia Anti-Corrosao, S.A. of Setubal, Portugal ("Tecor"), the
      surface preparation contractor for the Lisnave shipyard. Pursuant to
the contract with Tecor, in October 2001, the Company began a 
         four-month systems performance demonstration in the Lisnave shipyard in
      Setubal, Portugal. The Company provided two automated hydro-blasting
      systems and a crew to demonstrate the operation and effectiveness of
      its new technology. In January 2002, at Tecor's request, the Company
       extended the term of this agreement for one additional month to March
        31, 2002. The Company's automated hydro-blasting systems were used for
    surface preparation work on seven different vessels in the Lisnave
shipyard, ranging from crude oil carriers to cruise ships.    

The Company believes that the completion of the USS EISENHOWER and USS COLE     
service contracts, the equipment purchase by RES, and the successful performance
of the Tecor contract represent significant steps toward full implementation of 
the Company's business plan. On May 13, 2002, the Company entered into an       
agreement with Metro Machine Corporation of Norfolk, Virginia for the sale of a 
prototype automated hydro-blasting system for $2,000,000. A deposit of $500,000 
was received on May 14, 2002. Spare parts and accessories were subsequently     
added to the order, increasing the purchase price to $2.3 million. $1.5 million 
was paid on August 21, 2002, upon delivery and testing of the equipment at the  
buyer's shipyard. The balance was paid on September 25, 2002. In June 2002, the 
Company demonstrated its automated hydro-blasting system for Atlantic Dry Dock  
Corporation in Jacksonville, Florida, by removing coatings from the outside hull
of the USS DOYLE, a U.S. Navy guided missile frigate. Revenues from this        
demonstration were $22,223. While the Company currently has no pending orders   
for new service contracts and does not anticipate any equipment rental          
contracts, the Company believes future service contracts, rental contracts or   
equipment purchases may be likely from its customer base. Future service        
contract work, plus paid demonstrations and trial periods, will increase        
marketplace visibility.                                                         

RISK FACTORS - "GOING CONCERN". Reference is made to Risk Factors; Cautionary   
Statement as to Forward-Looking Statements, beginning on page 14, in addition to
the explanatory paragraph in the Company's independent certified public         
accountants' reports on the Company's 2001 and 2000 financial statements        
regarding the Company's ability to continue as a going concern. As more fully   
described elsewhere, the Company lacks assured available financial resources to 
meet its December 31, 2001 working capital deficit of $3,631,759 and future     
operating costs and currently does not have cash available to pay its accounts  
payable and other liabilities. At September 30, 2002, the working capital       
deficit is in excess of $5.5 million. The Company is actively seeking additional
capital. Through September 2002, the Company has successfully generated $1.2    
million in net cash from financing activities, $0.4 million from the issuance of
debt and $0.8 million from the issuance of Common Stock and warrants. While     
management believes that resources may be available from private sources in 2002
to carry out its business plan, no assurance can be given that the Company will 
be able to raise such additional capital. See Item 1 - "Risk Factors"; Item 6 - 
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" and Note 1 to the financial statements.                             

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INDUSTRY AND MARKET OVERVIEW                                                    
----------------------------                                                    

The two principal markets for the Company's automated ultra-high pressure       
hydro-blasting system are the ship maintenance and repair market and the        
above-ground storage tank maintenance market.                                   

SHIP MAINTENANCE AND REPAIR. While there are many transportation modes for the  
worldwide distribution of goods, such as truck, rail, and air, according to     
Wired.com, as of October 1999, 95% of the world's cargo volume was transported  
by ship. The Company believes that the shipping industry is faced with low      
margins and high capital requirements, requiring most successful market         
participants to focus on operational efficiency. As a result, shipping companies
strive to maximize a ship's time at sea and minimize downtime, from cargo       
loading and unloading to routine repair and maintenance work.                   

    Market Dynamics. According to the 2000 publication of World Shipyards,
    there are over 3,000 shipyards in the world, and the Company estimates
     that at least seventy-five percent of those offer ship repair services.
  These shipyards service over 80,000 ships in the world fleet and the
approximately 1,500 new ships that are built each year.           

      The ship maintenance and repair industry is characterized by oversupply,
      which has led to financial difficulties and increased competition within
  the industry according to World Shipyards. The Company believes that
reducing costs and remaining price competitive will be critical to
     shipyard survival and that shipbuilders and ship repairers will need to
  focus on cost-saving innovations to improve profitability. Also, the
  Company believes that with the oversupply of shipyard capacity, ship
owners and managers are better positioned to demand high-quality  
       services, such as quick turn-around times and high performance standards.

       In addition, in October 2001, the International Maritime Organization, an
agency of the United Nations with responsibility for the safety of
 shipping and the prevention of marine pollution by ships, adopted a
 global antifouling convention to ban the application of antifouling
       organotin (pesticide) coatings by 2003. The convention also calls for the
      complete removal of antifouling organotin coatings from the hulls of all
    ships or the application of additional coatings to prevent leaching of
antifouling organotin coatings into the water by 2008.            

      Challenges of Maritime Coatings Removal. All ships require both periodic
    repairs and preventative maintenance. The process of removing coatings
     from steel surfaces such as ship hulls historically has been both labor
and time intensive.                                               

       A key step in the repair/maintenance process is the stripping of coatings
     from the ship's hull. As described in the U.S. Environmental Protection
   Agency's November 1997 report, Profile of the Shipbuilding and Repair
Industry, ship hull coatings consist of multiple layers of paints 
   (typically including conventional and epoxy anticorrosives along with

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    pesticide-containing antifoulings). Anticorrosives protect the hull of
       the ship from steel corrosion. Pesticide-containing antifoulings kill off
       targeted sea life, such as barnacles, algae, and seaweed, which attach to
   the hull's surface, cause surface damage and reduce the ship's speed.
       These coatings periodically need to be stripped and reapplied to maintain
 the integrity of the hull and reinforce the antifouling properties,
thereby maximizing operational efficiency.                        

    Stripping rough, fouled and corroded surfaces helps to ensure a smooth
      hull, allowing for the most efficient operation by reducing the friction
   created by a ship's movement through the water. Further, the economic
cost sustained by a ship owner when a vessel is out of service for
       maintenance can be high. Minimizing the time that a vessel is in dry dock
      for maintenance increases a vessel's income producing usage. The Company
       anticipates the proper utilization of its automated hydro-blasting system
     should decrease dry docking time, thereby increasing fleet and dry dock
capacity without need for new capital investment.                 

ABOVE-GROUND STORAGE TANK MAINTENANCE MARKET. Above-ground storage tanks        
("ASTs") are used for storage of liquid materials such as petroleum and refinery
by-products, chemicals, pulp and paper, municipal water, vegetable and mineral  
oils, and other process liquids. The Aboveground Storage Tank Survey, a 1991    
technical report by the American Petroleum Institute ("API"), estimated the     
number of tanks in use across all segments of the petroleum industry alone at   
approximately 700,000. The Company believes its initial target market segment   
will be those tanks with shell capacity greater than 1,000 barrels, which       
represent approximately 76,000 tanks in the petroleum industry according to the 
API report.                                                                     

Coatings are applied to the metal surfaces of ASTs to inhibit corrosion and     
subsequent degradation of the metal structure. These coatings degrade naturally 
over time requiring recoating of the steel surfaces. This process requires the  
removal of the old coatings before application of the new coatings. As with the 
marine coatings removal market, the standard procedure for removing coatings    
from ASTs is grit blasting.                                                     

Additionally, in the U.S. industrial market, there is concern regarding removal 
of lead-based paints from ASTs. Lead abatement is a very costly procedure       
requiring:                                                                      
o        100% encapsulation of the abrasive grit and lead paint while blasting. 
This requires scaffolding and tarping the whole tank.         
o        Protection and monitoring lead levels in the persons performing the    
work.                                                         
o        Hazardous waste disposal of the grit and lead paint after project      
completion.                                                   

Storage tank owners seek to minimize the idle time their tanks experience while 
being cleaned and repainted. Typically, an average tank of 20,000 square feet   
(100' x 32') requires approximately 60 days to repaint, including scaffold      
installation, tarp placement, blasting and painting, tarp and scaffold removal, 
and clean up. The Company estimates that its automated hydro-blasting system can
accomplish this project in 8 to 10 days.                                        

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BUSINESS STRATEGY                                                               
-----------------                                                               

The Company's near term business strategy is to focus on sales and marketing    
efforts to place its automated hydro-blasting systems into use in the ship      
maintenance and repair and above-ground storage tank maintenance markets. The   
Company believes the most effective marketing effort for its product will be to 
conduct live demonstrations at shipyards and storage tank facilities in the     
United States and in shipyards throughout the world which are leaders in        
environmental protection, thereby introducing the ship maintenance and repair   
and storage tank industries to automated hydro-blasting and demonstrating its   
superiority to existing surface preparation methods and competitive             
technologies.                                                                   

The Company offers three primary sales options: outright equipment sales,       
long-term rental contracts, and contract services. By offering this variety of  
alternatives, customers can select the relationship that best matches their     
capital allocation plan. In 2002, the Company also intends to increase the focus
of its marketing efforts on the U.S. market. The Company believes that          
environmental regulations are currently a very strong influence on shipyard     
operations in the United States and may provide an external impetus to shipyards
to carefully consider the Company's products.                                   

For information about the Company's business and financial plan over the next 12
months, including its current cost reduction measures and capital raising       
efforts, see "Management's Discussion and Analysis of Financial Condition and   
Results of Operations."                                                         

PRODUCTS AND SERVICES                                                           
---------------------                                                           

The Company has developed and is offering for sale or rental, or as part of a   
contract services arrangement, its M2000 automated hydro-blasting system.       

The Company's M2000 automated hydro-blasting system is designed to strip        
coatings from the hulls of ships in dry dock and from the exterior surfaces of  
storage tanks. The titanium and aluminum robot attaches to the hull using an air
gap, rare earth magnetic array and is controlled and monitored via a remote     
operator. The paint removal process performed by the automated hydro-blasting   
system is accomplished through an ultra high-pressure pump which provides water 
to the robot at pressures in excess of 40,000 pounds per square inch, while a   
vacuum filtration system captures removed paint chips and water, separates      
particulates from the waste water and re-circulates clean water back to the high
pressure pump in a closed loop system. The relatively minimal waste is then     
disposed of in sealed drums.                                                    

The automated hydro-blasting system consists of three major components:         

o        The robotic vehicle is controlled by a joystick, enabling remote       
         controlled mobile hydro-blasting. The M2000's magnetic array adheres to
        steel surfaces while its independent suspension permits it to traverse
       ship hulls at high speeds. The robotic vehicle cuts a 15- inch swath,
         moves 360 degrees, and is capable of removing coatings at a rate of 500
to 2,000 square feet per hour.                                

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o        The ultra high-pressure pump is powered by a large diesel engine, which
   propels high volumes of water per minute, at a pressure of 40,000
pounds per square inch or higher.                             

o        The vacuum filtration component is powered by a second, smaller diesel 
      engine. The filtration component captures the contaminated coatings,
     separates particulate contaminants from wastewater and recycles the
 water into the pump. The filtration component is a closed loop,
ensuring minimal contaminant discharge.                       

         Operational Advantages. The M2000's magnetic attachment and independent
suspension enable the robotic vehicle to rapidly traverse an entire vessel,     
resulting in increased productivity and reduced time spent in dry dock.         

o        The Company's automated hydro-blasting systems can remove a 15-inch    
        swath during the stripping process at higher speeds than the 6-12-inch
       swath that the Company estimates can be removed by competing systems.

o        Competing systems are moved around the vessel or storage tank by cables
         and pulleys or a fixed arm attached to a vehicle in the dry dock, which
  the Company estimates result in lower overall operational rates.

o        The joystick-controlled M2000 minimizes the use of lifts and scaffolds,
   which the Company believes reduces the potential for work-related
injuries.                                                     

o        The Company's products can be tailored to a customer's specialized     
needs.                                                        

o        Shipyards can perform concurrently other repair work on a ship while   
operating the M2000. No other repair work can occur on a ship 
        undergoing grit blasting. Concurrent operation can reduce the duration
     of the entire repair and maintenance process and effectively create
   additional docking capacity for shipyards and additional shipping
capacity for ship owners.                                     

         Environmental Advantages. Paint stripping and application activities in
shipyards represent a source of marine pollution, according to the Environmental
Protection Agency's November 1997 report on the ship repair industry. Paint     
stripping in U.S. shipyards is frequently performed using manual hydro-blasting,
a procedure whereby high-pressure water is sprayed onto a steel surface from a  
handheld gun. Wastewater from paint stripping contains high levels of metals and
toxins from removed paint. This toxic waste destroys local sea life and         
contaminates nearby bodies of water, threatening the health of the world's      
oceans.                                                                         

The Company believes that the self-contained M2000 system represents an         
environmentally friendly alternative to other methods of paint stripping,       
specifically grit blasting or manual hydro-blasting. In addition, the remote    
operation, the closed loop system, and the resulting distance from the stripping
process avoids the operator's contact with grit and toxic paints, thereby       
reducing the potential for lung and skin damage associated with grit blasting.  

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The Company is also offering to perform hydro-blasting services with its deck   
surface automated hydro-blasting system. The deck surface system utilizes       
ultra-high pressure pumps and vacuum filtration systems similar to those        
utilized by the M2000 system. However, the robotic vehicle utilized by the deck 
surface system is designed for performance only on horizontal surfaces and thus 
does not require magnetic attachment features.                                  

SALES AND MARKETING                                                             
-------------------                                                             

The Company currently offers its equipment for sale or rental, and its contract 
services principally through its internal sales management team, supported by   
its sales and marketing partners, and through a limited number of distributors  
and marketing representatives.                                                  

The primary distribution method for the ship maintenance and repair industry is 
direct sale by the Company. Ship maintenance and repair customers are offered   
three primary system arrangements: system sales, long-term system rental        
agreements and contract services. These customers can also purchase spare parts 
and accessories directly from the Company. Pursuant to the agreement between the
Company and Wallem Shipmanagement Limited ("Wallem"), Wallem has agreed to      
provide the field resources necessary to operate the M2000 automated            
hydro-blasting system for future short and long-term service contracts. The     
Company intends to use its own personnel, with additional personnel from Wallem,
to provide the optimal operating crews for various projects.                    

For markets outside the ship maintenance and repair industry, the Company plans 
to utilize exclusive distributor arrangements as a distribution channel to reach
customers. These arrangements may be employed in select geographic markets where
the use of a local representative would facilitate the Company's market         
penetration.                                                                    

The Company believes that U.S. environmental regulations exert significant      
influence on domestic shipyard operators to choose environmentally friendly     
paint-stripping processes. Thus, the Company intends to increase the focus of   
its marketing efforts on the U.S. market.                                       

TARGET CUSTOMERS. The Company's target customers principally include shipyards, 
ship owners and ship managers/operators, storage tank coatings removal          
contractors and vehicle stripping contractors.                                  

        Shipyards. The Company primarily targets shipyards that provide repair
     services for the largest commercial and military ships. The Company
      estimates that its initial target market consists of the 150 largest
shipyards in the world.                                       

     Ship Owners and Ship Managers/Operators. Orders for ship repair are
  generally placed by companies that own or manage the ships or by
    government agencies. Ship-owning companies potentially may include
      commercial shipping companies, passenger and cruise lines, and ferry
      companies. U.S. and foreign government agencies are also significant
sources of ship repair orders.                                

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Coatings Removal Contractors. Coatings removal contractors are
       important participants in both the ship maintenance and repair market
         and the above-ground storage tank maintenance market. Thus, the Company
plans to market directly to contractors as well.              

      Automobile and Military Rolling Stock Paint Removal Contractors. The
  Company has identified the automotive and military rolling stock
 maintenance industries as potential future markets. Through its
     relationship with the National Robotics Engineering Consortium (the
       "NREC"), the Company is developing a method to use the same automated
 hydro-blasting system, in a different format, to strip cars and
military rolling stock, such as Jeeps, trucks, power units and
artillery.                                                    

MARKETING ACTIVITIES. The Company reaches its customers primarily through direct
contact, product demonstrations, and the efforts of its sales and marketing     
partners. The Company recognizes that almost all new customers will require a   
field demonstration before deciding to purchase or lease a system and is taking 
steps to ensure potential customers will be able to visit shipyards that have   
already installed the automated hydro-blasting system to witness its operation  
in real-world conditions.                                                       

    Trade Shows. In 2001, the Company exhibited at the following trade
     shows: the NorShipping Exhibition in Oslo, Norway; the SNAME IMExpo
         2001, sponsored by the Society of Naval Architects and Marine Engineers
       in Orlando, Florida; and the Ship Repair & Conversion show in London.
         In 2002, the Company may return to the Ship Repair & Conversion show in
London.                                                       

Public Relations and Advertising. The Company's automated     
hydro-blasting system has been featured in industry and trade 
  publications, including ShipCare (June/July 2001), International
   ShipRepair News (July/August 2001), and Shiprepair And Conversion
      Technology (Third Quarter). The Company also advertises regularly in
        trade publications such as Seatrade, Maritime Reporter and Engineering
        News, Marine Engineers Review, and Shipcare. The M2000 system has also
    been featured on the National Aeronautics and Space Administration
   ("NASA") and Ocean Futures Society websites. In 2001, the Company
         received the Innovation of the Year award from International Shiprepair
   News and was a semi-finalist for the Discover Magazine Awards for
        Technological Innovation. The Company was also a finalist for the 2002
 Seatrade Award for Countering Marine and Atmospheric Pollution.

    Website. The Company also presents critical data on the design and
         functionality of its M2000 system on its website at www.ultrastrip.com.
 The website is continuously updated to provide the most current
         information on the Company's products, services and completed projects.

SALES AND MARKETING PARTNERS. To augment the direct sales efforts of Company    
employees, the Company has entered into various third party arrangements to     
promote the marketing, sale or use of the Company's automated system, including 
arrangements with Wallem, Carnival Cruise Lines and Robotic Environmental       
Services.                                                                       

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Wallem Shipmanagement Limited. In 2000, the Company executed a
         strategic alliance agreement with Wallem, a global company with offices
   serving Asia, Australia, Europe, North and South America, and the
     Middle East. Wallem actively engages in ship owning, ship and cargo
       brokering, ship management, ship agency, freight forwarding, shipyard
 and marine equipment services and industry specific information
 technology development. Wallem has agreed to provide all of the
     management and marketing for the Company's contract services in the
    ship maintenance and repair industry. The agreement provides for a
        monthly management fee to be paid to Wallem for each shipyard in which
       its management services are used. In addition, the agreement provides
    for a commission to be paid to Wallem on revenues generated by its
marketing efforts.                                            

   Wallem currently specifies the Company's automated hydro-blasting
         process as its preferred surface preparation method in its bid requests
     for dry-dock maintenance of its 130-ship fleet. In addition, Wallem
      engages in direct marketing of the Company's system to shipyards and
        ship owners in the Far East and Europe. To date, Wallem's efforts have
       resulted in the use of the Company's automated hydro-blasting systems
      on several ships during the demonstration contract with Tecor in the
         Lisnave shipyard in Portugal. No sales, additional service contracts or
        commitments have resulted from Wallem's efforts or are expected in the
        foreseeable future. No assurance can be given that additional shipyard
  maintenance providers to Wallem will use the Company's automated
hydro-blasting system.                                        

       Carnival Cruise Lines. Carnival Cruise Lines ("Carnival") (NYSE: CCL)
 executed a strategic environmental alliance with the Company in
       December 2000, pursuant to which Carnival agreed to use the Company's
       automated hydro-blasting technology for coatings removal on the hulls
   of its vessels where geographically and financially feasible. The
Company is in discussions with Carnival concerning dry-dock   
         schedules and coordination of surface preparation activity. The Company
       has identified eight Carnival ships scheduled for routine maintenance
   in the second half of 2002 and in 2003 that may be candidates for
       coatings removal with the Company's M2000 system. No assurance can be
     given that Carnival will use the Company's automated hydro-blasting
system.                                                       

       Robotic Environmental Services. In September 2001, the Company signed
         an exclusive distributor agreement with Robotic Environmental Services,
   LLC (RES) of Baton Rouge, Louisiana for the sale of the Company's
      patented automated hydro-blasting systems in Louisiana and Texas and
       the purchase of one automated hydro-blasting system. The distribution
        agreement is for a term of five years and establishes minimum purchase
        requirements and other terms necessary to maintain RES' exclusivity in
         the two states. RES also received an option from the Company to acquire
         the exclusive distribution rights in Venezuela. To exercise this option
       RES was required to purchase four additional automated hydro-blasting
         systems by June 30, 2002, which it has failed to do. RES also failed to
         meet certain contract requirements under this distribution agreement in
        March 2002. The Company informed RES that it no longer holds exclusive
        distributor status in Louisiana and Texas. While the foregoing default

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  may materially affect the Company's future sales to RES, it also
      provided the Company with an opportunity to recover the distribution
         rights to the exclusive territories and afforded greater flexibility in
       negotiating with future customers and distributors. The Company is in
   discussion with RES to explore ways to facilitate the sale of its
automated hydro-blasting systems.                             

In addition, in October 2000 the Company entered into a consulting agreement    
with T.A.S.T. Corporation, which is a representative in the U.S. and Canada for 
many international shipyards for sales and marketing services. Furthermore, in  
January 2001 the Company entered into a long- term joint venture agreement with 
Global Technology Holdings, Inc. to form a joint venture in the United Arab     
Emirates to engage in sales and marketing in the Middle East and Africa on an   
exclusive basis. This joint venture agreement, which is not terminable without  
the consent of both parties, provides for the Company's grant to the joint      
venture entity of an exclusive royalty-free license to the technology           
encompassing the Company's M2000 automated hydro-blasting system for the        
duration of the venture. To date, no sales or service contracts related to the  
Company's automated hydro-blasting system have been entered into under either of
these arrangements.                                                             

The Company also has developed a relationship with the Ocean Futures Society    
("Ocean Futures"), an international nonprofit organization founded by           
Jean-Michel Cousteau and wireless communications pioneer, Craig McCaw, dedicated
to improving the understanding of the global water ecosystem and preserving     
marine habitats. In exchange for promoting the benefits of the Company's        
automated hydro-blasting system and to further the Ocean Futures' mission, the  
Company has committed to remit two percent of its annual gross revenues directly
to Ocean Futures. These funds will be used to protect the oceans from           
environmental contaminants and hazardous substances, and, in 2001, this         
commitment generated $34,162 for Ocean Futures. Mr. Cousteau is a member of the 
Company's Board of Directors.                                                   

COMPETITION                                                                     
-----------                                                                     

Coatings removal within the ship maintenance and repair market and the          
above-ground storage tank maintenance market is highly competitive. Significant 
competitive factors include price of coatings removal equipment compared to     
contract services or other service arrangements, the cost-effectiveness of      
existing coatings removal methods, equipment performance, customer support,     
financial viability of the vendor and environmental/regulatory compliance.      

The Company has identified two predominant industry practices as its primary    
sources of competition, as well as certain competitive products.                

EXISTING INDUSTRY PRACTICES.                                                    

      Grit Blasting. The Company views grit blasting, the current industry
         standard practice for steel surface preparation, as the main competitor
  of automated hydro-blasting. Historically, bottom paint has been
    stripped using grit blasting or "sandblasting", a process in which
  laborers with sandblasting guns are positioned on a lift that is
         maneuvered around the hull of the ship as workers manually strip paint.

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         The Company believes that this technique has a number of disadvantages.
      For example, according to the EPA's November 1997 report on the ship
       repair industry, grit blasting creates toxic dust and grit which must
         be properly removed from the worksite and properly disposed. During the
      grit blasting process, toxic pesticide coatings and used grit medium
are released into the air and oceans surrounding the dry dock,
         adversely affecting reefs and marine life. Furthermore, as noted in the
        August 1999 edition of the Journal of Protective Coatings and Linings,
         airborne paint and grit media resulting from grit blasting can damage a
worker's lungs.                                               

 Despite these operational and environmental disadvantages, grit
      blasting remains the primary method of stripping the hulls of ships,
        largely because of low capital requirements and pre-established vendor
relationships.                                                

       Manual Hydro-Blasting. Some shipyards have shifted from grit blasting
       to a process known as manual hydro-blasting. In this process, workers
         spray ultra-high pressure water from handheld guns to remove paint from
        steel surfaces. Manual hydro-blasting offers some advantages over grit
        blasting in that it creates little or no toxic dust, and it avoids the
       expense of acquiring, removing, and properly disposing of toxic grit.

        However, manual hydro-blasting also has several limitations, including
        time, worker efficacy, and wastewater collection and removal. A worker
    with a hydro-blasting tool generally takes longer to strip a given
   amount of surface area than a worker with a sandblasting tool. In
        addition, efforts to increase production rates by increasing the water
 flow rate or pressure thrust from a hydro-blasting tool make it
    difficult for the average worker to control the tool. Lastly, with
manual hydro-blasting, used water falls to the dry dock floor.
      Historically, collection of the wastewater at the hull of a ship has
         proven difficult, making it hard to prevent the toxic chemicals present
in the removed paint from contaminating surrounding seawater. 

COMPETITIVE PRODUCTS. The Company's automated hydro-blasting system also faces  
competition from established companies, which are both larger and financially   
stronger than the Company. The companies that manufacture and market            
semi-autonomous technologies include:                                           

o        FLOW INTERNATIONAL (NASDAQ: FLOW) of Kent, Washington manufactures a   
       vehicle marketed as the Hydrocat, which uses vacuum suction to adhere
         itself to vessels and ultra-high pressure water to remove coatings. The
      vacuum attachment feature of the Hydrocat permits limited capture of
   wastewater; however, this feature also prohibits the machine from
        moving quickly and freely across the steel surface being cleaned. Flow
        International also manufactures and markets its own line of ultra-high
      pressure pumps that are sold in combination with the vacuum crawlers
     and as separate product offerings. Flow's strategy has been to sell
      their equipment to both shipyards and contractors. While this vacuum
technology has made meaningful penetration into the U.S. ship 
         maintenance and repair market, particularly with small contractors, the
        Company believes this system is not suitable for use on large vessels.

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o        HAMMELMANN of Oelde, Germany manufactures the Dockmaster, which is a   
       large motorized vehicle that uses an arm to move the stripping system
        along the surface of a ship. This system also uses ultra-high pressure
 water to remove the coatings but is not designed to capture the
       wastewater. The Company believes that the arm on the Dockmaster lacks
         mobility and makes it incapable of stripping the underside and portions
         of the flat sides of a ship, and as a result, the Company does not view
the Dockmaster as a whole product solution. Hammelmann also   
         manufactures and markets its own line of ultra-high pressure pumps that
     are sold in combination with the Dockmaster and as separate product
         offerings. To date, the Company believes that the Dockmaster has failed
       to achieve significant market penetration in the ship maintenance and
repair market.                                                

o        JET EDGE of Minneapolis, Minnesota manufactures a smaller magnetic     
      track vehicle, called the Hydro-Crawler. This product features a low
    production rate, a lack of mobility, and an inability to adhere to
      thick marine coatings. This product has not been heavily marketed in
       the ship maintenance and repair market, and the Company believes that
         it is not suitable for use on large vessels. Jet Edge also manufactures
         and markets ultra-high pressure pumps that are sold in combination with
their crawlers and as separate product offerings.             

o        OCEANEERING INTERNATIONAL, INC. (OI) (NYSE:OII), based in Houston,     
        Texas, is an advanced applied technology company providing engineering
     services and hardware to customers who operate in marine, space and
     other harsh environments. OI supplies diverse technical services to
various industries and is focused on three business segments, 
       specifically Oilfield Marine Services, Offshore Field Development and
     Advanced Technologies. While OI does not currently market a product
         that competes with the Company's system, OI possesses deep expertise in
    the field of remotely operated vehicles (ROV) that utilize robotic
technologies and operate in harsh environments.               

The following product comparison of the Company's automated hydro-blasting      
system versus other existing products was prepared by the NREC as of July 2001. 

                                                        [Enlarge/Download Table]


-------------------------------------- ------------------------- ------------------------ ---------------------
              CRITERIA                   ULTRASTRIP AUTOMATED        VACUUM ADHESION       BOOM TRUCK VEHICLE  
                                           HYDRO-BLASTING               VEHICLES                               
-------------------------------------- ------------------------- ------------------------ ---------------------
                                                                                                               
Operational applicability              Broad                     Limited                  Limited              
-------------------------------------- ------------------------- ------------------------ ---------------------
Maneuverability/ Controllability       Good                      Poor                     Poor                 
-------------------------------------- ------------------------- ------------------------ ---------------------
Productivity/hour (SA 2.5)             1,000 - 2,000 ft          50 - 300 ft              500 - 1,000 ft       
-------------------------------------- ------------------------- ------------------------ ---------------------
Sweeping capability (SA 1)             Yes                       Difficult                Difficult            
-------------------------------------- ------------------------- ------------------------ ---------------------
High speed spot and sweep              Yes                       No                       No                   
-------------------------------------- ------------------------- ------------------------ ---------------------
Consistent productivity                Yes                       No                       No                   
-------------------------------------- ------------------------- ------------------------ ---------------------
Operational orientation                Horizontal/Vertical       Vertical                 Vertical             
-------------------------------------- ------------------------- ------------------------ ---------------------
Waste water treatment                  Complete                  Minimal                  Minimal              
-------------------------------------- ------------------------- ------------------------ ---------------------

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RESEARCH AND DEVELOPMENT                                                        
------------------------                                                        

RESEARCH AND DEVELOPMENT ALLIANCE. The Company established a research and       
development alliance with the National Robotics Engineering Consortium, or NREC,
and the Robotics Institute, a leading institution in the robotics industry in   
1999. The Robotics Institute at Carnegie Mellon University (CMU) was established
to boost the productivity and competitiveness of U.S. businesses within the     
global marketplace. The NREC is a cooperative venture among NASA, the City      
of Pittsburgh, and the Commonwealth of Pennsylvania and serves as the           
commercialization division of The Robotics Institute. The primary goal of the   
NREC is to rapidly move robotics technologies, including NASA-developed         
technologies, from the laboratories into commercial terrestrial applications.   
NASA provides operational funding for the NREC as well as specific project      
matching funding in an effort to further NASA's technological goals.            

In September 1999, the Company entered into a Development Agreement with the    
NREC to develop technologies based on the Company's original robotic coatings   
removal concept. Simultaneously, the Company executed the NASA Joint Sponsored  
Research Agreement for the Robotics Engineering Consortium along with Articles  
of Collaboration, thus securing NASA matching funding for project-related       
efforts at the NREC and at NASA's Jet Propulsion Laboratory (JPL) in Pasadena,  
California. Under this Agreement, NASA provided to the NREC and JPL matching    
funds of $435,000 in federal fiscal year 2000, and $484,600 in federal fiscal   
year 2001.                                                                      

Any technology developed by the Company prior to entering into the Development  
Agreement or developed without the NREC's assistance belongs exclusively to the 
Company. It is the Company's opinion that any patent application and resulting  
patent that is the result of the joint research of the Company and the NREC, and
that constitutes an improvement to the Company's existing technology, will be   
owned by the Company. Should patent applications be filed based upon a new      
technology or technology that may be used outside the field of ultra high       
pressure cleaning, the NREC or its affiliates would be the owner of such rights 
and, in view of the Agreement between the Company and the NREC, the Company     
would have a right to license the technology if the technology was based on     
funds provided by the Company.                                                  

During 2001 and 2000, the Company incurred $629,801 and $513,291, respectively, 
for research and development activities. In July 2000, the Company entered into 
a Development Agreement whereby it agreed to pay CMU up to $1,000,000 to develop
the robotics for the automobile stripping system, of which approximately        
$200,000 has been incurred through September 30, 2002. Through its relationship 
with the NREC, the Company also intends to pursue a stripping application for   
coatings removal in cut-in areas, which are areas adjacent to welds or other    
difficult-to-reach surfaces and confined spaces, such as cargo and ballast tanks
in the interiors of ships. Removal of pre-construction primer during the ship   
building process presents another potential marine industry stripping           
application.                                                                    

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PATENTS. Dennis McGuire, a founder of the Company and the current Chief         
Technology Officer and Director of Sales, developed the base technology for     
ultra high-pressure coatings removal between 1990 and 1995. Patent applications 
for the base technology were filed in 1995, resulting in the issuance of U.S.   
Patent 5,628,271 in 1997, which expires in 2015, and U.S. Patent 5,849,099 in   
1998, which expires in 2015. These patents were acquired by and assigned to the 
Company in 1999 and relate to the apparatus and methodology for removing        
coatings from the hulls of vessels using ultra-high pressure water. Furthermore,
the U.S. Patent Office has allowed Patent Application 08/854,384 which is based 
on a filing date of 1995. A pending C-I-P application also claims a 1995 filing 
date. The U.S. Patent Office issued patent 6,287,389 in September 2001 to Dennis
McGuire as inventor which was subsequently assigned to the Company. This patent,
which expires in 2020, covers a three-dimensional, ultra-high pressure          
automobile paint stripping system and is solely owned by the Company.           

CAPITAL EXPENDITURES. The Company continues to develop and refine new           
technologies. In the years 2000 and 2001, the Company expended approximately    
$1.1 million on the research and development of the technology related to its   
automated hydro-blasting system and other research projects. As of December 31, 
2001, the Company is committed to expend an additional $695,799 to the NREC for 
2002 capital expenditures. The Company's current business plan anticipates the  
need for additional funds from debt or equity financing for future research and 
development in the amount of $250,000 in 2002, approximately $50,000 of which   
has occurred to date. There is no assurance that such funds will be obtained.   

MANUFACTURING                                                                   
-------------                                                                   

The Company currently outsources the manufacturing of all of the M2000 system's 
components to major industry suppliers. The Company has also identified back-up 
vendors for all critical components and expects to retain sufficient inventory  
of all highly specialized components.                                           

As of September 30, 2002, the Company has three complete M2000 automated        
hydro-blasting systems available, as well as two of its automated deck          
hydro-blasting systems. The Company currently estimates that it needs 60 to 90  
days to complete the manufacture of an M2000 system.                            

The Company intends to manufacture the robotic vehicle component of the system, 
as well as associated spare parts, in a new manufacturing facility adjacent to  
its Stuart, Florida headquarters and warehousing facilities when the Company    
obtains sufficient resources to permit this capital investment. The Company     
believes that bringing the manufacturing of its robot component in-house will   
help to ensure product quality and availability and provide it with the ability 
to identify and implement product modifications and upgrades quickly and        
efficiently. The Company will also perform product testing and failure analysis.
After assembly, the Company plans to store its automated hydro-blasting systems 
in the Company's on-site warehouse, which it believes should be sufficient to   
accommodate all near-term operations.                                           

ENVIRONMENTAL REGULATION                                                        
------------------------                                                        

The Company maintains office facilities in Stuart, Florida and is subject to    
applicable federal, state and local regulations with respect to such facilities.
The Company does not currently own or operate any manufacturing, operating, or  
shipbuilding or repair facilities.                                              

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The Company is not licensed to store or transport any hazardous waste. When     
performing contract services for a customer, the Company ensures that the burden
of disposal of all hazardous paint residue remains the responsibility of the    
customer. When selling or renting its equipment to a customer, the Company      
assumes no liability for compliance with applicable environmental regulations.  
The Company believes that it is in substantial compliance with all environmental
laws and regulations applicable to its business as currently conducted.         

EMPLOYEES                                                                       
---------                                                                       

At September 30, 2002, the Company employed 18 full-time employees and one      
part-time employee.                                                             

CENTRAL HEADQUARTERS                                                            
--------------------                                                            

The Company's headquarters and office facilities are located in an industrial   
area of Stuart, Florida. The Company currently occupies two buildings at this   
site - one building contains administrative offices and warehouse storage space,
while the second building contains space for the Company's eventual expansion of
manufacturing operations. The Stuart office serves as the Company's central     
headquarters.                                                                   

In October 2001, the Company received its ISO 9001:2000 certification for its   
quality management system. The Company is committed to consistently providing   
quality services that meet or exceed customer expectations, as well as          
continually reassessing its internal processes and procedures in order to       
maintain its status as an ISO 9001-certified company.                           

 * * * * *

RISK FACTORS; CAUTIONARY STATEMENT AS TO FORWARD-LOOKING STATEMENTS.            

The Company faces severe risks and uncertainties of continuing as a going       
concern for the following reasons, among others referred to in this report:     

         o        The Company continues to experience losses from operations and
               remains dependent on outside sources of funding to continue
its operations.                             

  o        The Company faces significant competitive challenges in
           commercializing its automated M2000 systems and has had
                limited success to date in obtaining contracts from the ship
                  maintenance and repair market or the above-ground storage tank
market.                                     

 o        The Company has not generated substantial revenue from
               operations to date and may be unable to generate sufficient
                 cash flow from the sale or lease of its products and services
                  in the future to meet its current and future obligations, make
             necessary capital expenditures and meet other cash needs.

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      o        The Company incurred a net loss of approximately $5,613,440
                 and $11,130,286 in 2001 and 2000, respectively, and continues
to incur a net loss in 2002.                

        o        The Company may be unable to raise additional debt capital or
        private equity financing to fund its working capital
            requirements and capital expenditures. The Company lacks
                 assured financial resources to meet its year-end 2001 working
             capital deficit of $3,631,759 and future operating costs.

      o        If the Company is unable to obtain the necessary additional
               capital, it may be required to change its proposed business
               plan and decrease the planned operations which could have a
        material adverse effect upon its business, financial
condition or results of operations.         

        o        If the Company is unable to obtain needed sources of funds or
              effect sufficient cost reductions, the Company's liquidity
                  would be materially adversely affected and it is unlikely that
  the Company would continue as a going concern.

These factors could materially affect "forward looking statements" (within the  
meaning of the Private Securities Litigation Reform Act of 1995) that the       
Company may from time to time make, including forward-looking statements        
contained in "Item 1. Description of Business" and "Item 6. Management's        
Discussion and Analysis of Financial Condition and Results of Operations" of    
this Form 10-KSB.                                                               

ITEM 2.  DESCRIPTION OF PROPERTY.                                               

The Company leases and occupies 14,700 square feet of space in Stuart, Florida. 
The average monthly rent for the space is $8,740. The space is comprised of two 
buildings, and the leases on these buildings expire on September 30, 2005 and   
August 31, 2006. One building contains sales and corporate administrative       
offices, customer support and product engineering, as well as warehouse storage 
space for automated hydro-blasting systems and components and serves as the     
Company's central headquarters, while the second building contains space for the
Company's potential expansion of manufacturing operations.                      

ITEM 3.  LEGAL PROCEEDINGS.                                                     

On December 21, 2001, the Company filed a complaint in the Circuit Court in and 
for Palm Beach County, Florida against Mark H. Mirkin and Mirkin & Woolf, P.A., 
the Company's former corporate and securities counsel and transfer agent,       
seeking a declaration from the court that a warrant to purchase 1,653,800 shares
of the Company's common stock for $0.625 per share obtained by Mirkin & Woolf,  
P.A. in April 1998 is void. In May 2002, the Company amended the complaint to   
remove Mr. Mirkin as an individual defendant in the complaint. Mirkin & Woolf   
attempted to exercise the warrant in April 2001, but shares have not been issued

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as the exercise is subject to the resolution of the aforementioned action. The  
Company is also seeking the return of all corporate books, files and stock      
records, including original stock transfer records, which the defendants        
continue to hold in their possession. The Company believes, after consultation  
with its counsel, that it will prevail in this action and that it will suffer no
materially adverse impact as a result of Mirkin & Woolf's claims with respect to
the warrant.                                                                    

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

No matters were submitted to a vote of the Company's shareholders during the    
fourth quarter of 2001.                                                         

 PART II
 -------

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

There is no established trading market for the Company's Common Stock. The      
Company has not paid any cash dividends and does not anticipate paying cash     
dividends in the foreseeable future. Payment of dividends is within the         
discretion of our Board of Directors, and will depend, among other factors, upon
earnings, financial condition and capital requirements. As of September 30,     
2002, the Company had 1,576 record holders of its Common Stock, 19 record       
holders of Series A Redeemable Preferred Stock and 71 record holders of Series B
Redeemable Preferred Stock.                                                     

As of September 30, 2002, stock options and warrants to acquire an aggregate of 
11,870,310 shares of the Company's Common Stock were outstanding, held by       
affiliates and non-affiliates. In addition, as of September 30, 2002, 672,000   
shares of Common Stock could be converted from the 28 shares of Series A        
Redeemable Preferred Stock issued and outstanding, and 880,090 shares of Common 
Stock could be converted from the 1,054 shares of Series B Redeemable Preferred 
Stock issued and outstanding.                                                   

During the period from January 1, 2001 to March 31, 2001, four holders of an    
aggregate of 102 shares of Series B Redeemable Preferred Stock exercised their  
conversion rights and were issued 85,170 shares of Common Stock.                

Beginning in the first quarter of 2001 and ending April 5, 2001, the Company    
issued 625,943 shares of restricted, unregistered Common Stock in a number of   
private sales, at approximately $3.00 per share, for aggregate net proceeds of  
$1,809,828, which were applied to fund the Company's operations and working     
capital needs. Business and financial information about the Company was         
furnished to the purchasers in connection with these transactions. Based on     
corporate records and documents in the Company's possession relating to these   
sales, the Company believes that the sales of such shares under these           
circumstances were exempt from registration under the Act by virtue of Section  
4(2) thereof.                                                                   

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On March 31, 2001 the Company issued 50,000 shares of restricted, unregistered  
Common Stock in exchange for the provision of sales and marketing services. The 
issuances were valued at approximately $144,000 ($2.88 per share), which equals 
management's estimate of the fair market value of the services. Also during the 
period from January 1, 2001 to March 31, 2001, the Company authorized the       
issuance of 725,000 shares of restricted, unregistered Common Stock as part of  
the new compensation package for key employees, of which 725,000 shares have    
been issued. These obligations were valued at approximately $2,088,000 ($2.88   
per share), which equals management's estimate of the fair market value of the  
services provided.                                                              

Beginning in the second quarter of 2001 and ending in the third quarter of 2001,
the Company commenced a private placement to raise up to $50 million through an 
offering of restricted, unregistered shares of its Common Stock, initially at   
$5.00 per share. The Company sold 542,426 shares, at an average price of $4.06  
per share, and received net proceeds of $2,197,331 during the offering period   
ended August 31, 2001. Pursuant to an addendum to the private placement         
memorandum, the Company approved sales to a limited number of accredited        
purchasers at less than $5.00 per share, taking into account the size of the    
investment and other factors deemed relevant by management. The net proceeds of 
this offering were applied to fund the Company's operations and working capital 
needs. Based on corporate records and documents in the Company's possession     
relating to these sales, the Company believes that the sale of these shares in  
the private placement was exempt from registration under the Act by virtue of   
Rule 506 under Regulation D.                                                    

On April 30, 2001, a warrant holder attempted to exercise an alleged warrant to 
purchase 1,653,800 shares of Common Stock (see Item 3).                         

During the period of September 1, 2001 to October 31, 2001, the Company issued  
70,000 shares of restricted, unregistered Common Stock in exchange for the      
provision of consulting services. The issuances were valued at approximately    
$238,000 ($3.00 - $4.40 per share), which equaled management's estimate of the  
fair market value of the services.                                              

On October 19, 2001, the Company issued a promissory note and 100,000 warrants  
to purchase shares of the Company's Common Stock to a member of the Company's   
Board of Advisors for aggregate proceeds of $1,000,000. The warrants have an    
exercise price of $0.07 per share and are exercisable within twenty years from  
the issue date.                                                                 

There has been no change in the rights, preferences or privileges of any        
security of the Company during the year ended December 31, 2001.                

Please see our filings on Form 10-SB/A, our Form 10-KSB for the year ended      
December 31, 1999, and our Form 10-KSB/A for the year ended December 31, 2000,  
for information about equity sales prior to our fiscal year 2001 that were not  
registered under the Securities Act.                                            

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

Certain statements in "Management's Discussion and Analysis of Financial        
Condition and Results of Operations" are forward-looking statements that involve
risks and uncertainties. Words such as may, will, should, would, anticipates,   
expects, intends, plans, believes, seeks, estimates and similar expressions     
identify such forward-looking statements. Readers are cautioned not to place    
undue reliance on these forward-looking statements, which reflect management's  
analysis only as of the date hereof. The Company assumes no obligation to update
these forward-looking statements to reflect actual results or changes in factors
or assumptions affecting forward-looking statements.                            

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CRITICAL ACCOUNTING POLICIES                                                    

Financial Reporting Release No. 60, which was recently released by the U.S.     
Securities and Exchange Commission, encourages all companies to include a       
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our financial statements include a summary of the         
significant accounting policies and methods used in the preparation of our      
financial statements.                                                           

Management believes the following critical accounting policies affect the       
significant judgments and estimates used in the preparation of the financial    
statements.                                                                     

REVENUE RECOGNITION                                                             
-------------------                                                             
Revenue from sales of equipment is generally recognized when products are       
shipped, economic risk of loss has passed to the customer, collection is        
probable and any future obligations of the Company are insignificant. Revenue   
from hydro-blasting service contracts is recognized ratably over the service    
period or as the services are rendered. Payments received in advance of the     
performance of services are deferred until the services are performed.          

USE OF ESTIMATES                                                                
----------------                                                                
The preparation of the 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. On an on-going basis, management evaluates these estimates,   
including those relating to the carrying value of inventories and property and  
equipment and valuation/amortization periods related to equity instruments      
issued in exchange for services rendered to the Company. Actual results could   
differ from estimated amounts.                                                  

RESULTS OF OPERATIONS                                                           

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000           

During the year ended December 31, 2001, the Company recognized significant     
revenue for the first time in its history. From its inception in April 1998     
through February 25, 2001, the Company operated as a development stage company. 
Effective, February 26, 2001, upon entering the contract with Corrosion         
Engineering Services to remove coatings from the flight deck of the USS         
EISENHOWER, the Company commenced its planned principal operations.             

REVENUE                                                                         
-------                                                                         
Revenues were $1,708,077 for the year ended December 31, 2001, as compared to   
$30,076 for the year ended December 31, 2000. Revenues for 2001 were generated  
by two primary lines of business. These primary lines of business include       
equipment sales and service contracts. In this connection, the Company had      
equipment sales of $850,000 and service contract revenue of $858,077 in 2001,   
all of which are described below:                                               

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Equipment Sales                                                                 
Revenue from the sale of equipment in 2001 was from one customer, Robotic       
Environmental Services, LLC (RES). In September 2001, the Company signed an     
exclusive distribution agreement with RES for the sale of the Company's         
automated hydro-blasting systems in Louisiana and Texas. In connection with the 
distribution agreement, RES purchased its first UltraStrip automated            
hydro-blasting system. This system was delivered to RES in September 2001.      

Service Contracts                                                               
In 2001 the Company performed three major service contracts including the USS   
EISENHOWER, a U.S. Navy Nimitz-class aircraft carrier, dry-docked in Norfolk,   
Virginia, and the USS COLE, a U.S. Navy guided missile destroyer, dry-docked in 
Pascagoula, Mississippi, and multiple vessels at the Lisnave shipyard.          

From February 26 to March 16, 2001, the Company performed sub-contractor        
services for Corrosion Engineering Services, Inc. to remove the non-skid coating
from the flight deck of the USS EISENHOWER. During August 2001, the Company     
removed the coatings from approximately 16,000 square feet of the hull and sides
of the USS COLE. The USS COLE, which was attacked in Yemen in October 2000, was 
under repair at the Ingalls Shipbuilding facility in Pascagoula, Mississippi.   

During 2001, the Company also entered into a major contract with Tecor -        
Tecnologia Anti-Corrosao, S.A. of Setubal, Portugal (Tecor), the surface        
preparation contractor for the Lisnave shipyards. Pursuant to the contract with 
Tecor, in October 2001, the Company began a four-month demonstration with Tecor 
in the Lisnave shipyard in Setubal, Portugal. The Company provided two automated
hydro-blasting systems and crews, through Wallem and the Company, to demonstrate
the operation and effectiveness of its new technology. Recent discussions with  
Tecor management and Tecor statements in trade magazines and seminars indicate  
their satisfaction with the UltraStrip automated hydro-blasting systems. In     
January 2002, at Tecor's request, the Company extended the term of this         
agreement for one additional month to March 31, 2002. Upon completion of this   
contract on March 31, 2002, the Company's automated hydro-blasting equipment had
been used for surface preparation work on seven different vessels in the Lisnave
shipyard, ranging from crude oil carriers to cruise ships.                      

The Company believes that the completion of the USS EISENHOWER and USS COLE     
service contracts, the equipment purchase by RES, and the successful performance
of the contract in Portugal, represent the first steps towards implementation of
the Company's business plan. The Company believes future service contracts,     
equipment purchases or planned equipment rental contracts may be likely from its
customer base. The Company also believes that the most effective method of      
marketing its technology is to continue to demonstrate the operation of its     
systems in shipyards throughout the world. Future service contract work, plus   
paid demonstrations and trial periods, will increase marketplace visibility.    
However, the Company does not believe the 2001 revenue mix from these lines of  
business is indicative of the likely future revenue mix of the Company.         

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OPERATING EXPENSES                                                              
------------------                                                              
Operating expenses were $7,275,515 for the year ended December 31, 2001, as     
compared to $11,142,297 for the year ended December 31, 2000. The primary lines 
of the business consist of equipment sales and service contracts. In this       
connection, the Company had cost of sales relating to equipment sales of        
$1,803,219 and service contracts of $1,413,191, selling, general and            
administrative costs (excluding non-cash compensation) of $5,803,295, and a     
non-cash benefit pertaining to equity-related transactions of $(1,744,190) in   
2001, all of which are described below.                                         

Cost of Equipment Sales                                                         
Cost of equipment sales exceeded revenues primarily as a result of purchases of 
system components at prices not reflective of bulk pricing, which the Company   
expects to obtain in the future, as well as the purchase of certain components  
that have been replaced by lower-cost components in newer systems. In addition, 
the sale was made knowingly at an incentive discount to initiate a customer     
relationship. As the Company increases its purchasing leverage with its         
suppliers through increased volume and more frequent orders, the Company expects
a decrease in major component costs. In addition, the Company continually seeks 
new vendors that may offer compatible, lower-cost components for use in the     
Company's automated hydro-blasting systems. Through its efforts to realize      
economies of scale in system component purchasing, the Company believes it will 
be able to generate positive gross margins from equipment sales.                

Cost of equipment sales also includes impairment losses on equipment, which     
increased from $214,134 in the year ended December 31, 2000 to $611,020 in the  
year ended December 31, 2001. This increase is attributable to write-offs of    
obsolete replacement parts and a robotic hydro-blasting system made obsolete by 
the Company's launch of the newest version of its product in August 2001.       

Cost of Service Contracts                                                       
Cost of service contracts exceeded revenues primarily as a result of the Company
incurring additional costs on all contracts to ensure the successful completion 
of each job, as the successful completion of each contract is viewed as critical
to the long-term success of the Company. To date, all contracts have required   
more consumable parts and labor than necessary, and other precautions to ensure 
a successful outcome. The Company decided to over-supply labor on its 2001      
service contracts to ensure customer satisfaction. In the future, the Company   
expects to provide adequate levels of equipment, consumable parts, and labor to 
generate positive gross profit margins from contract services.                  

The Company does not view its inability to achieve positive gross margins as    
indicative of future performance from its equipment sales, contract services or 
planned rentals.                                                                

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Selling, General and Administrative Expenses Excluding Non-Cash Compensation    
(Benefit) Expense                                                               
Selling, general and administrative expenses (excluding non-cash compensation)  
increased from $3,910,988 for the year ended December 31, 2000 to $5,803,295 for
the year ended December 31, 2001, an increase of $1,892,307 (48%).              

Salaries and wages, exclusive of officer salaries but including employee        
benefits, were $701,875 for the year 2001. This compares to $156,295 for        
salaries and wages during 2000. The Company increased the number of employees   
from 4 in 2000 to 18 full-time and 2 part-time employees in 2001. Officer       
salaries, excluding stock compensation, were $885,833 for the year ended        
December 31, 2001, as compared to $390,000 for the year ended December 31, 2000.
This increase results from hiring four additional full-time Company officers. In
anticipation of the Company transitioning from a development stage enterprise to
an operating entity, it chose to hire additional members of senior management to
assist with this transition and to establish the foundation for immediate       
growth.                                                                         

Legal fees increased from $304,635 in 2000 to $691,292 in 2001. The increase is 
attributable partly to the preparation and filing of numerous SEC documents as  
the Company became aware that it was subject to SEC reporting requirements in   
2001. This increase is also a result of the Company's compliance with proxy     
rules and increases in corporate and commercial work as part of its transition  
to an operating entity.                                                         

Consulting expenses increased to $739,313 for the year ended December 31, 2001  
from $697,659 for the year ended December 31, 2000, primarily due to an increase
in engineering, investor relations, information technology, international       
marketing, quality management and other consulting services. The quality        
management consulting services were associated with the Company's certification 
for ISO 9001:2000 quality management standards.                                 

Research and development increased from $513,291 in 2000 to $629,801 in 2001.   
The increase is attributable to an increase in the number and scope of research 
and development projects conducted by the Company and the NREC (see Item 12).   
The Company currently has two significant research projects in process, with a  
third project initiated, but currently on hold. The first significant research  
project, the Company's latest model robot, has required the cumulative          
expenditure of approximately $500,000 to develop. While this project has yielded
a commercially viable model, the Company is undertaking additional engineering  
modifications to improve the design which are estimated to be completed in March
2003 and require an additional $250,000 in research expenditures. This project  
is expected to yield cash inflows from the sale of equipment and future service 
contracts.                                                                      

The Company's second significant research project involves the design of a robot
for use solely on horizontal surfaces. This project has required approximately  
$213,000 in research expenditures. This project is estimated for completion in  
March 2003 and may require an additional $25,000 in research expenditures. This 
project is expected to yield cash inflows from the sale of equipment and future 
service contracts.                                                              

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The Company's third significant research project involves designing a commercial
application for its patented automotive stripping technology. Approximately     
$225,000 in research expenditures has been spent on this project to date. This  
project is not currently active due to the Company's limited financial          
resources. The Company estimates that this project will require $775,000 to     
complete.                                                                       

Non-Cash Compensation (Benefit) Expense                                         
This (benefit) expense is a result of non-cash charges primarily stemming from  
the Company's issuance of options to employees and directors in 1998 and 1999   
with cashless conversion provisions that require variable accounting treatment. 
(Benefit) expense arises as the fair value of the Company's Common Stock        
(decreases) increases from period to period. The non-cash (benefit) expense     
associated with these options totaled $(4,387,350) and $4,031,986 for the years 
ended December 31, 2001 and 2000, respectively.                                 

The increase in non-cash charges is also a result of the Company issuing common 
stock for services, the value of which increased from $800,000 for the year     
ended December 31, 2000 to $2,470,000 for the year ended December 31, 2001. This
increase is largely attributable to the issuance of 725,000 restricted,         
unregistered shares of common stock to attract members of the Company's new     
senior management team as part of compensation packages, which resulted in a    
non-cash charge to operations of $2,088,000.                                    

The non-cash charges for equity compensation were partially offset by a decrease
in non-cash expense resulting from options issued to members of the Company's   
Board of Advisors and service providers, which decreased to $173,160 for the    
year ended December 31, 2001 from $2,155,423 in the year ended December 31,     
2000.                                                                           

LOSS FROM OPERATIONS                                                            
--------------------                                                            
The Company continues to recognize losses from its operations. Loss from        
operations for the year ended December 31, 2001 was $5,567,438 as compared to   
$11,112,221 for the prior year. This decrease in loss is primarily due to the   
decrease in operating expenses, including equity compensation, described above. 

INTEREST EXPENSE                                                                
----------------                                                                
Interest expense totaled $61,188 for the year ended December 31, 2001, compared 
to $18,065 for the year ended December 31, 2000. This increase is due largely to
interest expense associated with the note payable from a shareholder due in     
October 2002.                                                                   

PROVISION FOR INCOME TAXES                                                      
--------------------------                                                      
No provision for income taxes was necessary in 2001 and 2000 due to the loss    
reported for such years (See note 10 to the financial statements). Further,     
given the uncertainties as to realization, the deferred tax assets have been    
fully reserved.                                                                 

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NET LOSS                                                                        
--------                                                                        
Net loss was $5,613,440 for the year ended December 31, 2001, compared to       
$11,130,286 for the year ended December 31, 2000.                               

PREFERRED STOCK DIVIDENDS                                                       
-------------------------                                                       
Preferred stock dividends were $397,875 and $213,768 for the years ended        
December 31, 2001 and 2000, respectively. These dividends reflect Company       
obligations to preferred shareholders but have not been paid.                   

NET LOSS APPLICABLE TO COMMON STOCK                                             
-----------------------------------                                             
Net loss applicable to common stock was $6,011,315 for the year ended December  
31, 2001, compared to $11,344,054 for the year ended December 31, 2000. Loss per
common share was $0.14 and $0.28 in 2001 and 2000, respectively.                

LIQUIDITY AND CAPITAL RESOURCES                                                 

The Company continues to experience losses from operations and remains dependent
on outside sources of funding to continue its operations.                       

Below is a chart setting forth our contractual cash payment obligations as of   
December 31, 2001 which have been aggregated in order to facilitate a basic     
understanding of our liquidity (in thousands):                                  

                                        Payments due by Period

                                           Less than                     After 5
Contractual obligations              Total   1 year  1-3 years  4-5 years years 
                                    --------------------------------------------
Notes payable                       $ 2,053  $ 1,443  $   561   $    49   $ --  
Redeemable Convertible Preferred                                                
Stock (at July 1, 2002, earliest                                                
redemption date)                      4,618    4,618       --        --     --  
Operating leases                        480      113      334        33     --  
Employment agreements                 2,232    1,141    1,091        --     --  
Carnegie Mellon University              696      696       --        --     --  
Hammelmann Corp.                         84       84       --        --     --  
                                    --------------------------------------------
Total contractual cash obligations  $10,163  $ 8,095  $ 1,986   $    82   $ --  
                                    --------------------------------------------

On September 3, 1999 the Company entered into a Development Agreement with      
Carnegie Mellon University, through the NREC, to develop technologies based on  
the Company's base technology for ultra high-pressure coatings removal. This    
agreement is integral to the success and development of the automated           
technologies used by the Company. In this connection, during 2001, the Company  
incurred costs to the NREC of $1,379,749. At December 31, 2001, the Company is  
committed to expend an additional $695,799 to the NREC.                         

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Since inception, the Company has relied principally upon the proceeds of private
equity financings and loans to fund its working capital requirements and capital
expenditures. The Company has generated only minimal revenues from operations to
date. The Company's net cash used in operating activities for the year ended    
December 31, 2001 was $4,846,895, compared to $2,752,568 for the year ended     
December 31, 2000, an increase of $2,094,327. This increase resulted from       
increases in the Company's net loss, inventories, offset by increases in        
accounts payable and accrued expenses. These increases resulted from the        
expansion of the Company's operations. Net cash used in operating activities    
during 2001 does not include non-cash charges of $2,470,000 for issuance of     
common stock for services, $173,154 for options granted to service providers, or
$(4,387,350) for non-cash compensation (benefit) from employees and directors.  

The Company's net cash provided by financing activities amounted to $5,788,825  
from proceeds received from the sale of warrants, issuance of long-term debt,   
and primarily from the issuance of Common Stock. In October 2001, the Company   
issued a promissory note and 100,000 warrants to purchase the Company's Common  
Stock at an exercise price of $0.07 per share to a member of the Company's Board
of Advisors for aggregate proceeds of $1,000,000. The Company also received     
$691,457 from the issuance of long-term debt. Beginning in the first quarter of 
2001 and ending April 5, 2001, the Company issued 625,943 shares of restricted, 
unregistered Common Stock in a number of private sales, at approximately $3.00  
per share, for aggregate net proceeds of $1,809,828, which were applied to fund 
the Company's operations and working capital needs. Business and financial      
information about the Company was furnished to the purchasers in connection with
these transactions. Based on corporate records and documents in the Company's   
possession relating to these sales, the Company believes that the sales of such 
shares under these circumstances were exempt from registration under the Act by 
virtue of Section 4(2) thereof. Beginning in the second quarter of 2001 and     
ending in the third quarter of 2001, the Company commenced a private placement  
to raise up to $50 million through an offering of restricted, unregistered      
shares of its Common Stock, initially at $5.00 per share. The Company sold      
542,426 shares, at an average price of $4.06 per share, and received net        
proceeds of $2,197,331 during the offering period ended August 31, 2001.        
Pursuant to an addendum to the private placement memorandum, the Company        
approved sales to a limited number of accredited purchasers at less than $5.00  
per share, taking into account the size of the investment and other factors     
deemed relevant by management. The net proceeds of this offering were applied to
fund the Company's operations and working capital needs. Based on corporate     
records and documents in the Company's possession relating to these sales, the  
Company believes that the sale of these shares in the private placement was     
exempt from registration under the Act by virtue of Rule 506 under Regulation D.
This compares to net cash provided by financing activities of $4,791,427 for the
year ended December 31, 2000, largely from the sale of common and preferred     
shares.                                                                         

The Company's net cash used in investing activities for the year ended December 
31, 2001 was $698,300 compared to $1,798,525 for the year ended December 31,    
2000, primarily as a result of new equipment purchases. Management expects to   
continue to employ this equipment in connection with future operations.         

The Company's short-term and long-term liquidity requirements are expected to   
result from working capital needs to purchase inventory, retire existing trade  
liabilities and redeemable preferred stock and to pay other operating expenses. 
Although the Company cannot accurately predict the precise timing of its future 

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capital expenditures, the Company estimates that it will need to expend         
approximately $4.25 million, within the next twelve months from the Fall of     
2002. The Company estimates that of that amount (i) $0.25 million will be for   
machine tools and equipment required to manufacture critical components of its  
automated hydro-blasting systems, (ii) $0.25 million for research and           
development (iii) $1.0 million for sales and marketing forces, (iv) $0.2 million
for professional fees and (v) $2.55 million for other operating expenses, such  
as payroll, rent and office expense.                                            

The Company lacks assured available financial resources to meet its December 31,
2001 working capital deficit of $3,631,759 and future operating costs.          

The Company will seek additional equity capital from private offerings. There is
no assurance, that the Company will be able to raise such additional capital    
during the next 12 months from the Fall of 2002. If the Company is unable to    
obtain the necessary additional capital, it may be required to change the       
proposed business plan and decrease the planned operations, which could have a  
material adverse effect upon the business, financial condition, or results of   
operations.                                                                     

The Company's inability to raise needed equity funding has delayed the execution
of the Company's business plan and caused the Company's outstanding payables to 
increase. Due to insufficient cash generated from operations, the Company       
presently does not have cash available to pay its accounts payable and other    
liabilities. Obligations are being met on a month-to-month basis as cash becomes
available. There can be no assurances that the Company's present flow of cash   
will be sufficient to meet current and future obligations. The Company has      
incurred losses since its inception, and continues to require additional capital
to fund operations and development. As such, the Company's ability to pay its   
already incurred obligations is mostly dependent on the Company raising         
additional capital in the form of equity or debt.                               

Subsequent to December 31, 2001 Company management has taken the following steps
to improve the Company's cash flow:                                             

       1.       The Company's business plan for the next twelve months is to
               focus on sales and marketing efforts to place its automated
               hydro-blasting systems into use in the ship maintenance and
                 repair and above ground storage tank maintenance markets. The
                Company believes the most effective marketing effort for its
               product will be to conduct live demonstrations at shipyards
           and storage tank facilities in the United States and in
       shipyards throughout the world which are leaders in
            environmental protection, thereby introducing the marine
              industry to automated hydro-blasting and demonstrating its
           superiority to existing surface preparation methods and
              competitive technologies. The Company plans to offer three
              primary sales options: outright equipment sales, long-term
             rental contracts, and contract services. By offering this
                  variety of alternatives, customers can select the relationship
                 that best matches their capital allocation plan. In 2002, the
               Company also intends to increase the focus of its marketing
         efforts on the U.S. market. The Company believes that
         environmental regulations are currently a very strong
                 influence on shipyard operations in the United States and may
                  provide an external impetus to shipyards to carefully consider
the Company's products.                     

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        2.       In the event that the Company executes future sales orders or
                  rental contracts, the Company has had discussions with lenders
               willing to provide project finance funds to cover the costs
            associated with equipment manufacture. The proceeds from
              orders or contracts, the Company's work-in-process and the
    manufactured equipment will serve as collateral.

3.       The Company has begun to reduce costs. In addition to
                  deferring salaries for some members of senior management since
               February 2002, the Company has also reduced annual salaries
         for three members of senior management by $300,000, a
             reduction of 29% in total senior management salaries. The
        Company will also reduce its advertising, travel and
              entertainment, consulting and office expenses, among other
areas, for further cost reductions.         

 4.       The Company continues to seek loans and equity through
               relationships amongst the Company's shareholders, officers,
               board members, and third parties. On February 21, 2002, the
               Company signed an agreement to borrow up to $200,000 from a
                 third party, with interest accruing at 18% per year. The loan
               is due on August 25, 2002, and the interest is payable with
           warrants to purchase 8,001 shares of Common Stock at an
                exercise price of $0.07 per share. On February 26, 2002, the
                 Company borrowed $200,000 under this agreement. This note was
             extended on August 25, 2002 for an additional six months.
                 Through September 30, 2002, the Company has signed agreements
               to borrow an aggregate of $1.5 million from various Company
           officers and related parties. These notes are generally
                 repayable one year from their respective agreement dates, and
                all have interest calculated at prime rate plus 2% per year.
                Through September 2002, $1.3 million of these notes had been
               repaid. In June 2002, the Company entered into an agreement
            with a third party, Conquest Joint Venture 2002, to sell
                 1,125,000 warrants to purchase Common Stock for $500,000. The
              warrants are exercisable for a term of 7 years and have an
                  exercise price of $0.10 per warrant. In June 2002, the Company
          also entered into an agreement for the sale of 115,385
         restricted, unregistered shares of Common Stock to an
                  accredited investor for $150,000 in a transaction exempt under
                  Section 4(2) of the Securities Act of 1933. In September 2002,
         the Company sold 100,000 shares of Common Stock to an
                  accredited investor for $131,000 in a transaction exempt under
Section 4(2) of the Securities Act of 1933. 

      5.       On May 13, 2002, the Company entered into an agreement with
                Metro Machine Corporation of Norfolk, Virginia to purchase a
               prototype automated hydro-blasting paint removal system for
             $2,000,000. A deposit of $500,000 was received on May 14,
                2002. Spare parts and accessories were subsequently added to
                  the order, increasing the purchase price to $2.3 million. $1.5
              million was paid on August 21, 2002, upon the delivery and
            acceptance of the equipment at the buyer's shipyard. The
             balance was paid on September 25, 2002. Under the 16-year
                  agreement, Metro Machine intends to further develop and refine
                the paint removal system for use in its shipyard and to make
                and sell the Company's paint removal system as part of Metro
Machine's Metro Ship Coating System.        

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     6.       In June 2002, the Company conducted a demonstration of its
          automated hydro-blasting systems for Atlantic Dry Dock
                Corporation in Jacksonville, Florida, removing coatings from
                 the outside hull of the USS DOYLE, a U.S. Navy guided missile
           frigate. Revenues from this demonstration were $22,223.

       7.       On July 30, 2002, Dennis McGuire was awarded U.S. Patent No.
           6,425,340 which granted exclusive use of the method and
           apparatus for removing coatings from ship hulls using a
                magnetic-attraction vehicle and an ultra-high pressure water
                jet system. Mr. McGuire subsequently assigned this patent to
the Company.                                

     8.       Through September 2002, $600,000 has been paid to Carnegie
              Mellon University to meet previously incurred commitments.

      9.       Through September 30, 2002, $435,000 has been repaid toward
        the Company's $450,000 promissory note payable to an
        employee/shareholder which was due on March 1, 2002.

Should the Company receive the number of sales orders and rental contracts it is
projecting over the next twelve months from the Fall of 2002, the Company should
be able to generate sufficient cash flow to sustain operations and meet all     
obligations as they become due. However, should the number of purchase orders or
rental contracts be less than currently forecasted, or should the sales or      
rental prices be less than currently forecasted, there can be no assurance that 
the Company will be able to generate sufficient cash flow to sustain operations 
and meet all obligations for the next twelve months from the Fall of 2002.      

The Company does not currently anticipate any significant changes in its total  
number of employees over the next twelve months from the Fall of 2002. However, 
should the demand for the Company's products or contract services increase      
significantly, the Company anticipates the need to hire additional employees in 
the equipment operation area for the performance of contract services, equipment
maintenance, field support and component and spare parts manufacturing.         

In the event that the Company is unable to obtain the requisite funds to        
continue its operations as planned, it will be necessary for the Company to     
curtail its expenditures and refocus its business plan with a view toward       
containing costs and obtaining additional revenues. Specific actions to this end
might include a reduction in staff, research and development and marketing      
expenditures. There can be no assurance, however, that such cost reductions will
be achieved.                                                                    

GOING CONCERN QUALIFICATION                                                     

The Company's auditors stated in their reports that the financial statements of 
the Company for the years ended December 31, 2001 and December 31, 2000 were    
prepared on the going-concern basis. For the years ended December 31, 2001 and  
2000, the Company incurred net annual losses of $6,011,315 and $11,344,054,     
respectively, had a working capital deficit of $3,631,759 and $829,071          
respectively, and has outstanding redeemable preferred stock that can become    
mandatorily redeemable during 2002. These factors raise substantial doubt about 
the ability of the Company to continue as a going concern. In the first nine    
months of 2002, the Company continues to incur net losses, and, at September 30,
2002, its working capital deficit is in excess of $5.5 million. Management      
believes that resources will be available from private sources for the remainder
of 2002 and 2003 to carry out its business plan described above. The financial  
statements do not include any adjustments relating to the recoverability and    
classification of recorded assets, or the amounts and classification of         
liabilities that might be necessary in the event the Company cannot continue in 
existence.                                                                      

Management has established plans intended to increase the sales of the Company's
products. Management intends to seek new capital from new equity securities and 
loans to provide funds needed to increase liquidity, fund growth and implement  
its business plan; however, no assurance can be given that the Company will be  
able to raise any additional capital. If the Company is unable to obtain needed 
sources of funds or effect sufficient cost reductions, the Company's liquidity  
would be materially adversely affected and it is unlikely that the Company would
continue as a going concern (see note 1 to the financial statements).           

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ITEM 7.  FINANCIAL STATEMENTS.                                                  

The Company's financial statements are contained in this Report beginning at    
page F-1.                                                                       

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

As previously disclosed in the Company's current reports filed on Form 8-K on   
March 5, 2002 and March 14, 2002, on February 15, 2002, the relationship with   
Barry I. Hechtman, P.A. as principal independent accountants for the Company was
terminated and, on March 8, 2002, BDO Seidman, LLP was appointed.               

PART III
--------

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS           

All directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualify. Officers are appointed by, and serve  
at the discretion of, the Board of Directors. The Company's directors and       
officers are as follows:                                                        

                                                        [Enlarge/Download Table]


Name and Title           Age  Occupational History                                                       
--------------           ---  --------------------                                                       
                                                                                                         
William A. Owens........ 61   Admiral Owens (USN,  Retired) has served as a Company director since May 1,
     Chairman of the          2000 and was reelected on August 18, 2001 to serve an  additional  one-year
     Board; Director          term.  He currently  serves  Teledesic  LLC as  vice-chairman  and co-chief
                              executive officer. Admiral Owens joined Teledesic in August 1998 from      
                              Science Applications International Corp., where he served as vice          
                              chairman, president and chief operating officer since 1996. Prior to       
                              joining SAIC, he served as Vice Chairman of the Joint Chiefs of Staff,     
                              appointed by President Clinton in March 1994. Admiral Owens received a     
                              bachelor's degree in mathematics from the U.S. Naval Academy in 1962,      
                              bachelor's and master's degrees in politics, philosophy and economics      
                              from Oxford University between 1970 and 1972 and a master's degree in      
                              management from George Washington University in 1974.                      

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                                                        [Enlarge/Download Table]


                                                                                                              

Robert O. Baratta........  61  Dr.  Baratta  served the Company as part-time  Co-Chief  Executive  Officer    
     President, Chief          from December  2000 to June 2001 and became  full-time  Co-Chief  Executive    
     Executive Officer,        Officer in July 2001. In November  2001,  Dr.  Baratta became the Company's    
     and Vice Chairman;        sole Chief Executive Officer.  Dr. Baratta has served as a Company director    
     Director                  since  August 15,  1999 and was  reelected  on August 18,  2001 to serve an    
                               additional  one-year  term.  Dr. Baratta has served as the chairman of FPIC    
                               Insurance Group Inc. (NASDAQ:  FPIC), a Florida-based  multi-line insurance    
                               carrier,  since 1999 and as a Director  since 1996.  From 1972 to 2001, Dr.    
                               Baratta practiced  ophthalmology in Stuart, Florida and remains the founder    
                               and majority  shareholder in The Surgery Center of Stuart, a multispecialty    
                               ambulatory  surgery  center.  He also founded and chaired  Stuart  Hatteras    
                               Inc., the largest Hatteras dealer in the world, has developed  professional    
                               office  real estate  projects,  and owns a property  management  firm and a    
                               yacht charter business.  Dr. Baratta received his bachelors degree from St.    
                               Peter's  College in 1962 and medical  degree from  Columbia  University  in    
                               1966. He completed his residency in ophthalmology at Vanderbilt  University    
                               School of Medicine.                                                            

John P. Odwazny.........   45  Mr.  Odwazny  served the Company as Co-Chief  Executive  Officer from March    
     Chief Operating           2001 until  November  2001. In November  2001,  Mr. Odwazny was named Chief    
     Officer and Director      Operating  Officer.  Mr.  Odwazny  has served as a Company  director  since    
                               August 15, 1999 and was reelected on August 18, 2001 to serve an additional    
                               one-year term. From 1981 to 2001, Mr. Odwazny served as a Senior Sales         
                               Executive at AKZO Nobel/ International Paint, the world's largest chemical     
                               and coatings company, where he managed the South Florida and Caribbean         
                               region. His responsibilities included designing technical specifications of    
                               surface preparation and coating applications for large marine and              
                               industrial companies. He also serves on an Advisory Board for the National     
                               Association of Corrosion Engineers. Mr. Odwazny received his bachelors         
                               degree from Florida State University in 1978.                                  

John E. Bares, Ph.D......  39  Dr.  Bares has served as a Company  director  since August 15, 1999 and was    
     Director                  reelected on August 18, 2001 to serve an additional  one-year  term.  Since    
                               1997, Dr. Bares has been a Senior Research Scientist at Carnegie Mellon        
                               University's Robotics Institute and the Director of its National Robotics      
                               Engineering Consortium. His research focuses on robotic applications for       
                               hazardous environments. Dr. Bares received his bachelors degree in 1985,       
                               masters degree in 1987 and doctorate in civil engineering in 1991 from         
                               Carnegie Mellon University. Prior to returning to Carnegie Mellon              
                               University, he served as a visiting research scientist at Mitsubishi Heavy     
                               Industries.                                                                    

Patrick Bischoff........   34  On October 16,  2002,  Mr.  Bischoff  was  elected to the  Company's           
     Director                  Board  of  Directors.  He had  served  on  the  Company's  Board  of           
                               Advisors since August 18, 2001. Mr. Bischoff is the founder of Spinnaker       
                               Ventures LLC and is currently a member of the Advisory Boards of Saba Software,
                               Magnitude.com, and Datango.com. Mr. Bischoff co-founded Saba Software, an      
                               enterprise software company specializing in human resources applications. Prior
                               to his experience with Saba, Mr. Bischoff worked for CompuNet Computer         
                               AG, helping build the company into the largest systems integrator in Europe and
                               completing its sale to GE IT Solutions                                         
                               in 1997.                                                                       

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R. Gerald Buchanan...     54  Mr.  Buchanan has served as a Company  director  since January 31, 2001 and
     Director                 was  reelected  on August 18, 2001 to serve an  additional  one-year  term.
                              Since  1996,  Mr.  Buchanan  has  acted  as  Managing  Director  of  Wallem
                              Shipmanagement  Ltd., one of the largest ship  management  companies in the
                              world. Previously,  from 1990 to 1996, he served as Director of Engineering
                              at Canada Steamship Lines.                                                 

Jean-Michel Cousteau...   63  Mr.  Cousteau  has served as a Company  director  since August 15, 1999 and
     Director                 was reelected on August 18, 2001 to serve an additional  one-year term. Mr.
                              Cousteau, the son of the late environmentalist and ocean pioneer           
                              Jacques Cousteau, has spent his life exploring and researching the world's 
                              oceans. He has collaborated in the development of artificial floating      
                              islands, schools, a residential and research complex in Madagascar and an  
                              advanced marine studies center in Marseille. He supervised the             
                              transformation of part of the ocean liner QUEEN MARY into the Living Sea   
                              Museum in Long Beach, California. He designed and developed the Parc       
                              Oceanique Cousteau in Paris. Currently, Mr. Cousteau lectures              
                              extensively around the world and writes a column for THE LOS ANGELES       
                              TIMES SYNDICATE. Mr. Cousteau graduated from the Paris School of           
                              Architecture in 1960.                                                      

John M. Gumersell.......  55  Mr.  Gumersell has served as a Company  director  since  September 21, 2000
     Director                 and was reelected on August 18, 2001 to serve an additional  one-year term.
                              Since 2001, Mr. Gumersell has served as Principal with Innovix Advisory    
                              Services. From 1998 to 2001, Mr. Gumersell served as president and         
                              chief executive of Lucent Technologies Consumer Products L.P. Previously,  
                              from 1997 to 1998, he served as senior vice president and chief financial  
                              officer of Philips Consumer Communications. Mr. Gumersell received         
                              his bachelors degree in accounting and economics from Rutgers University in
                              1980 and his masters degree in management from Pace University in          
                              1982.                                                                      

Gordon G. Kuljian........ 41  Mr.  Kuljian has served as a Company  director  since June 22, 2000 and was
     Director                 reelected on August 18, 2001 to serve an additional  one-year  term.  Since
                              2000, Mr. Kuljian has served as vice president-operations for Chemstar     
                              Urethanes Inc. Previously, from 1994 to 2000, he served as a Senior        
                              Engineer and the Operations Manager for Coatings Services at Corrpro       
                              Companies Inc. Mr. Kuljian has over 15 years of experience in the field of 


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                               corrosion control by protective coatings, surface preparation and                
                               coatings formulation and application and has lectured and written several        
                               scholarly articles in the field. Mr. Kuljian received his bachelors degree       
                               in chemical engineering from Northwestern University in 1982.                    

T. Joseph Lopez..........  62  Admiral Lopez (USN,  Retired) has served as a Company director since August      
     Director                  18,  2000 and was  reelected  on  August  18,  2001 to serve an  additional      
                               one-year term. Admiral Lopez is employed by Halliburton Company as the           
                               chief operating officer of the North and South America and U.S. Government       
                               Projects Worldwide for its Brown & Root Services division. Previously he         
                               served in the U.S. Navy, including a tour as both Commander in Chief of          
                               U.S. Naval Forces (Europe) and Commander in Chief of Allied Forces               
                               (Southern Europe). During his naval career he was awarded two Defense            
                               Distinguished Service Medals, among other accolades. He received a               
                               bachelors degree in International Relations from Potomac State College           
                               in 1972, and a masters degree in business management from the U.S.               
                               Naval Postgraduate School in 1973.                                               

Eugene C. Rainis......     61  On July 24, 2002,  Mr. Rainis was elected to the Company's  Board of             
    Director                   Directors.  He had served on the Company's  Board of Advisors  since             
                               February 2, 2001. Mr. Rainis is a General Partner of Brown Brothers              
                               Harriman & Co., the private banking, brokerage and financial advisory firm       
                               where he has worked since 1965. From 1972 through 1996 his main                  
                               responsibility was supervising the firm's fixed income business. He was          
                               chairman of the board of both the Jefferson Insurance Company and the            
                               Monticello Insurance Company. He received his bachelors degree in                
                               economics from Fordham College in 1962 and an MBA from The Wharton School in     
                               1964.                                                                            

George R. Sterner......    61  On March 1, 2002,  Vice Admiral  Sterner (USN,  Retired) was elected to the      
     Director                  Company's  Board of Directors.   He had served on the Company's Board of Advisors
                               since February 2, 2001. Since 1999,  Admiral  Sterner has served as              
                               Vice President - Naval Mission Area Executive for Raytheon. From 1998 to         
                               1999, he served as Vice President - System Integration for Walt Disney           
                               Imagineering and directed the technical aspects and delivery                     
                               preparations for the MS Disney Wonder cruise ship. Admiral Sterner served as     
                               Commander Naval Sea Systems Command for the U.S. Navy from 1994 to 1998.         
                               In total, he spent 37 distinguished years with the U.S. Navy, from 1962          
                               until his retirement in April 1998. Admiral Sterner received a bachelors         
                               degree in aerospace engineering from Penn State University in 1962 and a         
                               masters degree in operations research from the Naval Postgraduate School in      
                               1964.                                                                            

Dennis E. McGuire......    51  Mr.  McGuire has served as a Company  director  since April 2, 1998 and was      
     Chief Technology          reelected  on August 18,  2001 to serve an  additional  one-year  term.  On      
     Officer and Director      March 1,  2002,  Mr.  McGuire  resigned  from the  Board of  Directors  for      
     of Sales                  personal  reasons.  Mr. McGuire  continues to serve as the Company's  Chief      
                               Technology  Officer  and  Director  of  Sales.  Mr.  McGuire  has  traveled      
                               extensively  throughout the world performing contract services at shipyards      
                               and has given  educational  seminars to various navies and shipyards on the      
                               benefits of ultrahigh pressure  hydro-blasting as an environmentally  safer      


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                                alternative  to grit  blasting  for  removing  coatings  from the  hulls of 
                                ships.  Mr. McGuire  formed  Amclean,  Inc. in 1992 as the first  ultrahigh 
                                pressure hydro-blasting  contractor in the marine industry and assigned his 
                                original patented invention to that company,  which Amclean assigned to the 
                                Company in December  1999.  Mr. McGuire left Amclean in early 1998 to start 
                                the Company.  Mr.  McGuire  received his  associate of science  degree from 
                                Miami-Dade Community College in 1974.                                       

Jacqueline K. McGuire...    39  Ms.  McGuire  has served as a Company  officer  since  April 2,  1998.  Ms. 
     Senior Vice President      McGuire,  the wife of Dennis  McGuire,  has served as chairman of the board 
     of Administration          of Amclean Inc. since 1992. Ms. McGuire has traveled  extensively to Europe 
     and Secretary              to negotiate with equipment  manufacturers on pricing,  delivery and terms. 
                                Ms. McGuire received her associate's degree in business  administration from
                                Barry College in 1984.                                                      

Scott R. Baratta........... 32  Mr.  Baratta has served as a Company  officer since January 1, 2001.  Prior 
     Senior Vice President      to joining  the  Company,  from 1999 to 2000,  Mr.  Baratta,  son of Robert 
     of Finance                 Baratta,   served  as  a  Senior  Manager  in  the  Strategy   Practice  at 
                                marchFIRST, an Internet consulting firm. From 1996 to 1999, he worked in    
                                the Business and Strategic Planning department of Frito-Lay Company. Mr.    
                                Baratta received his bachelors degree from the University of Virginia in    
                                1991 and his masters in business administration from The Wharton School     
                                in 1996.                                                                    

Michael R. Donn.......      54  Mr. Donn has served as a Company  officer since January 1, 2001.  From 1994 
     Senior Vice President      to 2000, Mr. Donn, brother of Jacqueline  McGuire,  served as the President 
     of Operations and          of the Miami-Dade County Fire Fighters Association,  a 1700-member employee 
     Treasurer                  association  for which he also served as vice president and treasurer since 
                                1982.  From 1978 to 1980,  he conducted the  day-to-day  operations of Dade 
                                Oil Company as General  Manager.  Mr. Donn received  associates  degrees in 
                                the  arts  and  in  the  sciences  (Fire  Administration)  from  Miami-Dade 
                                Community College in 1976 and 1978, respectively.                           

The Company regretfully reports that Frank R. Esposito passed away on January   
22, 2002. Mr. Esposito had served the Company tirelessly as a Director since    
June 22, 2000.                                                                  

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ADVISORY BOARD. The Company's Board of Directors established an Advisory Board  
in June 2000. David M. Ransom serves as its chairman, along with Advisory Board 
member Stephen R. Johnson. On August 18, 2001, Patrick Bischoff was appointed to
the Company's Board of Advisors, and, on October 16, 2002, Ms. Bischoff was     
elected to the Company's Board of Directors.                                    

                                                        [Enlarge/Download Table]


Name and Title          Occupational History                                                                
--------------          --------------------                                                                
                                                                                                            
David M. Ransom         Since his  retirement  from  public  service in 1997,  Mr.  Ransom has  engaged in  
     Chairman of the    international  consulting  on Persian  Gulf matters  through his firm D.M.  Ransom  
     Board of Advisors  Associates.  Mr.  Ransom  served as U.S.  Ambassador to Bahrain from 1994 to 1997,  
                        upon the conclusion of which he received the Defense Distinguished Service Medal.   
                        Previously he headed the U.S. State Department office of Turkey, Greece and Cyprus  
                        in the Bureau of European Affairs, and was an embassy official in Yemen, the United 
                        Arab Emirates and Syria. Mr. Ransom earned a bachelors degree from Princeton        
                        University in 1960 and a masters degree from Johns Hopkins School of Advanced       
                        International Studies in 1962.                                                      

Stephen R. Johnson      Mr. Johnson serves as  vice-president  for the Ocean  Development  Group, a cruise  
    Advisor             ship  development  company.  Since  1997,  he has  served as  president  of Marine  
                        Management Consultants L.C. From 1994 to 1996, Mr. Johnson served as president and  
                        from 1991 to 1994 as vice-president of Atlantic Marine Inc. Before that he worked at
                        Bethlehem Steel Corporation's Sparrows Point Shipyard as a Senior Manager from 1987 
                        to 1990. Mr. Johnson received his bachelors degree in Marine Transportation from the
                        State University of New York Maritime College in 1968.                              

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ITEM 10.  EXECUTIVE COMPENSATION.                                               

The following table displays information concerning compensation paid or accrued
for the fiscal years ended December 31, 2001, 2000 and 1999, for the benefit of 
our named executive officers.                                                   

SUMMARY COMPENSATION TABLE                                                      

                                                        [Enlarge/Download Table]

                                                 ANNUAL COMPENSATION        LONG-TERM COMPENSATION AWARDS       
                                              ------------------------------------------------------------------
                                                       SALARY           RESTRICTED STOCK       SECURITIES       
                                     FISCAL                                 AWARD(S)       UNDERLYING OPTIONS   
NAME AND PRINCIPAL POSITION(S)         YEAR              ($)                  ($)                 (#S)          
----------------------------------------------------------------------------------------------------------------
                                                                                                                
Robert O. Baratta(1)                   2001            242,500             288,000(2)         3,050,000(3)      
President, Chief Executive             2000              --                    --                  --           
Officer and Vice Chairman              1999              --                    --                  --           

John P. Odwazny(4)                     2001            108,333             288,000(5)           450,000(6)      
Chief Operating Officer and            2000              --                    --                  --           
Director                               1999              --                    --                  --           

Dennis McGuire                         2001            275,000                 --             2,550,000(7)      
Chief Technology Officer               2000            260,000                 --                  --           
and Director of Sales                  1999            260,000(8)              --               400,000         

Jacqueline K. McGuire                  2001            150,000             432,000(9)           300,000         
Senior Vice President -                2000            130,000                 --                  --           
Administration and Secretary           1999             78,000(10)             --               200,000         

Michael R. Donn                        2001            110,000             288,000(11)          200,000         
Senior Vice President -                2000             41,400(12)             --               200,000(13)     
Operations and Treasurer               1999              --                    --                  --           

------------------                                                              

(1)      Dr. Baratta began serving as Co-Chief Executive Officer on a part-time 
       basis in January 2001 and became full-time Co-Chief Executive Officer
       in July 2001. Dr. Baratta became the sole Chief Executive Officer and
President in November 2001.                                   

(2)      Dr. Baratta received a one-time grant of restricted stock under which  
        he was awarded 100,000 shares of the Company's Common Stock, effective
     as of January 1, 2001. On March 31, 2002, Dr. Baratta agreed to the
         Company placing restrictions upon the resale of the shares which expire
       according to the following schedule: 40% of shares on April 15, 2002;
       30% of shares on April 15, 2003; and 30% of shares on April 15, 2004.

(3)      Option grants to Dr. Baratta in 2001 include 500,000 shares pursuant to
      his part-time employment agreement; 1,000,000 shares pursuant to his
  full-time employment agreement; 1,500,000 shares pursuant to his
        full-time employment agreement and subject to certain Company earnings
      performance targets; and 50,000 shares pursuant to his reelection to
serve on the Board of Directors in August 2001.               

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(4)      John P. Odwazny, who joined the Company in March 2001, served as       
        Co-Chief Executive Officer until November 2001. Mr. Odwazny now serves
as Chief Operating Officer.                                   

(5)      Mr. Odwazny received a one-time grant of restricted stock under which  
        he was awarded 100,000 shares of the Company's Common Stock, effective
     as of January 1, 2001. On March 31, 2002, Mr. Odwazny agreed to the
         Company placing restrictions upon the resale of the shares which expire
       according to the following schedule: 40% of shares on April 15, 2002;
       30% of shares on April 15, 2003; and 30% of shares on April 15, 2004.

(6)      Option grants to Mr. Odwazny in 2001 include 400,000 shares pursuant to
        his amended full-time employment agreement; and 50,000 shares pursuant
      to his reelection to serve on the Board of Directors in August 2001.

(7)      Option grants to Mr. McGuire in 2001 include 1,000,000 shares pursuant 
         to his full-time employment agreement; 1,500,000 shares pursuant to his
        full-time employment agreement and subject to certain Company earnings
      performance targets; and 50,000 shares pursuant to his reelection to
    serve on the Board of Directors in August 2001. Effective March 1,
     2002, Mr. McGuire resigned from the Board of Directors for personal
reasons.                                                      

(8)     In lieu of salary, Mr. McGuire received compensation in 1999 under a    
   consulting agreement, dated April 4, 1998 and expiring December 31,
1999.                                                           

(9)      Ms. McGuire received a one-time grant of restricted stock under which  
         she was awarded 150,000 shares of the Company's Common Stock, effective
     as of January 1, 2001. On March 31, 2002, Ms. McGuire agreed to the
         Company placing restrictions upon the resale of the shares which expire
       according to the following schedule: 40% of shares on April 15, 2002;
       30% of shares on April 15, 2003; and 30% of shares on April 15, 2004.

(10)     In lieu of salary, Mrs. McGuire received compensation in 1999 under a  
     consulting agreement, dated April 4, 1998 and expiring December 31,
1999.                                                         

(11)     Mr. Donn received a one-time grant of restricted stock under which he  
        was awarded 100,000 shares of the Company's Common Stock, effective as
       of January 1, 2001. On March 31, 2002, Mr. Donn agreed to the Company
 placing restrictions upon the resale of the shares which expire
       according to the following schedule: 40% of shares on April 15, 2002;
       30% of shares on April 15, 2003; and 30% of shares on April 15, 2004.

(12)     Mr. Donn received compensation in 2000 under a consulting arrangement  
   with the Company, prior to his joining the Company as a full-time
employee on January 1, 2001.                                  

(13)     Options grants to Mr. Donn in 2000 totaled 200,000 shares received as a
consultant to the Company.                                    

 OPTION GRANTS IN LAST FISCAL YEAR

The table below sets forth information for each named executive officer, with   
regard to certain information concerning stock option grants during the year    
ended December 31, 2001:                                                        

                                                        [Enlarge/Download Table]


                      NUMBER OF         % OF TOTAL                                    
                     SECURITIES       OPTIONS GRANTED                                 
                      UNDERLYING       TO EMPLOYEES    EXERCISE PRICE                 
      NAME         OPTIONS GRANTED    IN FISCAL YEAR       ($/SH)      EXPIRATION DATE
      ----         ---------------    --------------       ------      ---------------
                                                                                      
Robert O. Baratta         500,000(1)       7.0%             $3.00           12/31/05  
Robert O. Baratta       1,000,000(2)      14.0%             $3.00           6/30/07   
Robert O. Baratta         500,000(3)       7.0%             $3.00           6/30/07   
Robert O. Baratta         500,000(4)       7.0%             $3.00           6/30/08   
Robert O. Baratta         500,000(5)       7.0%             $3.00           6/30/09   


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Robert O. Baratta         50,000(6)    0.7%  $5.00  12/20/11
Dennis E. McGuire      1,000,000(7)   14.0%  $3.00  6/30/07 
Dennis E. McGuire        500,000(8)    7.0%  $3.00  6/30/07 
Dennis E. McGuire        500,000(9)    7.0%  $3.00  6/30/08 
Dennis E. McGuire        500,000(10)   7.0%  $3.00  6/30/09 
Dennis E. McGuire         50,000(11)   0.7%  $5.00  12/20/11
John P. Odwazny          100,000(12)   1.4%  $3.00  12/31/07
John P. Odwazny          300,000(13)   4.2%  $3.00  12/31/07
John P. Odwazny           50,000(14)   0.7%  $5.00  12/20/11
Jacqueline K. McGuire    100,000(15)   1.4%  $3.00  12/31/10
Jacqueline K. McGuire    200,000(16)   2.8%  $3.00  12/31/07
Michael R. Donn          100,000(17)   1.4%  $3.00  12/31/07
Michael R. Donn          100,000(18)   1.4%  $3.00  12/31/07

--------------------                                                            

                                                        [Enlarge/Download Table]


                                                                                                                   
(1)   Grant issued pursuant to part-time employment agreement.                                                     
(2)   Grant issued pursuant to full-time employment agreement.                                                     
(3)   Grant issued  pursuant to  full-time  employment  agreement  and subject to Company  earnings  performance   
      targets.                                                                                                     
(4)   Grant issued  pursuant to  full-time  employment  agreement  and subject to Company  earnings  performance   
      targets.                                                                                                     
(5)   Grant issued  pursuant to  full-time  employment  agreement  and subject to Company  earnings  performance   
      targets.                                                                                                     
(6)   Grant  issued upon  reelection  to the Board of  Directors  and subject to vesting as follows:  33% of the   
      shares shall vest on each of the 1st, 2nd, and 3rd anniversaries of the date of grant.                       
(7)   Grant issued pursuant to employment agreement.                                                               
(8)   Grant issued pursuant to employment agreement and subject to Company earnings performance targets.           
(9)   Grant issued pursuant to employment agreement and subject to Company earnings performance targets.           
(10)  Grant issued pursuant to employment agreement and subject to Company earnings performance targets.           
(11)  Grant  issued upon  reelection  to the Board of  Directors  and subject to vesting as follows:  33% of the   
      shares shall vest on each of the 1st, 2nd, and 3rd anniversaries of the ate of grant.                        
(12)  Grant issued  pursuant to  employment  agreement.  Incentive  stock option for 99,999 shares is subject to   
      vesting as follows:  33,333  shares shall vest on  12/31/01,  12/31/02,  and  12/31/03.  Non-qualified  stock
      option for 1 share shall vest on 12/31/03.                                                                   
(13)  Non-qualified  stock  option  grant  issued  pursuant to  employment  agreement  and subject to vesting as   
      follows: 100,000 shares shall vest on 12/31/04, 12/31/05, and 12/31/06.                                      
(14)  Grant  issued upon  reelection  to the Board of  Directors  and subject to vesting as follows:  33% of the   
      shares shall vest on each of the 1st, 2nd, and 3rd anniversaries of the date of grant.                       
(15)  Grant issued  pursuant to  employment  agreement.  Incentive  stock option for 99,999 shares is subject to   
      vesting as follows:  33,333  shares shall vest on  12/31/01,  12/31/02,  and  12/31/03.  Non-qualified  stock
      option for 1 share shall vest on 12/31/03.                                                                   

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(16)  Non-qualified  stock  option  grant  issued  pursuant to  employment  agreement  and subject to vesting as   
      follows: 66,666 shares shall vest on 12/31/04 and 12/31/05, and 66,668 shares on 12/31/06.                   
(17)  Grant issued  pursuant to  employment  agreement.  Incentive  stock option for 99,999 shares is subject to   
      vesting as follows:  33,333  shares shall vest on  12/31/01,  12/31/02,  and  12/31/03.  Non-qualified  stock
      option for 1 share shall vest on 12/31/03.                                                                   
(18)  Non-qualified  stock  option  grant  issued  pursuant to  employment  agreement  and subject to vesting as   
      follows: 33,333 shares shall vest on 12/31/04 and 12/31/05, and 33,334 shares on 12/31/06.                   

AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR
 AND FISCAL YEAR-END OPTION VALUES

The table below sets forth information for each named executive officer with    
regard to the aggregate stock options held at December 31, 2001. No stock       
options were exercised by any of the named executive officers during 2001.      

                                                        [Enlarge/Download Table]


                              SHARES                  NUMBER OF SECURITIES        VALUE OF UNEXERCISED      
                             ACQUIRED                UNDERLYING UNEXERCISED      IN-THE-MONEY OPTIONS AT    
                               UPON       VALUE        OPTIONS AT FY-END               FY-END (1)           
                                                  ----------------------------------------------------------
NAME                         EXERCISE   REALIZED  EXERCISABLE  UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE  
                                (#)        ($)        (#)           (#)            ($)            ($)       
------------------------------------------------------------------------------------------------------------
                                                                                                            
Robert O. Baratta               --         --        1,700,000       1,550,000      --            --        
Dennis McGuire                  --         --        1,400,000       1,550,000      --            --        
John P. Odwazny                 --         --          233,333         416,667      --            --        
Jacqueline K. McGuire           --         --          233,333         266,667   143,600          --        
Michael R. Donn                 --         --          233,333         166,667      --            --        

--------------------                                                            
(1) Based on the average price per share of $1.76 for the fourth quarter of     
2001. Because the Company's Common Stock is not listed on any public exchange or
established trading market, this may or may not be indicative of the fair market
value of the Company's Common Stock.                                            

EMPLOYMENT AGREEMENTS                                                           

ROBERT O. BARATTA. In January 2001, the Company entered into a part-time        
employment agreement with Dr. Baratta effective from January 1, 2001 to June 30,
2001, which provided for a salary of $105,000, a restricted stock grant of      
100,000 shares of the Company's Common Stock as an incentive bonus, a           
non-qualified stock option to acquire 500,000 shares of the Company's common    
stock at an exercise price of $3.00 per share exercisable through December 31,  
2005, and payment of normal business expenses. The Company subsequently entered 
into a full-time employment agreement with Dr. Baratta effective July 1, 2001 to
June 30, 2004, which provided for an annual salary of $275,000, a non-qualified 
stock option to acquire 1,000,000 shares of the Company's Common Stock at an    
exercise price of $3.00 per share exercisable through June 30, 2007, a          
non-qualified stock option to acquire 500,000 shares of the Company's Common    

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Stock at an exercise price of $3.00 per share exercisable through June 30, 2007 
and subject to certain Company earnings performance targets, a non-qualified    
stock option to acquire 500,000 shares of the Company's Common Stock at an      
exercise price of $3.00 per share exercisable through June 30, 2008 and subject 
to certain Company earnings performance targets, a non-qualified stock option to
acquire 500,000 shares of the Company's Common Stock at an exercise price of    
$3.00 per share exercisable through June 30, 2009 and subject to certain Company
earnings performance targets, and payment of normal business expenses.          

DENNIS E. MCGUIRE. In January 2001, the Company entered into an employment      
agreement with Mr. McGuire effective July 1, 2001 to June 30, 2004, which       
currently provides for an annual salary of $275,000, a non-qualified stock      
option to acquire 1,000,000 shares of the Company's Common Stock at an exercise 
price of $3.00 per share exercisable through June 30, 2007, a non-qualified     
stock option to acquire 500,000 shares of the Company's Common Stock at an      
exercise price of $3.00 per share exercisable through June 30, 2007 and subject 
to certain Company earnings performance targets, a non-qualified stock option to
acquire 500,000 shares of the Company's Common Stock at an exercise price of    
$3.00 per share exercisable through June 30, 2008 and subject to certain Company
earnings performance targets, a non-qualified stock option to acquire 500,000   
shares of the Company's Common Stock at an exercise price of $3.00 per share    
exercisable through June 30, 2009 and subject to certain Company earnings       
performance targets, and payment of normal business expenses.                   

JOHN P. ODWAZNY. In January 2001, the Company entered into an employment        
agreement with Mr. Odwazny effective March 1, 2001 to December 31, 2003, which  
agreement was amended on April 15, 2001, and which currently provides for an    
annual salary of $130,000, a restricted stock grant of 100,000 shares of the    
Company's Common Stock as an incentive bonus, a stock option grant to acquire   
100,000 shares of the Company's Common Stock at an exercise price of $3.00 per  
share exercisable through December 31, 2007 issued as follows: an incentive     
stock option for 99,999 shares subject to vesting as follows: 33,333 shares     
shall vest on 12/31/01, 12/31/02, and 12/31/03, and a non-qualified stock option
for 1 share shall vest on 12/31/03, a non-qualified stock option to acquire     
300,000 shares of the Company's Common Stock at an exercise price of $3.00 per  
share exercisable through December 31, 2007, subject to vesting as follows:     
100,000 shares shall vest on 12/31/04, 12/31/05, and 12/31/06, and payment of   
normal business expenses.                                                       

JACQUELINE K. MCGUIRE. In January 2001, the Company entered into an employment  
agreement with Ms. McGuire effective January 1, 2001 to December 31, 2003, which
currently provides for an annual salary of $150,000, a restricted stock grant of
150,000 shares of the Company's Common Stock as an incentive bonus, and, as     
amended by her stock option agreement with the Company, a stock option grant to 
acquire 100,000 shares of the Company's Common Stock at an exercise price of    
$3.00 per share exercisable through December 31, 2010 issued as follows: an     
incentive stock option for 99,999 shares subject to vesting as follows: 33,333  
shares shall vest on 12/31/01, 12/31/02, and 12/31/03, and a non-qualified stock
option for 1 share shall vest on 12/31/03, a non-qualified stock option to      
acquire 200,000 shares of the Company's Common Stock at an exercise price of    
$3.00 per share exercisable through December 31, 2007, subject to vesting as    
follows: 66,666 shares shall vest on 12/31/04 and 12/31/05, and 66,668 on       
12/31/06, and payment of normal business expenses.                              

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MICHAEL R. DONN. In January 2001, the Company entered into an employment        
agreement with Mr. Donn effective January 1, 2001 to December 31, 2003, which   
currently provides for an annual salary of $110,000, a restricted stock grant of
100,000 shares of the Company's Common Stock as an incentive bonus, a stock     
option grant to acquire 100,000 shares of the Company's Common Stock at an      
exercise price of $3.00 per share exercisable through December 31, 2007 issued  
as follows: an incentive stock option for 99,999 shares subject to vesting as   
follows: 33,333 shares shall vest on 12/31/01, 12/31/02, and 12/31/03, and a    
non-qualified stock option for 1 share shall vest on 12/31/03, a non-qualified  
stock option to acquire 100,000 shares of the Company's Common Stock at an      
exercise price of $3.00 per share exercisable through December 31, 2007, subject
to vesting as follows: 33,333 shares shall vest on 12/31/04 and 12/31/05, and   
33,334 on 12/31/06, and payment of normal business expenses.                    

COMPENSATION OF DIRECTORS                                                       

The Company does not compensate members of the Board of Directors with cash for 
their services in such capacity. The Company's shareholders adopted a 1999      
Outside Directors Stock Option Plan at the annual meeting of shareholders on    
August 14, 1999. The plan created a pool of 500,000 (increased by resolution of 
the Board of Directors in November 1999 to 2,000,000) shares of Common Stock to 
be granted at the discretion of the Board to directors of the Company who are   
not employed by the Company.                                                    

The Company has made the following awards under this plan:                      

        On August 15, 1999, the Board of Directors awarded options to purchase
     an aggregate of 1,000,000 shares of Common Stock to 5 newly-elected
       Directors. The options have an exercise price of $1.875 per share and
are exercisable through August 15, 2002.                      

     Through September 30, 2002, options to purchase 1,000,000 shares of
      Common Stock have either expired or been forfeited. At September 30,
        2002, total option grants outstanding under the 1999 Outside Directors
     Stock Option Plan covered the purchase of 0 shares of Common Stock.

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The following table shows all compensation paid to directors in 2001:           

                                                        [Enlarge/Download Table]

                                       CASH COMPENSATION                 SECURITY GRANTS               
                                       -----------------          -------------------------------      
                                                                                       NUMBER OF       
                  ANNUAL                     CONSULTING            NUMBER              SECURITIES      
                 RETAINER       MEETING       FEE/OTHER              OF                UNDERLYING      
     NAME        FEE ($)         FEES ($)       FEES ($)           SHARES (#)         OPTIONS/SARS (#) 
--------------  ----------  -------------- ------------------- ----------------------------------------
                                                                                                       
R.O. Baratta         0            0                 0                  --                 50,000       
J.P. Odwazny         0            0                 0                  --                 50,000       
D.E. McGuire         0            0                 0                  --                 50,000       
W.A. Owens           0            0                 0                  --                 50,000       
J.E. Bares           0            0                 0                  --                 50,000       
R.G. Buchanan        0            0                 0                  --                 50,000       
J.M. Cousteau        0            0                 0                  --                 50,000       
F.R. Esposito        0            0                 0                  --                 50,000       
J.M. Gumersell       0            0                 0              50,000(1)              50,000       
G.G. Kuljian         0            0            37,250(2)               --                 50,000       
T.J. Lopez           0            0                 0                  --                 50,000       

--------------------                                                            
(1)      Issuance of shares to which Mr. Gumersell was entitled pursuant to a   
 Pre-Employment Agreement under which Mr. Gumersell contemplated
employment with the Company.                                  
(2)      Consulting fees associated with the Company's contract services on the 
USS Eisenhower and the USS Cole.                              

The board of directors had two meetings during 2001.                            

STOCK PLAN                                                                      

The UltraStrip Systems, Inc. 2000 Long Term Incentive Program (the "Plan")      
adopted by the Company on August 18, 2000 was designed to encourage selected    
employees of the Company to acquire a proprietary and vested interest in the    
growth and performance of the Company to generate an increased incentive to     
contribute to the Company's future success and prosperity, thus enhancing the   
value of the Company for the benefit of shareholders, and to enhance the        
Company's ability to attract and retain individuals of exceptional managerial   
talent upon whom, in large measure, the sustained progress, growth and          
profitability of the Company depends. The Plan fixed a total of 4,000,000 shares
of common stock available for awards during its five-year term. The Plan        
provides that awards to employees who are, or are likely to be, "covered        
employees" under the Internal Revenue Code may be made subject to the           
achievement of certain performance goals in order for the compensation to such  
employees to qualify as "performance-based compensation" under the Code, and    
therefore be deductible for federal income tax purposes by the Company.         

The Plan is discretionary and based on Company financial performance. It permits
the granting of any or all of the following types of awards: (i) stock options, 
including incentive stock options under the Code, (ii) stock appreciation       
rights, in tandem with stock options or free-standing, (iii) restricted stock,  
(iv) performance shares conditioned upon meeting performance criteria, and (v)  
other awards of stock or awards valued by reference to stock.                   

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The Company has made the following awards under this plan:                      

         From January 1, 2001 through March 31, 2001, the Board of Directors and
        the Company awarded options to purchase an aggregate of 525,000 shares
         of Common Stock to officers and employees. The options have an exercise
         price of $3.00 per share and expire from March 4, 2005 through December
31, 2010.                                                     

         On August 1, 2001, the Company awarded options to purchase an aggregate
      of 25,000 shares of Common Stock to an employee. The options have an
exercise price of $5.00 per share and expire on July 31, 2005.

On January 1, 2002, the Company awarded options to purchase an
       aggregate of 20,000 of Common Stock to employees. The options have an
    exercise price of $1.76 per share and expire on December 31, 2011.

       At September 30, 2002, total option grants outstanding under the 2000
    Long-Term Incentive Plan covered the purchase of 570,000 shares of
Common Stock.                                                 

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.                              

No Form 3, 4 or 5 was filed by any director, officer or beneficial owner of more
than ten percent of any of the Company's equity securities during fiscal year   
2001 as these individuals were unaware of the Company's status as a public      
company and their resulting reporting obligations pursuant to the United States 
Securities and Exchange Act of 1934 until May 2001. Since that time, the Company
has diligently focused its attention and expended significant resources on      
preparing and filing its periodic reports required under the United States      
Securities and Exchange Act of 1934, but the Company has offered to assist its  
directors, officers and ten percent shareholders in complying with their        
Exchange Act reporting obligations and expects the required forms will be filed 
as soon as practicable.                                                         

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

The following table sets forth information as of September 30, 2002 with respect
to the beneficial ownership of shares of Common Stock, including shares as to   
which a right to acquire ownership exists within the meaning of Rule 13d-3(d)(1)
under the Securities Exchange Act of 1934, by (i) each person owning more than  
five percent, (ii) each director and named executive officer, and (iii) all     
named executive officers and directors as a group:                              

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                                                        [Enlarge/Download Table]


                                             Common Shares Underlying                  
                                             Options, Warrants, and                    
Owner                        Common Shares       Preferred Stock      Total     Percent
-----                        -------------   ----------------------   -----     -------
                                                                                       
Kevin P. Grady(3)              7,168,394             33,333          7,201,727    16.93
John Caperton(3)               2,015,556                  0          2,015,556     4.74
Michael Cristoforo(3)          1,354,423(4)         233,333          1,587,756     3.73

Dennis E. McGuire(2)           6,985,823(7)       1,000,000          7,985,823    18.77
Robert O. Baratta(1)(2)          683,333          1,763,000          2,446,333     5.75
Eugene C. Rainis(1)              200,000            441,800(8)         641,800     1.51
John P. Odwazny(1)(2)            499,307(5)          33,333            532,640     1.25
William A. Owens(1)                    0            500,000            500,000     1.18
Michael R. Donn(2)               125,000            233,333            358,333     0.84
Jacqueline K. McGuire(2)         227,680             33,333            261,013     0.61
George R. Sterner(1)                   0            250,000            250,000     0.59
Jean-Michel Cousteau(1)          200,000                  0            200,000     0.47
John M. Gumersell(1)              70,000                  0             70,000     0.16
R. Gerald Buchanan(1)             50,000                  0             50,000     0.12
Gordon G. Kuljian(1)                   0                  0                  0     0.00
T. Joseph Lopez(1)                     0                  0                  0     0.00
John E. Bares(1)(6)                    0                  0                  0     0.00
Officers and directors as a                                                            
group  (14 persons)            9,041,143          4,254,799         13,295,942    31.25

--------------------                                                            
(1)      A director                                                             
(2)      A named executive officer                                              
(3)      5% shareholder                                                         
(4)      Includes shares for which beneficial ownership is disclaimed: 231,500  
     owned by wife, 3,080 owned by daughter, and 155,556 owned by mother
(5)      Includes shares for which beneficial ownership is disclaimed: 346,112  
common shares owned by wife.                                  
(6)      On March 18, 2002, Dr. Bares elected to forfeit his previously         
disclosed 1999 and 2001 option grants.                        
(7)      On March 29, 2002, such shares were placed in the 2002 UltraStrip Stock
      Trust, with Mr. Steve Bronis, Esq., c/o Zuckerman Spaeder LLP, Miami
        Center, 301 Biscayne Boulevard, Suite 900, Miami, Florida, 33131-4326,
        as Trustee. The trustee has the exclusive right to vote the securities
    owned by the Trust and specifically can do any act or exercise any
   power with respect to securities under Section 15(b)(5), take any
        action deemed advisable for the protection, maintenance, and promotion
      of the assets owned by the trust under Section 15(b)(8) and take all
    other actions granted under Florida law to a trustee under Section
        15(c) [including the power to vote securities under Florida Stat. Sec.
     737.402(2)(n)]. The 2002 UltraStrip Stock Trust has a duration of 5
years.                                                        
(8)      Includes warrants for which beneficial ownership is disclaimed: 25,000 
owned by wife.                                                

The business address of each of the owners is c/o UltraStrip Systems, Inc., 3515
S.E. Lionel Terrace, Stuart, Florida 34997.                                     

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                       

The Company has not engaged in any transactions with management or others in    
which the amount involved exceeds $60,000 other than the following:             

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Dr. Bares serves as the director of the National Robotics Engineering Consortium
(NREC) at Carnegie Mellon University. The Company and NREC entered into a       
development agreement in September 1999 pursuant to which the NREC designs and  
develops technologies and constructs robots that are derivative of the Company's
original robotic stripping concept. The Company expended $680,559 and $1,379,749
to NREC in 2000 and 2001, respectively, pursuant to the development agreement.  
At September 30, 2002, $0 was payable to Carnegie Mellon University for         
research and development services performed in 2001.                            

Mr. Buchanan serves as Managing Director for Wallem Shipmanagement. Wallem      
provided the staff for the Company's operating crew for the Tecor               
contract/demonstration in Portugal. The Company reimbursed Wallem $87,204 in    
2001 related to the Tecor contract, and an additional $87,721 was payable to    
Wallem at December 31, 2001.                                                    

Other than normal trade payables, the Company is indebted to Dennis and         
Jacqueline McGuire, co-founders of the Company, current officers, and           
beneficiaries of the 2002 UltraStrip Stock Trust, in the amount of $566,544 for 
sums they lent the Company over the course of 2001. The Company is also indebted
to Mr. McGuire in the amount of $186,643 for officer wages accrued in 1999.     

The Company is indebted to Kevin Grady, co-founder of the Company, current      
employee, and significant shareholder, in the amount of $517,893 for sums he    
lent the Company over the course of 1999.                                       

On October 19, 2001, the Company issued a promissory note and 100,000 warrants  
with an exercise price of $0.07 to purchase shares of the Company's Common Stock
to Eugene Rainis, a member of the Company's Advisory Board, for aggregate       
proceeds of $1,000,000. This note is due on October 19, 2002. This note was     
extended to January 17, 2003 for an additional 62,500 warrants.                 

The Company exercised an option and acquired a Patent on December 17, 1999 from 
a related company, AmClean, Inc. The Patent was acquired through the issuance of
1,000,000 shares of the Company's restricted, unregistered common stock and     
$61,500 of prepaid royalties in exchange for ownership of the Patent and all    
rights pertaining to the Patent holder. At the time of the patent acquisition,  
four shareholders - Dennis and Jacqueline McGuire, Kevin Grady, and John        
Caperton - owned a majority of the outstanding common stock of both companies.  

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INDEX TO FINANCIAL STATEMENTS                                                   

                                                                      PAGE
                                                                      ----

Reports of Independent Certified Public Accountants                    F-2      

Balance Sheet                                                          F-4      

Statements of Operations                                               F-5      

Statements of Changes in Stockholders' Deficit                         F-6      

Statements of Cash Flows                                               F-7      

Summary of Significant Accounting Policies                             F-8      

Notes to Financial Statements                                          F-13     

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                              

To the Board of Directors of                                                    
UltraStrip Systems, Inc.                                                        
Stuart, Florida                                                                 

We have audited the accompanying balance sheet of UltraStrip Systems, Inc. as of
December 31, 2001, and the related statements of operations, changes in         
stockholders' deficit and cash flows for the year then ended. These financial   
statements are the responsibility of the Company's management. Our              
responsibility is to express an opinion on these financial statements based on  
our audit.                                                                      

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

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the financial position of UltraStrip Systems, Inc. as of 
December 31, 2001, and the results of its operations and its cash flows for the 
year then ended in conformity with accounting principles generally accepted in  
the United States of America.                                                   

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. As discussed in Note 1 to the         
financial statements, the Company has operated at a loss since inception, has an
excess of current liabilities over current assets and a capital deficit that    
raise substantial doubt about its ability to continue as a going concern.       
Management's plans in regard to these matters are also described in Note 1. The 
financial statements do not include any adjustments that might result from the  
outcome of this uncertainty.                                                    

Miami, Florida                                              /s/ BDO Seidman, LLP
June 28, 2002, except for                                       BDO Seidman, LLP
Notes 1 and 15, which are                                                       
as of September 25, 2002                                                        

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 BARRY I. HECHTMAN, P.A.
CERTIFIED PUBLIC ACCOUNTANTS

MEMBER OF:
FLORIDA AND AMERICAN INSTITUTE OF CPAS
 PRIVATE COMPANIES AND SEC PRACTICE SECTIONS

8100 SW 81 DRIVE                                       TELEPHONE: (305) 270-0014
SUITE 210                                                    FAX: (305) 598-3695
MIAMI FLORIDA, 33143-6603                            EMAIL: BARRYCPA@NETZERO.NET

INDEPENDENT AUDITORS' REPORT                                                    

To the Board of Directors of                                                    
Ultrastrip Systems, Inc.                                                        

We have audited the statements of loss, stockholders' deficit and cash flows of 
Ultrastrip Systems, Inc. (a Florida corporation) for the year ended December 31,
2000. These financial statements are the responsibility of the Company's        
management. Our responsibility is to express an opinion on these financial      
statements based on our audit.                                                  

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

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

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. As discussed in Note 1 to the         
financial statements, the Company has operated at a loss since inception, has an
excess of current liabilities over current assets and a capital deficit that    
raise substantial doubt about its ability to continue as a going concern.       
Management's plans in regard to that matter also are described in Note 1. The   
financial statements do not include any adjustments that might result from the  
outcome of this uncertainty.                                                    

/s/ Barry I Hechtman, P.A.                                                      

March 15, 2001                                                                  

Restated September 10, 2002                                                     

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                                                        [Enlarge/Download Table]


                                                                                                  ULTRASTRIP SYSTEMS, INC. 

                                                                                                             BALANCE SHEET 
December 31,                                                                                                          2001 
-------------------------------------------------------------------------------------------------------------------------- 
                                                                                                                           
CURRENT ASSETS                                                                                                             
   Cash and cash equivalents                                                                                  $    543,934 
   Accounts receivable                                                                                               7,799 
   Note receivable from officer (Note 2)                                                                            50,000 
   Inventories (Note 3)                                                                                            591,055 
   Prepaid expenses and other                                                                                      108,540 
-------------------------------------------------------------------------------------------------------------------------- 

TOTAL CURRENT ASSETS                                                                                             1,301,328 

Property and equipment, net (Notes 4, 5 and 6)                                                                   2,450,329 
Patents, less accumulated amortization of $11,528                                                                   97,805 
-------------------------------------------------------------------------------------------------------------------------- 

                                                                                                              $  3,849,462 
========================================================================================================================== 

LIABILITIES, REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT                                   

CURRENT LIABILITIES                                                                                                        
   Accounts payable and accrued expenses                                                                      $  1,889,810 
   Due to related parties (Note 12)                                                                                731,227 
   Deferred revenue                                                                                                125,000 
   Accrued preferred stock dividends (Note 8)                                                                      743,276 
   Notes payable to shareholders - current portion (Notes 5 and 6)                                               1,431,961 
   Notes payable - current portion (Note 6)                                                                         11,813 
-------------------------------------------------------------------------------------------------------------------------- 

TOTAL CURRENT LIABILITIES                                                                                        4,933,087 

LONG-TERM DEBT:                                                                                                            
   Notes payable to shareholders, less current portion (Notes 5 and 6)                                             517,893 
   Notes payable, less current portion (Note 6)                                                                     91,626 
-------------------------------------------------------------------------------------------------------------------------- 

TOTAL LIABILITIES                                                                                                5,542,606 

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK SERIES A                                                                 
   34 shares outstanding, $25,000 per share redemption amount (Note 8)                                             850,000 

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK SERIES B                                                                 
   1056 shares outstanding, $2,500 per share redemption amount (Note 8)                                          2,640,000 

COMMITMENTS AND CONTINGENCIES (Notes 1, 12 and 13)                                                                         

STOCKHOLDERS' DEFICIT (NOTES 7, 8 AND 9)                                                                                   

COMMON STOCK, $0.01 par value; 100,000,000 shares authorized; 42,382,679 shares issued and outstanding             423,827 
ADDITIONAL PAID-IN CAPITAL                                                                                      16,605,272 
ADDITIONAL PAID-IN CAPITAL - UNISSUED SUBSCRIBED SHARES                                                             75,000 
DEFERRED COMPENSATION                                                                                              (65,576)
ACCUMULATED DEFICIT                                                                                            (22,221,667)
-------------------------------------------------------------------------------------------------------------------------- 

TOTAL STOCKHOLDERS' DEFICIT                                                                                     (5,183,144)
-------------------------------------------------------------------------------------------------------------------------- 

                                                                                                              $  3,849,462 
========================================================================================================================== 

                            See accompanying summary of significant accounting policies and notes to financial statements. 

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                                                                                               ULTRASTRIP SYSTEMS, INC. 

                                                                                               STATEMENTS OF OPERATIONS 

Year ended December 31,                                                                     2001                   2000 
----------------------------------------------------------------------------------------------------------------------- 
                                                                                                                        
REVENUES (Note 16):                                                                                                     
     Equipment sales                                                                $    850,000           $     30,076 
     Hydro-blasting contracts                                                            858,077                     -- 
----------------------------------------------------------------------------------------------------------------------- 

Total revenues                                                                         1,708,077                 30,076 
----------------------------------------------------------------------------------------------------------------------- 

OPERATING EXPENSES:                                                                                                     
     Cost of equipment sales (Note 4)                                                  1,803,219                243,900 
     Cost of hydro-blasting contracts                                                  1,413,191                     -- 
     Selling, general and administrative, excluding non-cash                                                            
     compensation (benefit) expense                                                    5,803,295              3,910,988 
     Non-cash compensation (benefit) expense  (Notes 7 and 9)                         (1,744,190)             6,987,409 
----------------------------------------------------------------------------------------------------------------------- 

Total operating expenses                                                               7,275,515             11,142,297 
----------------------------------------------------------------------------------------------------------------------- 

Loss from operations                                                                  (5,567,438)           (11,112,221)

Other income (expense):                                                                                                 
     Other income                                                                         15,186                     -- 
     Interest expense                                                                    (61,188)               (18,065)
----------------------------------------------------------------------------------------------------------------------- 

Net loss                                                                              (5,613,440)           (11,130,286)

Preferred stock dividends (Note 8)                                                      (397,875)              (213,768)
----------------------------------------------------------------------------------------------------------------------- 

Net loss applicable to common stock                                                 $ (6,011,315)          $(11,344,054)
======================================================================================================================= 

Net loss per common share (basic and diluted)                                       $      (0.14)          $      (0.28)
======================================================================================================================= 

Weighted average number of common shares outstanding                                  41,526,184             39,812,198 
======================================================================================================================= 

                         See accompanying summary of significant accounting policies and notes to financial statements. 

F-5 

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                                                                                         ULTRASTRIP SYSTEMS, INC.

                                                                   STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

                                                                                                      Additional 
                                                                                                      Paid-In    
                                                                                                      Capital    
                                                                                                      Unissued   
                                                              Common Stock            Additional        Sub-     
                                                       ---------------------------     Paid-In         scribed   
                                                          Shares         Amount        Capital         Shares    
                                                       ------------   ------------   ------------    ------------
                                                                                                                 
Balance at January 1, 2000                               38,539,876   $    385,400   $  4,327,471    $     75,000

Common stock issued for cash (Note 7)                       872,374          8,722      1,856,552              --
Common stock issued for services (Note 7)                   400,000          4,000        796,000              --
Issuance of equity instruments for services (Note 9)             --             --      2,155,423              --
Non-cash compensation (benefit) expense (Note 9)                 --             --      4,031,986              --
Preferred stock dividends (Note 8)                               --             --             --              --
Conversion of series A preferred to common (Note 8)         360,000          3,600        371,400              --
Conversion of series B preferred to common (Note 8)         111,890          1,119        333,881              --

Net loss for the year                                            --             --             --              --
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000                             40,284,140        402,841     13,872,713          75,000

Conversion of series B preferred to common (Note 8)          85,170            852        254,148              --
Common stock issued for cash (Note 7)                     1,168,369         11,684      3,995,475              --
Common stock issued for services (Note 7)                   845,000          8,450      2,461,550              --
Issuance of equity instruments for services (Note 9)             --             --        173,160              --
Non-cash compensation (benefit) expense (Note 9)                 --             --     (4,387,350)             --
Deferred compensation (Note 9)                                   --             --         65,576              --
Preferred stock dividends (Note 8)                               --             --             --              --
Grant of warrants for financing (Note 5)                         --             --        170,000              --

Net loss for the year                                            --             --             --              --
-----------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2001                             42,382,679   $    423,827   $ 16,605,272    $     75,000
=================================================================================================================

[RESTUBBED]                                                                                                      


                                                                                            Total                
                                                           Deferred     Accumulated        Capital               
                                                         Compensation      Deficit         Deficit               
                                                         ------------    ------------    ------------            
                                                                                                                 
Balance at January 1, 2000                               $         --    $ (4,866,298)    $   (78,427)           

Common stock issued for cash (Note 7)                              --              --       1,865,274            
Common stock issued for services (Note 7)                          --              --         800,000            
Issuance of equity instruments for services (Note 9)               --              --       2,155,423            
Non-cash compensation (benefit) expense (Note 9)                   --              --       4,031,986            
Preferred stock dividends (Note 8)                                 --        (213,768)       (213,768)           
Conversion of series A preferred to common (Note 8)                --              --         375,000            
Conversion of series B preferred to common (Note 8)                --              --         335,000            

Net loss for the year                                              --     (11,130,286)    (11,130,286)           
-----------------------------------------------------------------------------------------------------            

Balance at December 31, 2000                                       --     (16,210,352)     (1,859,798)           

Conversion of series B preferred to common (Note 8)                --              --         255,000            
Common stock issued for cash (Note 7)                              --              --       4,007,159            
Common stock issued for services (Note 7)                          --              --       2,470,000            
Issuance of equity instruments for services (Note 9)               --              --         173,160            
Non-cash compensation (benefit) expense (Note 9)                   --              --      (4,387,350)           
Deferred compensation (Note 9)                                (65,576)             --              --            
Preferred stock dividends (Note 8)                                 --        (397,875)       (397,875)           
Grant of warrants for financing (Note 5)                           --              --         170,000            

Net loss for the year                                              --      (5,613,440)     (5,613,440)           
-----------------------------------------------------------------------------------------------------            

BALANCE AT DECEMBER 31, 2001                             $    (65,576)   $(22,221,667)   $ (5,183,144)           
=====================================================================================================            

                  See accompanying summary of significant accounting policies and notes to financial statements. 

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                                                                                          ULTRASTRIP SYSTEMS, INC. 

                                                                                STATEMENTS OF CASH FLOWS (NOTE 14) 

Year ended December 31,                                                                   2001                2000 
-----------------------------------------------------------------------------------------------------------------  
                                                                                                                   
OPERATING ACTIVITIES:                                                                                              
   Net loss                                                                       $ (5,613,440)        (11,130,286)

   Adjustments to reconcile net loss to net cash used in operating activities:                                     
       Depreciation and amortization                                                   596,125             703,143 
       Provision for equipment impairment                                              611,020             214,134 
       Accretion of discount on note payable                                            35,417                  -- 
       Common stock issued for services                                              2,470,000             800,000 
       Issuance of equity instruments for services                                     173,160           2,155,423 
       Non-cash compensation (benefit) expense                                      (4,387,350)          4,031,986 
   Change in assets and liabilities:                                                                               
         Accounts receivable                                                            (7,799)                 -- 
         Inventories                                                                  (591,055)                 -- 
         Prepaid expenses and other                                                   (104,474)             12,903 
         Accounts payable and accrued expenses                                       1,115,274             460,125 
         Due to related parties                                                        731,227                  -- 
         Deferred revenue                                                              125,000                  -- 
------------------------------------------------------------------------------------------------------------------ 

Net cash used in operating activities                                               (4,846,895)         (2,752,568)
------------------------------------------------------------------------------------------------------------------ 

INVESTING ACTIVITIES:                                                                                              
   Patent expenditures                                                                 (14,224)                 -- 
   Purchase of property and equipment                                                 (634,076)         (1,798,525)
   (Increase) in note receivable from officer                                          (50,000)                 -- 
------------------------------------------------------------------------------------------------------------------ 

Net cash used in investing activities                                                 (698,300)         (1,798,525)
------------------------------------------------------------------------------------------------------------------ 

FINANCING ACTIVITIES:                                                                                              
   Proceeds from issuance of long-term debt                                             24,913                  -- 
   Proceeds from issuance of long-term debt and warrants to shareholders             1,666,544             351,111 
   Payments on long-term debt                                                           (9,791)             (5,965)
   Payments on long-term debt to shareholders                                         (100,000)           (448,992)
   Proceeds from issuance of preferred stock                                           200,000           3,030,000 
   Proceeds from issuance of common stock                                            4,007,159           1,865,273 
------------------------------------------------------------------------------------------------------------------ 

Net cash provided by financing activities                                            5,788,825           4,791,427 
------------------------------------------------------------------------------------------------------------------ 

Net increase in cash and cash equivalents                                              243,630             240,334 

Cash and cash equivalents, beginning of year                                           300,304              59,970 
------------------------------------------------------------------------------------------------------------------ 

Cash and cash equivalents, end of year                                            $    543,934        $    300,304 
================================================================================================================== 

                    See accompanying summary of significant accounting policies and notes to financial statements. 

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                                                        ULTRASTRIP SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

        NATURE OF OPERATIONS        UltraStrip Systems, Inc. (the "Company") was
                                    incorporated on April 2, 1998 under the laws
                            of the State of Florida. The Company
                          designs, develops and assembles an
                                 automated hydro-blasting system that uses
                                    ultra-high water pressure to remove coatings
                              from steel surfaces. The Company was a
                             development stage enterprise from its
                                   inception through February 26, 2001 and was
                                 devoting substantially all its efforts to
                                   the ongoing development of the Company. The
                                   Company commenced significant operations in
   March 2001.

                          The Company operates solely in one
                                reportable operating segment. Management
                                  monitors and reviews the operating results
                                  of equipment sales and contract activities
                            and allocates resources solely on an
        aggregate basis.

   CASH AND CASH               The Company considers all highly liquid
EQUIVALENTS                 investments with a maturity of three
                        months or less when purchased to
            be cash equivalents.

 FAIR VALUE OF FINANCIAL     The carrying amounts of the Company's
     INSTRUMENTS                 financial assets, including cash and cash
                                 equivalents, accounts receivable and note
                           receivable and of certain financial
                                 liabilities (accounts payable and accrued
                             expenses and due to related parties),
                               approximate fair value because of their
         short maturities.

                              Based on the Company's estimate of its
                                    current incremental borrowing rate for loans
                                  with similar terms and average maturities,
                                the carrying amounts of notes payable to
                                  shareholders and notes payable approximate
   fair value.

                              Based upon the conversion terms of the
                           Company's Series A and B Redeemable
                              Convertible Cumulative Preferred Stock
                                   (Preferred Stock) and the estimated current
                                fair value of the Company's Common Stock
                         into which the Preferred Stock is
                                    convertible, the fair value of the Preferred
                                  Stock aggregates approximately $2,990,000.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

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

       INVENTORIES                 Inventories are stated at the lower of cost
                               or market. Cost is determined using the
                   first-in, first-out method.

       PROPERTY AND EQUIPMENT      Property and equipment consists principally
                                 of automated hydro-blasting machinery and
                             equipment held for rent or for use in
                               contract performance and is recorded at
                              cost. Depreciation and amortization is
                               computed using the straight-line method
                                  based on the estimated useful lives of the
                                 related assets of 5 to 7 years. Leasehold
                                  improvements are amortized over the lesser
                                   of the lease term or the useful life of the
 property.

       LONG-LIVED ASSETS           The Company evaluates the recoverability of
                                   long-lived assets by measuring the carrying
                                  amount of the assets against the estimated
                                 undiscounted future cash flows associated
                               with them. At such time the evaluations
                                  indicate that the future undiscounted cash
                                   flows of the long-lived assets would not be
                                   sufficient to recover the carrying value of
                                    such assets, the assets would be adjusted to
          their fair values.

        PATENTS                     The patents are stated at cost and are being
                                   amortized on a straight-line basis over the
                                estimated future periods to be benefited
     (16.5 years).

        REVENUE RECOGNITION         Revenue from sales of equipment is generally
                             recognized when products are shipped,
                               economic risk of loss has passed to the
                                 customer, collection is probable, and any
                             future obligations of the Company are
                                  insignificant. Revenue from hydro-blasting
                                    service contracts is recognized ratably over
                                 the service period or as the services are
                                 rendered. Payments received in advance of
                                the performance of services are deferred
                         until the services are performed.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

                                  The Company includes shipping and handling
                                fees billed to customers as revenues and
                              shipping and handling costs as cost of
sales.  

    ADVERTISING                 The Company conducts advertising for the
                                    promotion of its products. Advertising costs
                                are charged to operations when incurred;
                                    such amounts aggregated $220,505 in 2001 and
         $138,805 in 2000.

 INCOME TAXES                The Company accounts for income taxes
                                  pursuant to the provisions of Statement of
                                 Financial Accounting Standards (SFAS) No.
                                 109, "Accounting for Income Taxes," which
                                 requires, among other things, a liability
                               approach to calculating deferred income
                               taxes. The asset and liability approach
                                requires the recognition of deferred tax
                               liabilities and assets for the expected
                            future tax consequences of temporary
                                    differences between the carrying amounts and
                                the tax bases of assets and liabilities.

LOSS PER SHARE              Basic loss per share is computed    
                                   on the basis of the weighted average number
                                of common shares outstanding during each
                                   year. Diluted loss per share is computed on
                                   the basis of the weighted average number of
                             common shares and dilutive securities
                                  outstanding. Dilutive securities having an
                               antidilutive effect on diluted loss per
                                share are excluded from the calculation.

  NEW ACCOUNTING              In June 2001, the Financial Accounting
     PRONOUNCEMENTS              Standards Board (FASB) finalized SFAS No.
                                  141, "Business Combinations," and SFAS No.
                                    142, "Goodwill and Other Intangible Assets."
                                 SFAS 141 requires the use of the purchase
                         method of accounting for business
                                   combinations initiated after June 30, 2001.
                               SFAS 141 also requires that the Company
                                  recognize acquired intangible assets apart
                                from goodwill if the acquired intangible
                              assets meet certain criteria. SFAS 141
                            applies to all business combinations
                             initiated after June 30, 2001 and for
                                   purchase business combinations completed on
                                or after July 1, 2001. It also requires,

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                                                        ULTRASTRIP SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

                                  upon adoption of SFAS 142 that the Company
                          reclassify the carrying amounts of
                                   intangible assets and goodwill based on the
             criteria in SFAS 141.

                                   SFAS 142 requires, among other things, that
                                  companies no longer amortize goodwill, but
                               instead test goodwill for impairment at
                             least annually. In addition, SFAS 142
                                    requires that the Company identify reporting
                           units for the purposes of assessing
                                 potential future impairments of goodwill,
                                   reassess the useful lives of other existing
                               recognized intangible assets, and cease
                                 amortization of intangible assets with an
                                   indefinite useful life. An intangible asset
                                with an indefinite useful life should be
                                    tested for impairment in accordance with the
                                  guidance in SFAS 142. SFAS 142 is required
                               to be applied in fiscal years beginning
                                   after December 15, 2001 to all goodwill and
                                  other intangible assets recognized at that
                                  date, regardless of when those assets were
                                   initially recognized. SFAS 142 requires the
                                   Company to complete a transitional goodwill
                                   impairment test six months from the date of
                                 adoption. The Company is also required to
                          reassess the useful lives of other
                                  intangible assets within the first interim
                               quarter after adoption of SFAS 142. The
                            Company is assessing but has not yet
                                    determined how the adoption of SFAS 142 will
                                    impact its financial position and results of
   operations.

                                In August 2001, the FASB issued SFAS No.
                              144, "Accounting for the Impairment or
                            Disposal of Long-lived Assets." This
                                    Statement addressed financial accounting and
                                   reporting for the impairment or disposal of
                                    long-lived assets. This Statement supersedes
                                   FASB Statement No. 121, "Accounting for the
                               Impairment of Long-Lived Assets and for
                                 Long-Lived Assets to be Disposed Of," and
                                  the accounting and reporting provisions of
                                 Accounting Principles Board (APB) Opinion
                         No. 30, "Reporting the Results of
                                    Operations-Reporting the Effects of Disposal
                       of a Segment of a Business, and
                               Extraordinary, Unusual and Infrequently
                               Occurring Events and Transactions," (as
                            previously defined in that Opinion).

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                                                        ULTRASTRIP SYSTEMS, INC.

                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

                            The provisions of this Statement are
                                 effective for financial statements issued
                                 for fiscal years beginning after December
                                  15, 2001, and interim periods within those
                         fiscal years, with early adoption
                                    encouraged. The provisions of this Statement
                                  generally are to be applied prospectively.
                                  Currently the Company is assessing but has
                                   not yet determined how the adoption of SFAS
                                  144 will impact its financial position and
              results of operations.

       RECLASSIFICATIONS           Certain 2000 amounts have been reclassified
                            to conform to the 2001 presentation.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.      GOING CONCERN               The accompanying financial statements were  
                               prepared assuming that the Company will
                                  continue as a going concern. This basis of
                                  accounting contemplates the realization of
                          assets and the satisfaction of its
                           liabilities in the normal course of
                                  operations. During the year ended December
                                31, 2001, the Company incurred losses of
                               approximately $6 million, has a working
                               capital deficiency of $3.6 million, has
                                   outstanding redeemable preferred stock that
                                    can become mandatorily redeemable after June
                                   2002 and has not reached a profitable level
                         of operations, all of which raise
                             substantial doubt about the Company's
                               ability to continue as a going concern.

                            The Company's continued existence is
                                 dependent upon its ability to resolve its
                                    liquidity problems, principally by obtaining
                            additional debt financing and equity
                                   capital. While pursuing additional debt and
                                    equity funding, the Company must continue to
                              operate on limited cash flow generated
   internally.

                               The Company plans to reduce its working
                            capital requirements by deferring or
                                    reducing salaries for some members of senior
                               management and by reducing advertising,
                                travel and entertainment, consulting and
                              office expenses in an effort to reduce
                                   costs. Working capital limitations continue
                                 to impinge on day-to-day operations, thus
                                   contributing to continued operating losses.
                                    The continued support and forbearance of its
                                  lenders will be required, although this is
    not assured.

                           The Company is in negotiations with
                                   potential purchasers of the Company's M2000
                                    automated hydro-blasting systems. During May
                              2002, the Company received $500,000 in
                                  advances against a $2 million sales order.
                        Spare parts and accessories were
                                   subsequently added to the order, increasing
                                the purchase price to $2.3 million. $1.5
                                 million was paid on August 21, 2002, upon
                                    delivery and testing of the equipment at the
                                 buyer's shipyard. The balance was paid on
                           September 25, 2002. See Note 15(c).

                                   The financial statements do not include any
                                  adjustments to reflect the possible future
                         effects on the recoverability and
                                   classification of assets or the amounts and
                              classification of liabilities that may
                                 result from the possible inability of the

                               Company to continue as a going concern.

                                 Accordingly, there are no assurances that
                                   the Company will be successful in achieving
                               the above plans, or that such plans, if
                               consummated, will enable the Company to
                                   obtain profitable operations or continue as
        a going concern.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

2.      NOTE RECEIVABLE FROM        Note receivable at December 31, 2001        
     OFFICER                     consists of an unsecured demand note with
                         an officer bearing interest at 6%
                        per annum, repaid in March 2002.

3.      INVENTORIES                Inventories consist of the following:        

                                                                [Download Table]


December 31,                                                             2001
-----------------------------------------------------------------------------

                                                                             
Finished goods                                                  $     456,678
Work in process                                                       134,377
-----------------------------------------------------------------------------

                                                                $     591,055
=============================================================================

4.      PROPERTY AND                Property and equipment consist of the       
EQUIPMENT                   following:                          

                                                                [Download Table]


                                                    Estimated                 
                                                      Useful                  
December 31,                                           Life           2001    
----------------------------------------------------------------------------- 
                                                                              
Machinery and equipment                                5 years  $   2,400,109 
Furniture and fixtures                                 7 years        276,644 
Automobile and trucks                                  5 years        209,970 
Leasehold improvements                                 5 years        207,161 
Office equipment                                       5 years        136,421 
----------------------------------------------------------------------------- 

                                                                    3,230,305 
Less accumulated depreciation and                                             
       amortization                                                  (779,976)
----------------------------------------------------------------------------- 

                                                                $   2,450,329 
============================================================================= 

                                 Substantially all machinery and equipment
                                 represents hydro-blasting equipment, used
                                   for contract services or planned short-term
leasing.

                                Depreciation expense for the years ended
                             December 31, 2001 and 2000 aggregated
                            $590,361 and $697,381, respectively.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                During the years ended December 31, 2001 and
                        2000, the Company recorded equipment
                       impairment expenses of $611,020 and
                          $214,134, respectively, resulting from
                            technological changes in product design.

5.      NOTES PAYABLE TO          Notes payable to shareholders consist of      
SHAREHOLDERS              the following:                        

                                                                [Download Table]


December 31,                                                             2001  
-------------------------------------------------------------------------------
                                                                               
Unsecured notes payable to                                                     
employee/shareholder, interest at prime plus                                   
2% (6.75% at December 31, 2001), $450,000 plus                                 
accrued interest repayable in 2002, balance                                    
due March 1, 2003, subject to earlier                                          
repayments upon (1) a public offering of the                                   
Company's common stock or debt securities or                                   
(2) in installments equal to 20% of revenues                                   
earned and collected by the Company                                            
subsequent to March 1, 2002 (a)                               $       566,544  

Unsecured note payable to                                                      
employee/shareholder, interest at prime                                        
plus 2% (6.75% at December 31, 2001), due                             517,893  
April 10, 2003                                                                 

$1,000,000 note payable to                                                     
shareholder/Advisory Board member, balloon                                     
payment due on October 19, 2002 in the amount                                  
of $1,000,000 including interest at 16%,                                       
secured by all existing equipment and                                          
machinery utilized to                                                          
manufacture the Company's product, net of                             865,417  
unamortized discount (b)                                                       
-----------------------------------------------------------------------------  
                                                                    1,949,854  

Less current portion                                               (1,431,961) 
-----------------------------------------------------------------------------  

                                                              $       517,893  
=============================================================================  

                           (a)      As a result of the Company not
                                         making a $450,000 payment due March
                                       31, 2002, the creditor can demand
                                         immediate repayment of these notes.
                                  Accordingly, these notes are
                                        classified as current liabilities.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                              (b)      In connection with the $1 million
                     note payable to
                                        shareholder/Advisory Board member,
                                     the Company granted warrants to
                                      acquire 100,000 shares of common
                                       stock and valued such warrants at
                                         $170,000 based on the relative fair
                                         value of the warrants. The warrants
                                         are exercisable at $0.07 per share,
                                      were fully vested at the date of
                                       grant and expire in 2021. As such
                                      the Company recorded $830,000 as
                                        debt, net of the allocation of the
                                        proceeds to the warrants, which is
                                        included in paid-in capital in the
                                    balance sheet of $170,000. The
                                   Company amortizes to interest
                                       expense the value ascribed to the
                                        warrants over the term of the debt

6.      Notes Payable             Notes payable consist of the following:       

                                                                [Download Table]

December 31,                                                               2001 
------------------------------------------------------------------------------- 
                                                                                
Installment notes payable to banks, payable $1,336 monthly                      
including interest at 10.99%, through July 2009 collateralized                  
by trucks                                                          $     81,809 

Installment note, payable $506 monthly including interest at                    
7.9%, through April 2006 collateralized by vehicle                       21,630 
------------------------------------------------------------------------------- 
                                                                        103,439 

Less current portion                                                    (11,813)
------------------------------------------------------------------------------- 

                                                                   $     91,626 
=============================================================================== 

Aggregate notes payable and notes payable to                                    
shareholders at December 31, 2001 consists of                                   
the following:                                                                  

-----------------------------------------------------------------------------   
Notes payable                                                      $    103,439 
Notes payable to shareholders, net of unamortized                               
    discount (Note 5)                                                 1,949,854 
-----------------------------------------------------------------------------   

                                                                   $  2,053,293 
=============================================================================== 

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                                [Download Table]


Future cash payment obligations under                                         
maturities of notes payable to shareholders                                   
and notes payable at December 31, 2001 are as                                 
follows:                                                                      

Year ending December 31,                                                      
------------------------------------------------------------------------------

                                                                              
2002                                                           $    1,578,357 
2003                                                                  530,990 
2004                                                                   14,449 
2005                                                                   15,944 
2006                                                                   13,870 
Thereafter                                                             34,266 
----------------------------------------------------------------------------- 
                                                               $    2,187,876 
Less unamortized discount relating to 2002 obligations                        
                                                                     (134,583)
----------------------------------------------------------------------------- 

                                                               $    2,053,293 
============================================================================= 

7.      Common Stock              During the year ended December 31, 2001 the   
                              Company issued 120,000 shares (50,000 to a
                                  member of the Company's Board of Directors and
                           70,000 to third parties) of restricted,
                             unregistered common stock in exchange for
                                  consulting services. The issuances were valued
                                at estimated fair value ranging from $2.88 -
                                 $4.40 per share. In connection therewith, the
                                  Company recorded a charge to operations in the
                            amount of $382,000 during 2001, of which
                                 $150,000 was for the services provided by the
 Board member.

                                During the year ended December 31, 2001, the
                         Company also issued 725,000 shares of
                                 restricted, unregistered common stock as part
                           of the new compensation package for key
                              employees. According to the original terms
                                there were no vesting requirements, however,
                                on March 31, 2002 the executives agreed to a
                                 vesting schedule. These issuances were valued
                               at estimated fair value of $2.88 per share.
                                 Accordingly, the Company recorded a charge to
                                 operations in the amount of $2,088,000 during
2001.       

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                During the year ended December 31, 2000, the
                                Company issued 400,000 shares of restricted,
                               unregistered common stock at estimated fair
                            value of $2.00 per share in exchange for
                            investment banking advisory services. In
                                connection therewith, the Company recorded a
                                  charge to operations in the amount of $800,000
                                during 2000. The shares were freely returned
                to the Company in June 2002.

                             During 2001, the Company issued 1,168,369
                             shares of restricted, unregistered common
                         stock for net proceeds of $4,007,159.

                                  During 2000, the Company issued 872,374 shares
                                of restricted, unregistered common stock for
               net proceeds of $1,865,274.

                              At December 31, 2001, 21,207,760 shares of
                                 Common Stock were reserved for issuance under
                               the Company's two fixed stock option plans,
                              outstanding non-plan options, warrants and
                               upon conversion of the outstanding Series A
                                  and Series B Redeemable Convertible Cumulative
    Preferred Stock.

                                  The following reconciles the components of the
               loss per share computation:

                                                        [Enlarge/Download Table]


For the years ended December 31,                      2001                             2000   
----------------------------------------------------------------------------------------------
                            Income      Shares    Per-Share   Income       Shares     Per-    
                            (Nume-     (Deno       Amount     (Nume        (Deno      Share   
                             rator)    -minator)              -rator       -minator    Amount 
----------------------------------------------------------------------------------------------
                                                                                              
Loss per common share                                                                         
    Net (loss)                                                                                
    available to                                                                              
    common shareholders   $(6,011,315) 41,526,184  $(0.14)  $(11,344,054)  39,812,198  $(0.28)

Effect of Dilutive                                                                            
    Securities:                                                                               
         Stock                                                                                
         options/warrants          --         --       --             --           --      -- 
--------------------------------------------------------------------------------------------- 
                                                                                           -- 

Net (loss) available                                                                          
    to  common                                                                                
    shareholders plus                                                                         
    assumed conversions    (6,011,315) 41,526,184  $(0.14)  $(11,344,054)  39,812,198  $(0.28)
============================================================================================= 

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                  The Company's outstanding options and warrants
                                to acquire common stock and shares of common
                                 stock issuable upon conversion of outstanding
                               redeemable convertible cumulative preferred
                         stock (all aggregating 16,757,760 and
                                 12,926,730 shares of common stock at December
                                  31, 2001 and 2000, respectively, exclusive for
                           2001 of 1,653,800 shares underlying the
                               litigated alleged warrant discussed in Note
                              13) are not included in the computation of
                         loss per share because the effects of
                     inclusion would be anti-dilutive.

8.      Redeemable Convertible    Series A                                      
Cumulative Preferred                                            
      Stock                     During the year ended December 31, 1999, the
                        Company issued 62 shares of Series A
                               Redeemable Convertible Cumulative Preferred
                                  Stock at $25,000 per share for net proceeds of
                                $1,550,000. The shares are redeemable at the
                              option of the Company at $27,500 per share
                                plus accrued dividends and are redeemable at
                                the option of the holder any time after June
                          2002 at $25,000 per share plus accrued
dividends.  

                                  The Series A Redeemable Convertible Cumulative
                                 Preferred Stock provides annual dividends, at
                                  the rate of $3,750 per share, payable in cash,
                               which are cumulative and have priority over
                                  dividends on the Series B preferred and common
                               stock. Dividends in arrears at December 31,
       2001 were $396,025.

                                 Each share of Series A Redeemable Convertible
                                  Cumulative Preferred Stock is convertible into
                                 24,000 shares of common stock at the holder's
                        option. The Series A preferred shall
                                automatically be converted into common stock
                          in the event of an underwritten public
                                offering. During the year ended December 31,
                               2000, 15 shares of Series A preferred stock
                                were converted into 360,000 shares of common
                           stock. In the event of dissolution, the
                          holders of Series A preferred shall be
                               entitled to receive $25,000 per share, plus
                                accrued dividends, prior to any distribution
                                  to holders of Series B preferred stock and the
            holders of common stock.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Series B    

                                During the year ended December 31, 2000, the
                           Company issued 1,292 shares of Series B
                               Redeemable Convertible Cumulative Preferred
                                 Stock at $2,500 per share for net proceeds of
                                  $3,230,000, of which $200,000 was not received
                                until 2001. The shares are redeemable at the
                                  option of the Company at $3,000 per share plus
                               accrued dividends and are redeemable at the
                                option of the holder anytime after June 2002
                               at $2,500 per share plus accrued dividends.

                                  The Series B Redeemable Convertible Cumulative
                                 preferred stock provides annual dividends, at
                                the rate of $250 per share, payable in cash,
                               which are cumulative and have priority over
                               dividends on the common stock. Dividends in
                               arrears at December 31, 2001 were $347,251.

                       Each share of Series B preferred is
                                  convertible into 835 shares of common stock at
                               the holder's option. The Series B preferred
                                shall automatically be converted into common
                                stock in the event of an underwritten public
                                 offering. During the years ended December 31,
                                 2001 and 2000, 102 and 134 shares of Series B
                                  preferred stock were converted into 85,170 and
                                 111,890 shares of common stock, respectively.
                               In the event of dissolution, the holders of
                           Series B preferred shall be entitled to
                          receive $3,000 per share, plus accrued
                           dividends, prior to any distribution to
            holders of common stock.

9.      STOCK OPTIONS AND                                                       
   WARRANTS                  At December 31, 2001, the Company has two
                                  fixed stock option plans and non-plan options,
                                  which are described below. The Company applies
                             APB Opinion No. 25, "Accounting for Stock
                     Issued to Employees," and related
                              interpretations in accounting for employee
                               stock options. Under APB Opinion No. 25, in
                            situations where the number of shares of
                             common stock that may be acquired and the
                                 price to be paid are determinable at the date
                           of grant, and the exercise price of the
                              Company's employee stock options equals or
                              exceeds the market price of the underlying
                               stock on the date of grant, no compensation
                              cost is recognized. For those grants where
                               either the number of shares of common stock
                                that may be acquired or the price to be paid
                             are not determinable, the Company records
                                  estimates of compensation costs based upon the
                                 market value of the stock at each intervening
             financial statement date.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                  On August 18, 2000, the Company adopted a Long
                                  Term Incentive Program, which provides for the
                                 granting of 4,000,000 stock options and stock
                                appreciation rights (SARs) to key employees.
                                  Options granted may be either "incentive stock
                                  options," within the meaning of Section 422 of
                            the Internal Revenue Code, non-qualified
                                  options, or restricted stock awards. The stock
                                  options are exercisable for a period no longer
                          than ten years after the date they are
                                granted. As of December 31, 2001, options to
                              purchase 550,000 shares of common stock at
                                prices ranging from $3.00 to $5.00 per share
                           have been granted pursuant to the plan.

                              On August 15, 1999, the Company adopted an
                              Outside Directors Stock Option Plan, which
                                provides for the granting of 2,000,000 stock
                               options to members of the Board who are not
                               full or part time employees of the Company.
                                  Under the plan, each eligible director will be
                               granted an option to purchase up to 200,000
                               shares on the date the person is elected to
                              the Board and will be granted an option to
                                 purchase 50,000 shares upon reelection to the
                                  Board at each annual shareholders meeting. The
                               stock options are not exercisable until six
                       months after the grant date and are
                              exercisable over a five-year period. As of
                          December 31, 2001, options to purchase
                               1,000,000 shares of common stock at a price
                                  of $1.875 per share have been granted pursuant
to the plan.

                                During the years ended December 31, 2001 and
                                2000, the Company granted options to acquire
                               7,750,000 and 500,000, respectively, shares
                               of common stock to employees and members of
                                 the Company's Board of Directors. The options
                                are exercisable at $2.00 to $5.00 per share,
                                  vesting over periods ranging from immediate to
                                  2006. During the years ended December 31, 1999
                            and 1998, the Company granted options to
                            acquire an aggregate 4,460,000 shares of
                              common stock which are exercisable, at the
                            holders' option, in a cashless manner by
                            surrendering options held on appreciated
                                  shares of common stock. For these options, the
                                number of shares of common stock that may be
                           acquired by the option holder cannot be
                               determined prior to exercise of the option.
                                 Accordingly, the Company records estimates of
                                 compensation (benefit) expense based upon the
                             estimated fair value of the stock at each
                         intervening financial statement date,
                                  $(4,387,350) and $4,031,986 for 2001 and 2000,
 respectively.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                    During the years ended December 31, 2001 and
                             2000, the Company granted options and
                                  warrants to acquire 380,000 and 1,650,000,
                               respectively, shares of common stock to
                                  third parties as compensation for services
                                rendered to the Company. The options and
                                  warrants are exercisable at $0.07 to $5.00
                                  per share, substantially were fully vested
                               at the date of grant and expire through
                          2021. The options and warrants are
                             exercisable by payment of cash to the
                              Company or, for 0 and 1,400,000 of the
                                options and warrants granted in 2001 and
                                   2000, at the holders' option, in a cashless
                                   manner by surrendering options and warrants
                                   held on appreciated shares of common stock.
                                 In connection with these grants, the fair
                                  value (Black Scholes value) of the options
                                   and warrants granted approximated the value
                                 of the services rendered, and the Company
                                   recorded expenses for the services rendered
                                   of $173,160 in 2001 and $2,155,423 in 2000.
                              Additionally, deferred compensation of
                                $65,576 was recorded in 2001 and will be
                                 amortized to expense during 2002 to 2004.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]


A summary of the status of the Company's fixed                                       
stock option plans and non-plan options and                                          
warrants as of December 31, 2001 and changes                                         
during the year then ended is presented below:                                       

                                   Plan Options and       Non-Plan Options and       
                                       Warrants                 Warrants             
                                -----------------------  ------------------------    

                                   Weighted                  Weighted                
                                    Average                  Average                 
                                   Exercise     Shares       Exercise   Shares       
                                    Price                     Price                  
-------------------------------------------------------------------------------------
                                                                                     
Outstanding at beginning of       $    1.88  1,000,000    $    1.13    10,143,800    
year                                                                                 
Granted                                3.09    550,000         3.14     7,380,000    
Exercised                                 -          -            -             -    
Forfeited                                 -          -         0.63     4,013,800 (1)
-------------------------------------------------------------------------------------

Outstanding at end of year             2.31  1,550,000         2.38    13,510,000    

Exercisable at year-end           $    2.03  1,166,665         1.92     8,963,333    
-------------------------------------------------------------------------------------

Weighted average fair value                                                          
of options granted                $    1.71               $    1.55                  
during the year                                                                      
-------------------------------------------------------------------------------------

(1)      Includes warrants to purchase 1,653,800 shares of common stock which are    
         the subject of litigation (Note 13)                                         

                                                        [Enlarge/Download Table]


 A summary of the status of the Company's                                            
 fixed stock option plans and non-plan options                                       
 and warrants as of December 31, 2000 and                                            
 changes during the year then ended is                                               
 presented below:                                                                    

                                   Plan Options and         Non-Plan Options and     
                                       Warrants                   Warrants           
                                ------------------------   ------------------------  
                                   Weighted                   Weighted               
                                    Average                    Average               
                                   Exercise      Shares       Exercise      Shares   
                                      Price                      Price               
-------------------------------------------------------------------------------------
                                                                                     
Outstanding at beginning of       $    1.88    1,000,000 $        0.88    7,993,800  
year                                                                                 
Granted                                   -           -           2.02    2,150,000  
Exercised                                 -           -              -           -   
Forfeited                                 -           -              -           -   
-------------------------------------------------------------------------------------
                                                                                 --  

Outstanding at end of year             1.88    1,000,000          1.13   10,143,800  

Exercisable at year-end           $    1.88    1,000,000          1.13   10,143,800  
=====================================================================================

Weighted average fair value                                                          
of options granted                $       -              $        1.25               
during the year                                                                      
=====================================================================================

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                             SFAS No. 123, "Accounting for Stock-Based
                                 Compensation," establishes a fair value based
                        method of accounting for stock-based
                            compensation plans under which employees
                           receive shares of stock or other equity
                             instruments of the Company or the Company
                              incurs liabilities to employees in amounts
                    based on the price of its stock.

                                The amounts of such Stock-Based Compensation
                            may be expensed in a Company's financial
                              statements or alternatively, companies may
                              elect to disclose the amounts as pro forma
                           information. The Company has elected to
                           disclose the amounts, which approximate
                               $4,553,488 and $418,173 for the years ended
                                 December 31, 2001 and 2000, respectively. Had
                                the Company elected to recognize the amounts
                                under the accounting provisions of SFAS 123,
                             the Company's net loss and loss per share
                              would have been increased to the pro forma
            amounts indicated below:

                                                                [Download Table]


Years ended December 31,                                     2001          2000   
----------------------------------------------------------------------------------
                                                                                  
Net (loss) applicable to common stock                                             
    as reported                                      $ (6,011,315) $(11,344,054)  
Net (loss) applicable to common stock pro forma       (10,564,803)  (11,762,227)  
Basic (loss) per share as reported                          (0.14)        (0.28)  
Basic (loss) per share pro forma                            (0.25)        (0.30)  

The Company estimates the fair value of each stock option at the grant date by    
using the Black-Scholes option pricing model based on the following assumptions:  

December 31,                                                 2001         2000    
----------------------------------------------------------------------------------

Risk free interest rate                                      5.16 %       5.96   %
Expected life                                          3-10 YEARS    3-5 years    
Expected volatility                                            51 %         74   %
Dividend yield                                                0.0          0.0    

10.     Income Taxes              Deferred income taxes reflect the net tax     
                                effects of temporary differences between the
                                  carrying amounts of assets and liabilities for
                                financial reporting purposes and the amounts
                                 used for income tax purposes. At December 31,
                               2001, the Company had federal net operating
                                  losses (NOL) of approximately $13,350,000. The
                                 NOL expires during the years 2018 to 2021. In
                               the event that a change in ownership of the
                      Company of greater than 50 percent

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                occurs/occurred as a result of the Company's
                               issuance of common and preferred stock, the
                               utilization of the NOL carryforward will be
                                  subject to limitation under certain provisions
                 of the Internal Revenue Code.

                                 Realization of any portion of the approximate
                            $7,727,388 deferred federal tax asset at
                            December 31, 2001 is not considered more
                                 likely than not by management; accordingly, a
                               valuation of allowance has been established
                      for the full amount of such asset.

                            The reconciliation of income tax benefit
                                  computed at the United States federal tax rate
                               of 34% to income tax benefit is as follows:

                                                                [Download Table]


 Year ended December 31,                             2001                2000      
--------------------------------------------------------------------------------   
                                                                                   
Tax benefit at the United States                                                   
statutory rate                                $ 1,909,000       $   3,784,297      
State income tax benefit, net                     204,000            (189,215)     
Valuation allowance adjustment                                                     
                                               (2,113,000)         (3,973,512)     
--------------------------------------------------------------------------------   

Income tax benefit                            $         -       $           -      
================================================================================   

Significant components of the Company's  deferred tax assets and liabilities are as
follows:                                                                           

December 31,                                         2001              2000        
---------------------------------------------------------------------------------- 

Deferred tax assets:                                                               
    Organizational costs                      $   114,000       $     114,326      
    Net operating loss                                                             
    carryforwards                               4,600,000           2,037,144      
    Compensation related to equity                                                 
    instruments issued for                                                         
    services                                    3,013,388           3,463,899      
---------------------------------------------------------------------------------- 
Valuation allowance for deferred                                                   
    tax assets                                 (7,727,388)         (5,615,369)     
---------------------------------------------------------------------------------- 

Net deferred tax asset                        $         -       $          -       
---------------------------------------------------------------------------------- 

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

11.    RESEARCH AND DEVELOPMENT    Research and development cost relates to both
                                 future and present products and are charged
                            to operations as incurred. The Company
                                  recognized research and development costs of
                               $629,801 and $513,291 for the years ended
                               December 31, 2001 and 2000, respectively.

12.    RELATED PARTY TRANSACTIONS  Amounts due to related parties consist of:   

                                                                [Download Table]


December 31,                                                             2001    
---------------------------------------------------------------------------------
                                                                                 
Due to employees and director                                $         37,037    
Due to Ocean Futures Society                                           21,054    
Due to Wallem Shipmanagement                                                     
Limited                                                                87,721    
Due to Carnegie Mellon University                                     585,415    
------------------------------------------------------------------------------   

                                                             $        731,227    
==============================================================================   

         Development Agreement
         ---------------------

                                 On September 3, 1999 the Company entered into
                                a Development Agreement with Carnegie Mellon
                             University, through the National Robotics
                               Engineering Consortium ("NREC"), to develop
                            technologies based on the Company's base
                               technology for ultra high-pressure coatings
                              removal. The project director of NREC is a
                               director of the Company. In accordance with
                                  the agreement, any technology developed by the
                                  Company prior to entering into the Development
                         Agreement or developed without NREC's
                             assistance will belong exclusively to the
Company.    

                                 New technology or technology that may be used
                            outside the field of ultra high-pressure
                              cleaning will belong to NREC, however, the
                              Company will have the right to license the
                                  technology if it is based on funds provided by
                                the Company. For the year ended December 31,

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
                                  2001, the Company incurred costs of $1,379,749
                         to NREC, of which $675,944 is for the
                                 construction of robots, $124,103 is for field
                           operations, $27,635 is for training and
                                  $552,067 is research and development advances.
                                 At December 31, 2001, $585,415 is included in
                              due to related parties in the accompanying
                                 balance sheet. Also at December 31, 2001, the
                                Company is committed to expend an additional
                          approximate $695,799 to NREC for robot
 construction.

       License Agreement
       -----------------

                               On July 17, 2000 the Company entered into a
                                License Agreement with Ocean Futures Society
                                ("OFS") and Jean-Michel Cousteau, a director
                                 of the Company, whereby the Company agreed to
                            pay OFS 2% of its revenues from sales of
                              products, equipment leases and services in
                               exchange for the exclusive right to utilize
                             their names in connection with marketing,
                              advertising, sales and distribution of the
                                 M2000 and hydro blasting services in the ship
                          cleaning industry. For the years ended
                                December 31, 2001 and 2000, royalty expenses
                               were $34,162 and $0, respectively, of which
                                  $21,054 and $0, respectively, were included in
                              due to related parties in the accompanying
  balance sheet.

        Management Agreement
        --------------------

                                 On September 1, 2000 the Company entered into
                           an agreement with Wallem Shipmanagement
                                  Limited ("Wallem") whereby Wallem will provide
                                 all of the Company's management and marketing
                                 for its contract services in the heavy marine
                             industry. For the year ended December 31,
                                2001, fees to Wallem were $87,721, which was
                             included in due to related parties in the
                            accompanying balance sheet. The managing
                           director of Wallem is a director of the
Company.    

13.     COMMITMENT AND            The Company currently maintains office        
    CONTINGENCIES             facilities in Stuart, Florida. The Company
                         does not currently own or operate any
                               manufacturing, operating or shipbuilding or
                               repair facilities. Substantially all of the
                           Company's operations are devoted to the
                              removal of paint, the disposal of which is

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                          regulated by various federal state and
                             international laws. Compliance with these
                                provisions has not had, nor does the Company
                                expect to have, any material affect upon the
                                capital expenditures, results of operations,
                                  financial condition or competitive position of
                                the Company. The Company believes that it is
                      in substantial compliance with all
                                 environmental laws and regulations applicable
                           to its business as currently conducted.

                         In December 2001, the Company filed a
                                  complaint in the Circuit Court in and for Palm
                                 Beach Country, Florida against Mark H. Mirkin
                                  and Mirkin & Woolf, P.A., the Company's former
                                 corporate and securities counsel and transfer
                               agent, seeking a declaration from the court
                                  that a warrant to purchase 1,653,800 shares of
                             the Company's common stock for $0.625 per
                             share was improperly obtained by Mirkin &
                               Woolf, P.A. in April 1998 is void. Mirkin &
                              Woolf attempted to exercise the warrant in
                                 April of 2001. The Company has not issued the
                             underlying shares of common stock. In May
                                2002, the complaint was amended to drop Mark
                             H. Mirkin as an individual defendant. The
                                  Company and its counsel believe that they will
                                  prevail in this action and that it will suffer
                               no materially adverse impact as a result of
                                Mirkin & Woolf's counter claims with respect
   to the warrant.

                               The Company has commitments with certain of
                            its vendors, including NREC and Carnegie
                             Mellon University (Note 12), amounting to
                              approximately $780,000 for the purchase of
                         equipment. The Company estimates that
                                 additional research and development costs for
                             existing projects approximate $1,050,000.

                              The Company has employment agreements with
                                 certain officers calling for aggregate annual
                                  base compensation of approximately $2,200,000,
                             expiring through 2004. As of December 31,
                               2001, accounts payable and accrued expenses
                      include $291,643 of accrued wages.

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                The Company rents office space and warehouse
                                 storage space under operating leases expiring
                             in September 2005 and August 2006, with a
                                guaranteed option to renew for an additional
                              five-year term at the Company's option for
              annual increases of 3.25%.

                              At December 31, 2001, future minimum lease
               commitments are as follows:

                                                                [Download Table]


 Years ending December 31,                                                     
 ------------------------------------------------------------------------------

                                                                               
 2002                                                           $       113,000
 2003                                                                   117,000
 2004                                                                   121,000
 2005                                                                    96,000
 2006                                                                    33,000
 Thereafter                                                                   -
-------------------------------------------------------------------------------

 Total                                                          $       480,000
===============================================================================

                                   Rent expense for the years ended December 31,
                            2001 and 2000 aggregated approximately
                        $85,000 and $32,000, respectively.

14.     SUPPLEMENTAL CASH FLOW    Supplemental disclosure is as follows:        
INFORMATION                                                     

                                                                [Download Table]


December 31,                                             2001              2000 
--------------------------------------------------------------------------------
                                                                                
Cash paid for interest                        $        25,771   $             - 
Cash paid for taxes                                         -                 - 

Non-cash investing and financing activities:                                    

Conversion of preferred stock to                                                
    common stock                              $       255,000   $       710,000 

Accrued preferred stock dividends             $       397,875   $       213,768 

15.     Subsequent Events                                                       

                                   (a)  On February 21, 2002, the Company signed
                                      an agreement to borrow up to $200,000,
                                       with interest at 18% per year. The loan
                                   is due August 25, 2002. The loan is
                                  guaranteed by the President of the
                                       Company and his spouse. On February 26,

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                      2002 the Company borrowed $200,000. In
                                    this connection, the Company granted
                                   warrants to acquire 8,001 shares of
                                        common stock and valued such warrants at
                                        $14,000 based on the relative fair value
                                 of the warrants. The warrants are
                                    exercisable at $0.07 per share, were
                                     fully vested at the date of grant and
                                    expire in 2022. As such, the Company
                                     recorded $186,000 as debt, net of the
                                 allocation of the proceeds to the
                                       warrants as paid-in capital of $14,000.
                                     The Company will amortize to interest
                                 expense the value ascribed to the
                                        warrants over the term of the debt. This
                                        note was extended on August 25, 2002 for
                         an additional six months.

                             (b)     In March 2002 the Company's 50% major
                                        customer failed to meet certain contract
                                 requirements under a distribution
                                  agreement. In this connection, the
                                   Company terminated its distribution
                                agreement, including the related
                                    exclusivity provision (See Note 16).

                            (c)     On May 13, 2002, the Company entered
                                       into a Development and Supply agreement
                             to sell a prototype automated
                                      hydro-blasting system to a shipyard in
                                    Norfolk, Virginia for $2 million, of
                                        which $500,000 was received in May 2002.
                                Spare parts and accessories were
                                subsequently added to the order,
                                     increasing the purchase price to $2.3
                                        million. $1.5 million was paid on August
                                      21, 2002, upon delivery and testing of
                                      the equipment at the buyer's shipyard.
                                     The balance was paid on September 25,
                                   2002. Under the 16 year cooperative
                                      agreement the buyer intends to further
                                    develop and refine the paint removal
                                      system for use in the buyer's shipyard
                                        and to make and sell the Company's paint
                                     removal system as part of the buyers'
                    ship coating system.

                            (d)     Subsequent to December 31, 2001, the
                                      Company executed several agreements to
                                        borrow an aggregate of $1.5 million from
                                   various officers of the Company and
                                related parties. These notes are
                                        repayable one year from their respective
                                    agreement dates and bear interest at
                                      prime plus 2%. Through September 2002,
                                    $1.3 million of these notes had been
       repaid.

F-30

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                                                        ULTRASTRIP SYSTEMS, INC.

                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                              (e)     In June 2002 the Company sold warrants
                                  to acquire 1,125,000 shares of the
                                        Company's common stock for $500,000. The
                                     warrants are exercisable at $0.10 per
                                       share, were fully vested on the date of
                              grant and expire in June 2009.

                             (f)     Also in June 2002 the Company entered
                                        into an agreement to sell 115,385 shares
                                of common stock to an accredited
                                      investor for $150,000 in a transaction
                                exempt under Section 4(2) of the
                       Securities Act of 1933.

                           (g)     In September 2002, the Company sold
                                    100,000 shares of Common Stock to an
                                     accredited investor for $131,000 in a
                                     transaction exempt under Section 4(2)
                              of the Securities Act of 1933.

16.     Major Customers and     During 2001, revenues from two customers        
Foreign Sales           accounted for 50% and 38% of revenues,  
                             respectively. One customer is a contractor in
                       the above-ground petroleum storage tank
                         maintenance and brown-water inland marine
                               maintenance markets while the other customer is
                            a contractor to the United States Navy which
                               provides surface preparation services on United
                           States Navy vessels. Foreign sales for 2001
                             accounted for 7% of total sales. During 2000,
           sales were not significant.

                               Financial instruments which potentially subject
                            the Company to concentrations of credit risk
                             consist of deposits in banks in excess of the
                              Federal Deposit Insurance Corporation ("FDIC")
                                limits and investments. At December 31, 2001 the
                        Company's uninsured cash balance totaled
$443,934.       

F-31

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

(a)     EXHIBITS.                                                               

                                                        [Enlarge/Download Table]


EXHIBIT                                                                      PRIOR FILING OR                 
NUMBER                       DESCRIPTION                                   SEQUENTIAL PAGE NO.               
------                       -----------                                   -------------------               

                                                                                                             
3.1      Articles of Incorporation, as amended               Incorporated by reference to Exhibit 2.1 to the 
                                                             Company's Registration Statement on Form 10-SB  
                                                             (the "Form 10-SB").                             
3.2      Bylaws                                              Incorporated by reference to Exhibit 2.2 to the 
                                                             Form 10-SB.                                     
4.1      Certificate of Designation for the Series A         Incorporated by reference to Exhibit 3.1 to the 
         Preferred Stock                                     Form 10-SB                                      
4.2      Certificate of Designation for the Series B         Incorporated by reference to Exhibit 3.2 to the 
         Preferred Stock                                     Form 10-SB                                      
10.1     Employment Agreement - Scott Baratta                Incorporated by reference to Exhibit 10.1 to the
                                                             Form 10-SB                                      
10.2     Employment Agreement - Jacqueline K. McGuire        Incorporated by reference to Exhibit 10.2 to the
                                                             Form 10-SB                                      
10.3     Employment Agreement - John P. Odwazny              Incorporated by reference to Exhibit 10.3 to the
                                                             Form 10-SB                                      
10.4     Employment Agreement - Michael R. Donn              Incorporated by reference to Exhibit 10.4 to the
                                                             Form 10-SB                                      
10.5     Employment Agreement - Kevin P. Grady               Incorporated by reference to Exhibit 10.5 to the
                                                             Form 10-SB                                      
10.6     Employment Agreement - Michael Cristoforo           Incorporated by reference to Exhibit 10.6 to the
                                                             Form 10-SB                                      
10.7     Employment Agreement - Robert O. Baratta            Incorporated by reference to Exhibit 10.7 to the
                                                             Form 10-SB                                      
10.8     Development Agreement with Carnegie Mellon          Incorporated by reference to Exhibit 10.8 to the
         University Robotics Institute                       Form 10-SB                                      
10.9     Agreement for Robotic Coatings Removal with Wallem  Incorporated by reference to Exhibit 10.9 to the
         Shipmanagement Ltd.                                 Form 10-SB                                      
10.10    Consulting Agreement with T.A.S.T. Corporation      Incorporated by reference to Exhibit 10.10 to   
                                                             the Form 10-SB                                  

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                                                        [Enlarge/Download Table]

                                                                                                            

10.11  Consulting Agreement with D.M. Ransom Associates,     Incorporated by reference to Exhibit 10.11 to  
       Inc.                                                  the Form 10-SB                                 
10.12  1999 Outside Directors Stock Option Plan              Incorporated by reference to Exhibit 10.12 to  
                                                             the Form 10-SB                                 
10.13  2000 Long Term Incentive Program                      Incorporated by reference to Exhibit 10.13 to  
                                                             the Form 10-SB                                 
10.14  License Agreement dated July 17, 2000 by and between  Incorporated by reference to Exhibit 10.14 to  
       UltraStrip Systems, Inc. and Ocean Futures Society    to the Form 10-SB                              
10.15  Promissory Note executed by UltraStrip Systems, Inc.  Incorporated by reference to Exhibit 10.15 to  
       in favor of Kevin P. Grady dated March 16, 2001       the Form 10-SB                                 
10.16  Full-time Employment Agreement - Robert O. Baratta    Incorporated by reference to Exhibit 10.14 to  
                                                             the Form 10Q-SB for the quarter ended March 31,
                                                             2001                                           
10.17  Employment Agreement - Dennis McGuire                 Incorporated by reference to Exhibit 10.15 to  
                                                             the Form 10Q-SB for the quarter ended March 31,
                                                             2001                                           
10.18  Consulting Agreement with George Sterner              Filed herewith                                 
10.19  Consulting Agreements (4)                             Incorporated by reference to Exhibit 2.3 to the
                                                             Form 10-SB                                     
10.20  Option to Purchase Assets and License Agreement       Incorporated by reference to Exhibit 2.6 to the
                                                             Form 10-SB                                     

(b)     REPORTS ON FORM 8-K.                                                    

       One report was filed on Form 8-K during the three months ended December
      31, 2001. On October 12, 2001, the Company filed a Form 8-K disclosing
its announcement of the execution of an exclusive distribution  
     agreement with and the sale of an M2000 robotic hydro-blasting system
to Robotic Environmental Services, LLC.                         

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SIGNATURES

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

                      ULTRASTRIP SYSTEMS, INC.

Date:    December 27, 2002             /s/ Robert O. Baratta                    
                                   -------------------------------------
                                President, Chief Executive Officer
               and Vice Chairman

                  /s/ Scott R. Baratta
                                      ----------------------------------------
                                      Principal Accounting and Finance Officer

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

                                                        [Enlarge/Download Table]


Signature                                 Title                       Date            
---------                                 -----                       ----            

                                                                                      
 /s/ William A. Owens            Chairman                            December 27, 2002
------------------------------                                                        
William A. Owens                                                                      

/s/ Robert O. Baratta            Vice Chairman, President and Chief  December 27, 2002
-------------------------------  Executive Officer                                    
Robert O. Baratta                                                                     

/s/ John Bares                   Director                            December 27, 2002
-------------------------------                                                       
John Bares                                                                            

/s/ Patrick Bischoff             Director                            December 27, 2002
-------------------------------                                                       
Patrick Bischoff                                                                      

-------------------------------  Director                            December 27, 2002
R. Gerald Buchanan                                                                    

/s/ Jean-Michel Cousteau         Director                            December 27, 2002
-------------------------------                                                       
Jean-Michel Cousteau                                                                  

/s/ John M. Gumersell            Director                            December 27, 2002
-------------------------------                                                       
John M. Gumersell                                                                     

-------------------------------  Director                            December 27, 2002
Gordon G. Kuljian                                                                     

-------------------------------                                                       
T. Joseph Lopez                  Director                            December 27, 2002

/s/ John P. Odwazny              Director                            December 27, 2002
-------------------------------                                                       
John P. Odwazny                                                                       

/s/ Eugene C. Rainis             Director                            December 27, 2002
-------------------------------                                                       
Eugene C. Rainis                                                                      

/s/ George R. Sterner            Director                            December 27, 2002
-------------------------------                                                       
George R. Sterner                                                                     

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 CERTIFICATION

In connection with the Annual Report of UltraStrip Systems, Inc. (the "Company")
on Form 10-KSB for the period ending December 31, 2001, as filed with the       
Securities and Exchange Commission on the date hereof (the "Report"), the       
undersigned certify pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to   
his knowledge that:                                                             

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and                                        

(2) The information contained in the Report fairly presents, in all material    
respects, the financial condition and results of operations of the Company.     

Date:  December 27, 2002                                                        

/s/ Robert O. Baratta                                                           
-----------------------------                                                   
President and Chief Executive Officer                                           

/s/ Scott R. Baratta                                                            
-----------------------------                                                   
Senior Vice President - Finance (Chief Financial Officer)                       

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CERTIFICATIONS

I, Robert O. Baratta, certify that:                                             

1. I have reviewed this annual report on Form 10-KSB of UltraStrip Systems, Inc;

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

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

Date:  December 27, 2002                 /s/ Robert O. Baratta                  
                                         ---------------------------------------
                           Robert O. Baratta
                                            President, Chief Executive Officer
                                        and Vice Chairman of the Board

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CERTIFICATIONS

I, Scott R. Baratta, certify that:                                              

1. I have reviewed this annual report on Form 10-KSB of UltraStrip Systems, Inc;

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

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

Date:  December 27, 2002                 /s/ Scott R. Baratta                   
                                      ------------------------------------
                          Scott R. Baratta
                                         Senior Vice President - Finance
                                   (Chief Financial Officer)

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10KSB Filing		Date		First		Last			Other Filings
		4/2/98		34		54
		4/4/98		38
		12/31/98		67
		8/14/99		42
		8/15/99		32		67			3, 4
		9/3/99		26		72
		12/17/99		46
		12/31/99		20		67			10KSB
		1/1/00		52
		6/22/00		33		35
		7/17/00		73		79
		8/18/00		43		67
		9/1/00		73
		9/21/00		33					3
		12/31/00		20		75			10KSB, 10KSB/A
		1/1/01		19		44			3, 4
		1/31/01		33
		2/2/01		34
		2/25/01		21
		2/26/01		3		54
		3/1/01		41
		3/15/01		49
		3/16/01		3		79
		3/31/01		19		44			10QSB, 10QSB/A
		4/5/01		19		27
		4/15/01		41
		4/30/01		20
		6/30/01		40		56			10QSB, 10QSB/A
		7/1/01		40		56
		8/1/01		44
		8/18/01		31		36			DEF 14C
		8/31/01		20		27
		9/1/01		20
		10/12/01		79					8-K
		10/19/01		20		46
		10/31/01		20					4
		12/15/01		57		58
		12/21/01		18
For The Period Ended		12/31/01		1		81			NT 10-K
		1/1/02		44
		1/22/02		35
		2/15/02		31					8-K, 8-K/A
		2/21/02		29		75
		2/26/02		29					4, 4/A
		3/1/02		30		61			3
		3/5/02		31					8-K/A
		3/8/02		31					8-K
		3/14/02		31					8-K
		3/18/02		45
		3/29/02		45
		3/31/02		4		63			10QSB
		4/15/02		37		38
		5/13/02		4		76
		5/14/02		4		29
		6/15/02		2
		6/28/02		48
		6/30/02		11					10QSB, 4
		7/1/02		26
		7/24/02		34					3
		7/30/02		30
		8/15/02		42
		8/21/02		4		76
		8/25/02		29		76
		9/10/02		49
		9/25/02		4		76
		9/30/02		2		46			10QSB
		10/16/02		32		36			3
		10/19/02		46		61			4
Filed On / Filed As Of		12/27/02		80		83
		1/17/03		46
		3/1/03		61
		4/10/03		61
		4/15/03		37		38
		12/31/03		41		42			10KSB, NT 10-K
		4/15/04		37		38
		6/30/04		40		41			10QSB, NT 10-Q
		3/4/05		44					8-K
		7/31/05		44
		9/30/05		18					10QSB, NT 10-Q
		12/31/05		40					10KSB, 5, NT 10-K
		8/31/06		18
		6/30/07		40		41
		12/31/07		41		42
		6/30/08		41
		6/30/09		41
		12/31/10		41		44
		12/31/11		44
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