SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

PDG Environmental, Inc.

(Exact name of registrant as specified in its charter)

Delaware		22-2677298
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1386 Beulah Road, Building 801
Pittsburgh, Pennsylvania		15235
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 412-243-3200

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

Common Stock, $0.02 par value
(Title of Class)

Indicated by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicated by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

The aggregate market value of the voting stock held by non-affiliates of the registrant was $18,041,928 as of May 11, 2007, computed on the basis of the average of the bid and asked prices on such date.

As of May 11, 2007 there were 20,502,191 shares of the registrant’s Common Stock outstanding.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

Indicated by check mark whether the registrant is a shell Corporation (as defined by Rule 12b-2 of the Exchange Act).Yes o No þ

 

 

PART I

ITEM 1. Business

Overview

PDG Environmental, Inc., the registrant, (“we” or the “Corporation”) is a holding Corporation which, through our wholly-owned operating subsidiaries, provides environmental and specialty contracting services including asbestos and lead abatement, insulation, microbial remediation, emergency response, loss mitigation and reconstruction, demolition and related services throughout the United States. We were incorporated in Delaware on February 9, 1987.

We have three operating subsidiaries; Project Development Group, Inc, which is incorporated in Pennsylvania; PDG, Inc., which is incorporated in Pennsylvania and Enviro-Tech Abatement Services Co., which is incorporated in North Carolina.

Description of the Business

Historically, we have derived the majority of our revenues from the abatement of asbestos. In recent years, we have broadened our offering of services to include a number of complementary services, which utilize our existing infrastructure and personnel. The following is a discussion of each of the major services we provide.

Asbestos Abatement

The asbestos abatement industry developed due to increased public awareness in the early 1970’s of the health risks associated with asbestos, which was extensively used in building construction.

Asbestos, which is a fibrous mineral found in rock formation throughout the world, was used extensively in a wide variety of construction-related products as a fire retardant and insulating material in residential, commercial and industrial properties. During the period from approximately 1910 to 1973, asbestos was commonly used as a construction material in structural steel fireproofing, as thermal insulation on pipes and mechanical equipment and as an acoustical insulation material. Asbestos was also used as a component in a variety of building materials (such as plaster, drywall, mortar and building block) and in caulking, tile adhesives, paint, roofing felts, floor tile and other surfacing materials. Most structures built before 1973 contain asbestos containing materials (“ACM”) in some form and surveys conducted by the U.S. federal government have estimated that 31,000 schools and 733,000 public and commercial buildings contain friable ACM. In addition, many more industrial facilities are known to contain other forms of asbestos.

In the early 1970’s, it became publicly recognized that inhalation or ingestion of asbestos fibers was a direct cause of certain diseases, including asbestosis (a debilitating pulmonary disease), lung cancer, mesothelioma (a cancer of the abdominal and lung lining) and other diseases. Friable ACM were designated as a potential health hazard because these materials can produce microscopic fibers and become airborne when disturbed.

The Environmental Protection Agency (the “EPA”) first banned the use of asbestos as a construction material in 1973 and the federal government subsequently banned the use of asbestos in other building materials as well.

During the 1980’s the asbestos abatement industry grew rapidly due to increasing public awareness and concern over health hazards associated with ACM, legislative action mandating safety standards and requiring abatement in certain circumstances, and economic pressures on building owners seeking to satisfy the requirements of financial institutions, insurers and tenants. During the last ten years the industry has remained stable with revenues tracking the general economic cycle.

We have experience in all types of asbestos abatement including removal and disposal, enclosure and encapsulation. Asbestos abatement projects have been performed in commercial buildings, government and institutional buildings, schools, hospitals and industrial facilities for both the public and private sector. Asbestos abatement work is completed in accordance with EPA, Occupational Safety and Health Administration (“OSHA”), state and local regulations governing asbestos abatement operations, disposal and air monitoring requirements.

Disaster Response/Loss Mitigation

The disaster response/loss mitigation industry responds to natural and man-made disasters including fires, floods, hurricanes, tornadoes, and sudden water intrusions events. Services provided include emergency response, loss mitigation and structural

drying, for both buildings and infrastructure. We have experience and have provided services in all areas of the emergency response/restoration industry.

While we have historically provided this service, the hurricane season in fiscal 2005 and 2006 became a major driver for this service offering. In fiscal 2005 we responded to the four hurricanes that impacted Florida and the Gulf Coast, providing services to resorts, governmental entities such as counties and school districts, commercial operations and residential buildings. In fiscal 2006 we responded to hurricanes Katrina, Rita and Wilma. Contracts are typically on a cost plus basis due to uncertainties relative to the magnitude and type of procedures required.

Reconstruction

The reconstruction and restoration industry responds to natural and man-made disasters including fires, floods, hurricanes, tornadoes, and sudden water intrusions events. Services are usually provided after the impact of the event has been assessed by the property owner and their insurance company. While we previously provided a limited amount of reconstruction services, the acquisition of Flagship Services Group, Inc. (“Flagship”) in August 2005 provided entree to this market on a nationwide basis. Flagship previously provided reconstruction services to commercial and residential clients throughout the United States.

Flagship traditionally acted as a general contractor, sub-contracting all aspects of a reconstruction contract. Contracts are typically on a fixed price basis or time and material basis. Since the acquisition of Flagship, the majority of the work performed on reconstruction contracts has been performed by subcontractors, although we have directly provided drying, loss mitigation and demolition thereby enhancing the services offered to our reconstruction clients.

Mold Remediation / Heat Treatment

Health professionals have been aware of the adverse health effects of exposure to mold for decades, but the issue has gained increased public awareness in recent years. Studies indicate that 50% of all homes contain mold and that the increase in asthma cases over the past 20 years can be linked to mold exposure.

We provide mold remediation services in both commercial and residential structures. Such services include decontamination, application of biocides and sealant, removal of building systems (drywall, carpet, etc.), and disposal of building furnishings. We have experience in remediation, detailing methods and performing microbial (mold, fungus, etc.) abatement in commercial, residential, educational, medical and industrial facilities.

Late in 2004, we licensed the Therma-Pure heat process, which gives us another technology that is a safe and chemical-free method to remediate mold, viruses and bacterial hazards. Homebuilders, the hospitality industry and schools have been purchasing this service to either alleviate current hazards and as a method of minimizing future hazards.

Lead Abatement

During the 1990’s, the lead abatement industry developed due to increased public awareness of the dangers associated with lead poisoning. While lead poisoning takes many forms, the most serious and troubling in the United States is the danger posed to children and infants from the ingestion of lead, primarily in the form of paint chips containing lead. Ingestion of lead has been proven to reduce mental capacities and is especially detrimental to children in the early stages of development.

The low income and public housing markets, due to the age of the structures, contain a significant amount of lead paint that is flaking and peeling. In response to this problem many municipal and state governments have developed programs to remediate the structures. We have experience in utilizing various methods to remove lead-based paint that is adhered to surfaces and the removal of loose and flaking lead-based paint and dust or lead-contaminated soil. Removal methods include chemical stripping, wet scraping, needle gun, high-pressure water/vacuum and abrasive blasting. HEPA vacuums are utilized for dust and debris clean up. Analysis of removed material, as required, is performed to assure proper disposal of lead- contaminated waste and debris generated from removal operations. We complete such lead removal work in accordance with EPA, OSHA, state and local regulations governing lead removal operations, disposal and air monitoring requirements.

Demolition

The demolition industry has a wide range of applications and services. We have currently limited our services to the performance of select interior and structural demolition. Our experience includes interior and structural demolition in

occupied buildings at times utilizing specially equipped air filtration devices to minimize airborne dust emissions in occupied areas.

This work has been a natural progression from asbestos abatement work, which often requires significant interior demolition to access asbestos material for removal.

Operations

Our operating subsidiaries provide services on a project contract basis. Individual projects are competitively bid, although most contracts with private owners are ultimately negotiated. The majority of contracts undertaken are on a fixed price basis. The length of the contracts is typically less than one year; however, larger projects may require two or more years to complete.

Larger and longer-term contracts are billed on a progress basis (usually monthly) in accordance with the terms of the contract. Smaller and shorter duration contracts are billed upon completion. Larger and longer-term contracts, which are billed on progress basis, may contain a provision for retainage whereby a portion of each billing (10% in many cases) is held by the client until the completion of the contract or until certain contractually defined milestones are met.

We monitor contracts by assigning responsibility for each contract to a project manager who coordinates the project until its completion. The contracted work is performed by an appropriately licensed labor force in accordance with regulatory requirements, contract specifications and our written operating procedures which describes worker safety and protection procedures, air monitoring protocols and abatement methods.

Our operations are nationwide. The majority of our national marketing efforts are performed by members of senior management located in the headquarters facility in Pittsburgh, Pennsylvania. Regional marketing and project operations are also conducted through branch offices located in Paramus, New Jersey (serving the New York City metropolitan area); Hazleton and Export, Pennsylvania; Fort Lauderdale, and Tampa, Florida; Dallas, Texas; New Orleans, Louisiana; Los Angeles, California; Las Vegas, Nevada; Portland, Oregon; and Rock Hill, South Carolina. Since our subsidiaries are able to perform work throughout the year, the business is not considered seasonal in nature. However, our revenue is affected by the timing and performance of large contracts. During fiscal 2007, the offices in Houston, Texas and Seattle, Washington were closed and the projects are now being performed by other offices.

Business Strategy

To the extent that we are able to identify appropriate candidates consistent with our business objectives, we intend to acquire additional reconstruction and restoration companies that service metropolitan population centers or regions with high population densities. While the former Flagship operation that we acquired in August 2005 has a nationwide footprint, we will continue to pursue attractive reconstruction and restoration companies that we believe will give us entrée to customers and / or markets where we believe we do not have adequate exposure. We believe that we would be able to derive additional operational and marketing efficiencies from such acquisitions due to the presence of our existing management structure, employee base and customer contacts.

Suppliers and Customers

We purchase the equipment and supplies used in our business from a number of suppliers. One of these suppliers accounted for 34% of our purchases in fiscal 2007. The items are purchased from the vendor’s available stock and are not covered by a formalized agreement.

In fiscal 2007, we estimate that approximately 57% of our operating subsidiaries’ revenues were derived from private sector clients, 35% from government contracts and 8% from public institutions. In fiscal 2006, we estimate that approximately 65% of our operating subsidiaries’ revenues were derived from private sector clients, 18% from government contracts and 17% from public institutions. Due to the nature of our business, which involves large contracts that are often completed within one year, customers that account for a significant portion of revenue in one year may represent an immaterial portion of revenue in subsequent years. For fiscal year 2007 only one customer, URS Corporation, accounted for 13% of our consolidated revenues. For the fiscal year 2006, no one customer accounted for more than 10% of our consolidated revenues.

Licenses

We are licensed and/or certified in all jurisdictions where required in order to conduct our operations. In addition, certain management and staff members are licensed and/or certified by various governmental agencies and professional organizations.

Insurance and Bonds

We maintain liability insurance for claims arising from our business. The policy insures against both property damage and bodily injury arising from the contracting activities of our operating subsidiaries. Obtaining adequate insurance is a problem faced by us and the environmental industry as a whole due to the limited number of insurers and the increasing cost of coverage. To the best of our knowledge, we currently have insurance sufficient to satisfy regulatory and customer requirements.

We also provide worker’s compensation insurance, at statutory limits, which covers all of our employees of our operating subsidiaries. We believe that we are fully covered by workers’ compensation insurance with respect to any claims that may be made by current and former employees relating to any of our operations. The amount of workers’ compensation insurance maintained varies from state to state in which our business operates and is not subject to any aggregate policy limits.

In line with industry practice, we are often required to provide payment and performance bonds to customers under fixed-price contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we may not be able to pursue that project. We have a bonding facility but, as is typically the case, the issuance of bonds under that facility is at the surety’s sole discretion. Depending upon future economic conditions and volatility in the insurance market, bonds may be more difficult to obtain in the future or they may be available at significant additional cost.

Competitive Conditions

Conditions in the specialty contractor industry is highly competitive. The industry is fragmented and includes both small firms and large diversified firms, which have the financial, technical and marketing capabilities to compete on a national level. The industry is not dominated by any one firm. We principally compete on the basis of competitive pricing, a reputation for quality and safety, and the ability to obtain the appropriate level of insurance and bonding.

Regulatory Matters

The environmental remediation industry is generally subject to extensive federal, state and local regulations, including the EPA’s Clean Air Act and OSHA requirements. As outlined below, these agencies have mandated procedures for monitoring and handling asbestos and lead containing material during abatement projects and the transportation and disposal of ACM and lead following removal.

Current EPA regulations establish procedures for controlling the emission of asbestos fibers into the environment during removal, transportation or disposal of ACM. The EPA also has notification requirements before removal operations can begin. Many state authorities and local jurisdictions have implemented similar programs governing removal, handling and disposal of ACM.

The health and safety of personnel involved in the removal of asbestos and lead are protected by OSHA regulations which specify allowable airborne exposure standards for asbestos workers and allowable blood levels for lead workers, engineering controls, work area practices, supervision, training, medical surveillance and decontamination practices for worker protection.

We believe we are in compliance with all of the federal, state and local statutes and regulations that affect our asbestos and lead abatement business.

The other segments of the environmental and specialty contractor industry that we operate in are not currently as regulated as the asbestos and lead abatement industries.

Backlog

We had a backlog of orders totaling approximately $52.7 million and $38.5 million at January 31, 2007 and January 31, 2006 respectively. At January 31, 2007, our backlog consisted of $34.8 million of booked orders and an additional $17.8 million of orders in final negotiation stage or open ended purchase orders which will likely become booked orders in the first quarter of fiscal 2008. At January 31, 2006 our backlog consisted of $20.0 million of booked orders and an additional $18.5 million of orders in final

negotiation stages or open ended purchase orders which became booked orders in the first quarter of fiscal 2007. Of the total amount booked and in final negotiation stage at January 31, 2007, $43.9 million consisted of uncompleted work on fixed price contracts and an estimated $8.8 million of work to be completed on time and materials or unit price contracts. Of the total amount booked and in final negotiation stage at January 31, 2006, $18.4 million consisted of uncompleted work on fixed price contracts and an estimated $20.1 million of work to be completed on time and materials or unit price contracts. From time to time we enter into fixed-price subcontracts, which tend to reduce our risk on fixed-price contracts.

The backlog represents the portion of contracts, which remain to be completed at a given point in time. As these contracts are completed, the backlog will be reduced and a compensating amount of revenue will be recognized. We are currently working on nearly all of the contracts in our January 31, 2007 backlog and anticipate that approximately 84% of this backlog will be completed and realized as revenue by January 31, 2008 in accordance with the terms of the applicable contracts between us and the owners of these properties. The remaining 16% is expected to be completed and realized as revenue subsequent to January 31, 2008. Approximately 81% of the backlog existing at January 31, 2006 was completed and recognized as revenue by January 31, 2007 and we expect that 16% of such backlog will be completed and realized as revenue during the year ending January 31, 2008 and 3% thereafter.

Employees

As of January 31, 2007, we employed approximately 123 senior managers and support staff in our headquarters in Pittsburgh and branch offices located in Paramus, NJ; Hazleton, PA; Export, PA; Fort Lauderdale, FL; Tampa, FL; Los Angeles, CA; New Orleans, LA; Dallas, TX; Las Vegas, NV; Portland, OR and Rock Hill, SC. The staff employees include accounting, administrative, sales and clerical personnel as well as project managers and field supervisors. We also employ laborers for field operations based upon specific projects; therefore, the precise number of our employees at any one time varies based upon the projects in progress. Approximately 400-550 laborers and supervisors are employed on a steady basis, with casual labor hired on an as-needed basis to supplement the work force. The majority of the services provided relative to disaster reconstruction are provided by subcontractors.

A portion of the field laborers who provide services to us are represented by a number of different unions. In many cases, we are a member of a multi-employer plan. Management considers its employee labor relations to be good.

Web Site Postings

Our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the U.S. Securities and Exchange Commission are available to the public free of charge through its website as soon as reasonably practicable after making such filings. Our website can be accessed at the following address: www.pdge.com. The information found on our website or that may be accessed through our website is not part of this report and is not incorporated herein by this reference.

ITEM 1A. Risk Factors

In addition to the other information included in this Annual Report on Form 10-K, any of the following risks could materially adversely affect our business, operating results and financial condition:

A significant portion of our revenue in fiscal 2006 and 2007 was derived from disaster response, loss mitigation and reconstruction work arising from damage caused by hurricanes that hit the United States. Disaster response, loss mitigation and reconstruction contracts arising from such causes present many unique challenges.

In fiscal 2006 and 2007 approximately 27% and 18% of our revenues were derived from disaster response, loss mitigation and reconstruction work that arose from damage caused by the hurricanes that hit the southeastern United States. For fiscal 2008 we again expect to derive revenue from our disaster response, loss mitigation and reconstruction work associated with hurricane damage. There can be no assurance that the magnitude of revenues generated in fiscal 2008 will be of the magnitude of the revenues realized in 2007 or that the emergency response and restoration contracts will be profitable or as profitable as those in prior years.

The timing of cash flow is difficult to predict, and any significant delay in the contract cycle could materially impair our cash flow.

The timing of our cash receipts from contracts receivable is unpredictable. In many cases we are a subcontractor to the general contractor on the project and, therefore, we often must collect outstanding contracts receivable from the general contractor, which, in turn, must collect from the customer. As a result, we are dependent upon the timing and success of the

general contractor in collecting accounts receivable as well as the credit worthiness of the general contractor and the customer. Additionally, many of our contracts provide for retention of a portion of our billings until the project has been accepted by the owner. As our activities are usually early in the contract cycle, if we are acting as a subcontractor, the retainage (typically 5% to 10% of the contract value) may be held until the project is complete. This time frame may be many months after our completion of our portion of the contract. This delay further subjects us to the credit risk associated with the general contractor and the owner of the project. We can and often do avail ourselves of lien rights and other security common to the construction industry to offset the aforementioned credit risk. Unexpected delays in receiving amounts due from customers can put a strain on our cash availability and cause us to delay payments to vendors and subcontractors. Additionally, even if we have successfully completed our work on a project and there are no disputes regarding our performance of such work, any disputes between the general contractor and the owner regarding other aspects of the completed projects by entities other than us could result in further delays, or could prevent, payment for our work.

At January 31, 2007, we had approximately $5.6 million of costs and estimated earnings in excess of billings on uncompleted contracts. Included in this amount is approximately $3.1 million of costs related to contracts claims and unapproved change orders. Of the $21.8 million in contracts receivable, approximately $2.6 million of contracts receivable represented contract claims and/or unapproved change orders. We expect to process change orders or pursue contract claims for at least the full amount of these costs relative to the aforementioned contracts.

Losses expected to be incurred on contracts in progress are charged to earnings in the period such losses are known. Contract revenue reflects the original contract price adjusted for approved change orders and estimated minimum recoveries of unapproved change orders and claims. We recognize unapproved change orders and claims to the extent that related costs have been incurred and when it is probable that they will result in additional contract revenue and their value can be reliably estimated.

We are dependent upon our line of credit to finance operations, and the failure to maintain the line of credit would have a material adverse effect on our operations.

We currently have a $15.0 million line of credit from our financial institution Sky Bank. We rely significantly upon our line of credit in order to operate our business. The line of credit and term loan is secured by a “blanket” security interest in our assets and a mortgage on the real estate owned by us. We expect that we will be able to maintain our existing line of credit (or to obtain replacement or additional financing) when it expires on June 6, 2008 or becomes fully utilized. However, there can be no assurance that such additional financing will be obtainable on favorable terms, if at all. An inability to maintain an adequate line of credit could result in limitations on our ability to bid for new or renew existing contracts, which could have a material adverse effect on our financial condition and results of operations.

At January 31, 2007, we were not in compliance with all of the covenants of our debt agreement. The bank subsequently waived certain covenants and amended the credit agreement in order to enable us retroactively to be in compliance at January 31, 2007.

Our credit facility contains restrictive covenants that limit our financial and operational flexibility and our ability to pay dividends.

Our credit facility contains restrictive covenants that limit our ability to incur debt, require us to maintain certain financial ratios, such as a debt service coverage ratio and leverage ratio and restrict our ability to pay dividends. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions and we may be unable to comply with these covenants in the future. A breach of any of these covenants could result in a default under this credit facility. If we default, our lender will no longer be obligated to extend revolving loans to us and could declare all amounts outstanding under our credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, our lender could proceed against the collateral granted to it to secure the indebtedness. The result of these actions would have a significantly negative impact on our results of operations and financial condition

These restrictions may also adversely affect our ability to conduct and expand our operations. Adequate funds may not be available when needed or may not be available on favorable terms. Even if adequate funds are available, our credit facility may restrict our ability to raise additional funds. If we are unable to raise capital, our finances and operations may be adversely affected.

We are subject to the risk and uncertainties experienced by contractors

We operate a labor-intensive business throughout the United States. Therefore, we are subject to employee risks inherent in the construction industry including employee fraud, fictitious employees, employee theft, violation of federal, state and/or local regulations and bogus workers compensation claims among other risks. While we actively monitor our branch offices and have controls in place at both the branch office and corporate level to ensure that our control procedures are complied with, our decentralized operation and the job site nature of our construction activities, (at any time we have in excess of 150 project in process), subjects us to the risk that illegal activities may be occurring that we are unaware of.

During the fourth quarter of fiscal 2007, we determined that it was necessary to restate our previously issued financial statements for the year ended January 31, 2006, and the quarters ended April 30, 2006 and July 31, 2006, to account for errors in the financial statements related to an employee fraud at our Seattle office. Our internal investigation identified a number of fraudulent activities undertaken by one or more former employees which included fraudulent billing to customers for work never performed, payment to employees where no actual work was performed, payments received directly by former employees which were deposited in their bank accounts and preparation of supporting documentation and customer invoices submitted to the Corporate office for work that was not performed. Our management has taken action to remediate these control deficiencies and has enhanced the monitoring and communication process with each remote location to better monitor branch operations. However, there can be no assurance that such actions will prevent future fraudulent activities. The nature and magnitude of these possible illegal activities may be significant and may have a material adverse effect on our financial condition and results of operations.

If we are unable to maintain adequate insurance and sufficient bonding capacity, our operations would be significantly impaired.

The number and size of contracts that we can perform is directly dependent upon our ability to obtain sufficient insurance and bonding. We maintain an insurance and bonding program consistent with our operational needs. However, there have been events in the national economy, which have adversely affected the major insurance and surety companies. This has resulted in a tightening of the insurance and bonding markets, which has resulted in increasing costs and the availability of certain types of insurance and surety capacity either decreasing or becoming non-existent. We believe our current insurance and bonding programs will be sufficient to satisfy our needs in the future. However, if such programs are insufficient, we may be unable to secure and perform contracts, which would substantially impair our ability to operate our business.

Additionally, we may incur liabilities that may not be covered by insurance policies, or, if covered, the dollar amount of such liabilities may exceed our policy limits. Such claims could also make it more difficult for us to obtain adequate insurance coverage in the future at a reasonable cost. A partially or completely uninsured claim, if successful and of significant magnitude, could cause us to suffer a significant loss and reduce cash available for our operations.

Our management information, internal controls and financial reporting systems may need further enhancements and development to comply with the requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 and the costs of compliance may strain our resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. Currently, Section 404 of the Sarbanes-Oxley Act requires that we assess and report on our system of internal controls beginning with our Annual Report on Form 10-K for the year ending January 31, 2008. Section 404 of the Sarbanes-Oxley Act also requires that our independent registered public accounting firm attest to management’s evaluation of our system of internal controls and to identify material weaknesses in our accounting systems and controls for the year ended January 31, 2009. We are in the process of documenting our system of internal controls which will provide the basis for this report. Any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, and civil or criminal penalties. Any inability to provide reliable financial reports could harm our business.

If our insurance costs increase significantly, these incremental costs could negatively affect our financial results.

Environmental remediation operations may expose our employees and others to dangerous and potentially toxic quantities of hazardous products. Such products can cause cancer and other debilitating diseases. Although we take precautions to minimize worker exposure and have not experienced any such claims from workers or others, there can be no assurance that, in the future, we will avoid liability to persons who contract diseases that may be related to such exposure. Such persons potentially include employees, persons occupying or visiting facilities in which contaminants are being, or have been, removed or stored, persons in surrounding areas, and persons engaged in the transportation and disposal of waste material. In

addition, we are subject to general risks inherent in the construction industry. We may also be exposed to liability from the acts of our subcontractors or other contractors on a work site. The costs related to obtaining and maintaining workers compensation, professional and general liability insurance and health insurance have been increasing. If the cost of carrying such insurance continues to increase significantly, we will recognize an associated increase in costs that may negatively impact its margins. This could have an adverse impact on our financial condition and the price of its common stock.

We depend upon a few key employees and the loss of these employees would severely impact us.

Our success is dependent upon the efforts of our senior management and staff. None of our executives are legally bound to remain employed for any specific term except for our Chief Executive Officer, John Regan, who has a three-year employment agreement, expiring March 15, 2010. If key individuals leave us, we could be adversely affected if suitable replacement personnel are not quickly recruited. Our future success depends on our ability to continue to attract, retain and motivate qualified personnel. There is competition for qualified personnel and in some markets there is a shortage of qualified personnel in the businesses in which we operate. If we are unable to continue to attract or retain highly qualified managerial, technical and marketing personnel, the development, growth and future success of our business could be adversely affected.

A significant number of our contracts are awarded via competitive bid and are priced as fixed fees, and a failure to accurately estimate the cost of such work could result in significant financial losses.

A significant amount of our business is performed on a contract basis as a result of competitive bidding and is priced at fixed fees. We must estimate the costs involved with the applicable job prior to submitting a bid and, therefore, if awarded the job bear the risk if actual costs exceed the estimated costs. Cost overruns on projects covered by such contracts, due to such things as unanticipated price increases, unanticipated problems, inefficient project management, inaccurate estimation of labor or material costs or disputes over the terms and specifications of contract performance or change orders, could have a material adverse effect on us and our operations. In addition, in order to remain competitive in the future, we may have to continue to enter into more fixed price contracts.

The environmental remediation business is subject to significant government regulations, and the failure to comply with any such regulations could result in fines or injunctions, which could materially impair or even prevent the operation of our business.

The environmental remediation business is subject to substantial regulations promulgated by governmental agencies, including the Environmental Protection Agency, various state agencies and county and local authorities acting in conjunction with such federal and state entities. These federal, state and local environmental laws and regulations, which govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of hazardous materials and the remediation of contaminated sites. Our businesses often involve working around and with volatile, toxic and hazardous substances and other highly regulated materials, the improper characterization, handling or disposal of which could constitute violations of U.S. federal, state or local laws and regulations and result in criminal and civil liabilities. Environmental laws and regulations generally impose limitations and standards for certain pollutants or waste materials and require us to obtain a permit and comply with various other requirements. Governmental authorities may seek to impose fines and penalties on us, or revoke or deny issuance or renewal of operating permits, for failure to comply with applicable laws and regulations. We are also exposed to potential liability for personal injury or property damage caused by any release, spill, exposure or other accident involving such substances or materials.

The environmental health and safety laws and regulations to which we are subject are constantly changing, and it is impossible to predict the effect of such laws and regulations on us in the future. We cannot predict what future changes in laws and regulations may be or that these changes in the laws and regulations will not cause us to incur significant costs or adopt more costly methods of operation.

The microbial remediation portion of our business currently is largely unregulated. As this business grows it is likely that government regulation will increase. We cannot predict how the regulations may evolve or whether they may require increased capital and/or operating expenditures to comply with the new regulations.

The failure to obtain and maintain required governmental licenses, permits and approvals could have a substantial adverse effect on our operations.

Certain portions of the environmental and specialty contracting industry are highly regulated. In portions of our business we are required to have federal, state and local governmental licenses, permits and approvals for our facilities and services. We

cannot be assured of the successful outcome of any pending application or demonstration testing for any such license, permit or approval. In addition our existing licenses, permits and approvals are subject to revocation or modification under a variety of circumstances. Failure to obtain timely or to comply with the conditions of, applicable licenses permits or approvals could adversely affect our business, financial condition and results of operations. As our business expands and as new procedures and technologies used in our business are introduced, we may be required to obtain additional operating licenses, permits or approvals. We may also be required to obtain additional operating licenses, permits or approvals if new environmental legislation or regulations are enacted or promulgated or existing legislation or regulations are amended, reinterpreted or enforced differently than in the past. Any new requirements that raise compliance standards may require us to modify our procedures and technologies to conform to more stringent regulatory requirements. There can be no assurance that we will be able to continue to comply with all of the environmental and other regulatory requirements applicable to all of the various businesses we operate.

The receipt of contract awards is unpredictable, and the failure to adjust our overhead structure to meet an unexpected decline in revenue could significantly impact our net income.

We are an environmental and specialty contractor and as such are affected by the timing of the award of large contracts. Therefore, backlogs, revenues and income are subject to significant fluctuation between quarters and years. Since our overhead structure is reasonably fixed, we may not be able to rapidly adjust our operating expenses to meet an unexpected decline in revenue, which could materially and adversely affect revenue and net income.

The environmental remediation and specialty contracting industries are highly competitive and we face substantial competition from other companies.

The environmental remediation and specialty contracting industries are very competitive. Many of our competitors have greater financial, managerial, technical and marketing resources than we have. To the extent that competitors possess or develop superior or more cost-effective environmental remediation solutions or field service capabilities, or otherwise possess or acquire competitive advantages compared to us, our ability to compete effectively could be materially adversely affected.

Our operating results may vary from quarter to quarter, causing our stock price to fluctuate.

Our operating results have in the past been subject to quarter-to-quarter fluctuations, and we expect that these fluctuations will continue, and may increase in magnitude, in future periods. Demand for our services is driven by many factors, including national and regional economic trends, the occurrence of unanticipated natural disasters, changes in governmental regulation and our success in being awarded contracts, among other items. These fluctuations in customer demand for our services can create corresponding fluctuations in period-to-period revenues, and therefore results in one period may not be indicative of our revenues in any future period. In addition, the number and timing of large individual contracts are difficult to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant contracts in a quarter could harm our operating results. It is possible that in some quarters our operating results will be below the expectations of public market analysts or investors. In such events, or in the event adverse conditions prevail, the market price of our common stock may decline significantly. It is also possible that in some quarters our operating results, particularly with respect to disaster response, will be unusually high due to the occurrence of unanticipated natural disasters. In these situations, our operating results in subsequent financial quarters may decline, which could cause a decline in the market price of our common stock.

We cannot give any assurance that we will be able to secure additional financing to meet its future capital needs.

Our long-term capital requirements will depend on many factors, including, but not limited to, cash flow from operations, the level of capital expenditures, working capital requirements and the growth of our business. We may need to incur additional indebtedness or raise additional capital to fund the capital needs of our operations or related growth opportunities. To the extent additional debt financing cannot be raised on acceptable terms, we may need to raise additional funds through public or private equity financings. No assurance can be given that additional debt or equity financing will be available or that, if such financing is available, the terms of such financing will be favorable to us or to our stockholders. If adequate funds are not available, we may be required to curtail its future operations significantly or to forego expansion opportunities.

A significant portion of our voting power is held by our directors, officers and significant stockholders, whose interest may conflict with those of our other shareholders.

Currently our directors and officers as a group beneficially own approximately 17% of our voting securities. Accordingly,

acting together, they may be able to substantially influence the election of directors, management and policies and the outcome of any corporate transaction or other matter submitted to its stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.

In addition, three stockholders, unrelated to us, have filed Schedule 13-G’s noting ownership of our common stock in excess of 5% of our outstanding common shares. Accordingly, they may be able to substantially influence the election of directors, management and policies and the outcome of any corporate transaction or other matter submitted to its stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets. From time to time, these unrelated stockholders may have interests that differ from those of our other stockholders.

There may be limited liquidity in our common stock and its price may be subject to fluctuation.

Our common stock is currently traded on the OTC Bulletin Board and there is only a limited market for our common stock. We cannot provide any assurances that we will be able to have our common stock listed on an exchange or quoted on NASDAQ or that we will continue to be quoted on the OTC Bulletin Board. If there is no market for trading our common stock, our stockholders will have substantial difficulty in trading in it and the market price of our common stock will be materially and adversely affected.

SEC rules concerning sales of low-priced securities may hinder re-sales of our common stock.

Because our common stock has a market price that is less than five dollars per share and our common stock is not listed on an exchange or quoted on NASDAQ and is traded on the OTC Bulletin Board, brokers and dealers who handle trades in our common stock are subject to certain SEC rules when effecting trades in our common stock. Additionally, the compensation that the brokerage firm and the salesperson handling a trade receive and legal remedies available to the buyer are also subject to SEC rules. These requirements may hinder re-sales of our common stock and may adversely affect the market price of the common stock.

Our strategy will include making additional acquisitions that may present risks to the business.

Making additional strategic acquisitions is part of our strategy. For example, on August 25, 2005, we completed the acquisition of certain assets of Flagship and its affiliated companies. Our ability to make future acquisitions will depend upon identifying attractive acquisition candidates and, if necessary, obtaining financing on satisfactory terms. Acquisitions may pose certain risks to us. These risks include the following:

•		we may be entering markets in which we have limited experience;
•		the acquisitions may be potential distractions to us and may divert resources and managerial time;
•		it may be difficult or costly to integrate an acquired business’ financial, computer, payroll and other systems into our own;
•		we may have difficulty implementing additional controls and information systems appropriate for a growing Corporation;
•		some of the acquired businesses may not achieve anticipated revenues, earnings or cash flow;
•		we may have unanticipated liabilities or contingencies from an acquired business;
•		we may have reduced earnings due to amortization expenses, goodwill impairment charges, increased interest costs and costs related to the acquisition and its integration;
•		we may finance future acquisitions by issuing common stock for some or all of the purchase price which could dilute the ownership interests of the stockholders;
•		acquired companies will have to become, within one year of their acquisition, compliant with SEC rules relating to internal control over financial reporting adopted pursuant to the Sarbanes-Oxley Act of 2002;
•		we may be unable to retain management and other key personnel of an acquired Corporation; and
•		we may impair relationships with an acquired Corporation’s employees, suppliers or customers by changing management.

If we are unsuccessful in meeting the challenges arising out of our acquisitions, our business, financial condition and future results could be materially harmed. Additionally, to the extent that the value of the assets acquired in any prior or future acquisitions, including goodwill or intangible assets with indefinite lives, becomes impaired, we would be required to incur impairment charges that would affect earnings. Such impairment charges could reduce our earnings and have a material adverse effect on the market value of our common stock.

Under certain circumstances, holders of the Series C Preferred may require us to redeem their preferred stock at a redemption amount in excess of the face value of the Series C Preferred.

Under certain circumstances, holders of our Series C Preferred outstanding may require us to redeem their preferred stock at a pre-determined redemption amount (as defined in the Certificate of Designation), which may exceed the face value of the Series C Preferred, including, without limitation, in the following circumstances: (a) if we fail to remove any restrictive legend on any certificate or any shares of common stock issued to the Preferred Stockholders (other than during a permitted black-out period as defined in the Certificate of Designation), (b) upon a bankruptcy event, (c) upon a sale of all or substantially all of the assets or merger of us or (d) we fail to comply in all material respects with certain specified covenants set forth in the Securities Purchase Agreement with the Preferred Stockholders or the Registration Rights Agreement with the Preferred Stockholders.

Holders of the Series C Preferred have substantial rights that could allow them to significantly influence the management and direction of the Corporation and such holders may have interests that differ from those of the other stockholders.

Holders of the Series C Preferred have no voting rights, except as required by law. However, as long as any shares of Series C Preferred remain outstanding, we cannot take the following corporate actions without the separate class vote or written consent of a majority of the then outstanding Series C Preferred: (i) alter the rights or preferences or privileges of the Series C Preferred, or increase the authorized number of shares of Series C Preferred, (ii) issue any shares of Series C Preferred or warrants to purchase additional shares of common stock at specified exercise prices other than pursuant to the Securities Purchase Agreement with Preferred Stockholders, (iii) redeem, repurchase or otherwise acquire, or declare or pay any cash dividend or distribution on, any class of stock ranking junior to the Series C Preferred with respect to liquidation, (iv) increase the par value of the common stock or (v) cause or authorize any subsidiary of us to engage in any of the foregoing actions. In addition, as long as 250 shares of Series C Convertible Series C Preferred remain outstanding, we cannot take the following corporate actions without the separate class vote or written consent of a majority of the then outstanding Series C Preferred: (i) alter the rights, preferences or privileges of any capital stock of us so as to affect adversely the Series C Preferred, (ii) create or issue any class of stock ranking senior to, or on equal basis with, the Series C Preferred with respect to liquidation, (iii) issue any debt securities or incur any indebtedness that would have any preferences over the Series C Preferred upon liquidation of us, or redeem, repurchase, prepay or otherwise acquire any outstanding debt securities or indebtedness of us (subject to certain exceptions), (iv) sell or otherwise transfer 10% or more of our assets (subject to certain exceptions), (v) enter into any agreement, commitment, understanding or other arrangement to take any of the foregoing actions or (vi) cause or authorize any subsidiary of us to engage in any of the foregoing actions.

Additionally, the holders of the Series C Preferred Stock have other significant rights relating to, among other things, liquidation, redemption, conversion and payments of premium. As a result of such rights, one or more of our preferred stockholders could substantially influence our management and policies and the outcome of any corporate transaction or other matters. From time to time, such preferred stockholders may have interests that differ from those of our other stockholders.

We are required to file and to keep effective a shelf registration statement for stockholders and if we are unable to do so for the required period we may be required to make additional payments to the holders of the Series C Preferred and Common Stock issued in connection with the July 2005 private placement of our securities.

In connection with the private placements, we entered into registration rights agreements with the Common Stockholders and Preferred Stockholders. Under these registration rights agreements, we agreed to file a registration statement for the purpose of registering the resale of the common stock and the shares of common stock underlying the convertible securities we issued in the private placements. The registration rights agreements require us to keep the registration statement effective for a specified period of time. In the event that the registration statement is not filed or declared effective within the specified deadlines or is not effective for any period exceeding a permitted Black-Out Period (45 consecutive Trading Days but no

more than an aggregate of 75 Trading Days during any 12-month period), then we will be obligated to pay the Preferred and Common Stockholders up to 12% of their purchase price per annum. On November 21, 2005 our Registration Statement on Form S-2 was declared effective by the Securities & Exchange Commission. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event. After assessing the provisions of the registration rights agreements and the related authoritative guidance a $20,000 warrant derivative liability was provided. No gain or loss on the derivative was recorded in the year ended January 31, 2006 and the liability was recorded in accrued liabilities. On May 10, 2006 the Post Effective Amendment #1 was declared effective by the Securities & Exchange Commission. As of April 18, 2007 the Corporation has utilized forty-five of permitted aggregate Black-Out days and seventeen of the consecutive Black-Out days had been expended. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event.

ITEM 2. Properties

As of January 31, 2007, we lease certain office space for our executive offices in Pittsburgh totaling 5,758 square feet. In addition, a combination of warehouse and office space is leased in Los Angeles (6,500 square feet), Hazleton (1,800 square feet), Fort Lauderdale (10,000 square feet), Tampa (5,400 square feet), Rock Hill (15,000 square feet), Dallas (15,800 square feet), Las Vegas (2,500 square feet), Phoenix (3,125 square feet), Portland (6,000 square feet), New Orleans (25,300 square feet), and Paramus (5,391 square feet).
We also own an 18,000 square foot office/warehouse situated on approximately six (6) acres in Export, Pennsylvania, which is subject to a mortgage of $277,000 at January 31, 2007.

ITEM 3. Legal Proceedings

We are subject to dispute and litigation in the ordinary course of business. We are not aware of any pending or threatened litigation that we believe is reasonably likely to have a material adverse effect on us, based upon information available at this time.

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

None

Part II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has traded on the OTC Bulletin Board since September 1996. Prior to that, it was listed for trading on NASDAQ Small Cap (Symbol: PDGE) and the information presented for the following periods reflects the high and low bid information as reported by the OTC Bulletin Board. The prices below may not represent actual transactions. These quotations reflect inter-dealer prices, without retail markup, markdown or commissions.

		Market Price Range
		Fiscal 2007								Fiscal 2006
		High				Low				High				Low
First Quarter		$	2.32			$	1.62			$	1.76			$	1.36
Second Quarter			2.05				1.30				1.41				0.94
Third Quarter			1.59				0.96				2.69				0.92
Fourth Quarter			1.02				0.66				2.21				1.73

At March 22, 2007, we had 1,933 stockholders of record.

We have not historically declared or paid dividends with respect to our common stock and have no intention to pay dividends in the foreseeable future. Our ability to pay dividends is prohibited due to limitations imposed by our banking agreement, which requires the prior consent of the bank before dividends are declared. Additionally, the private placement of our preferred stock in July 2005 contained restrictions on the payment of dividends on our common stock until the majority of the preferred stock has been converted into our common stock or redeemed.

ITEM 6. Selected Financial Data

The following consolidated selected financial data should be read in conjunction with the consolidated financial statements and related notes, and “Management Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the fiscal years ended January 31, 2007 and 2006 and the consolidated balance sheet data as of January 31, 2007 and 2006 have been derived from the consolidated financial statements that have been audited by Malin Bergquist & Company LLP, independent auditors, included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the fiscal years ended January 31, 2005 have been derived from the consolidated financial statements that have been audited by Parente Randolph LLC, independent auditors, included elsewhere in this annual report on Form 10-K. The consolidated statement of operations data for the years ended January 31, 2004 and 2003 and the consolidated balance sheet data as of January 31, 2004 and 2003 have been derived from audited consolidated financial statements not included in this annual report on Form 10-K. The historical results presented below are not necessarily indicative of future results.

		For the Years Ended January 31,
		2007				2006				2005				2004				2003
		As Restated(1)
		(Thousands except per share data)
OPERATING DATA
Contract revenues		$	74,977			$	78,181			$	60,362			$	35,962			$	40,621
Gross margin			7,106				11,349				9,762				6,628				5,567
Income (loss) from continuing operations			(5,661	)			2,013				2,960				1,016				486
Other income (expense)			(4,192	)			(1,766	)			(391	)			(310	)			(192	)
Net income (loss)			(7,177	)			508				2,186				644				278
COMMON SHARE DATA
Net income (loss) per common share:
Basic			(0.36	)			0.04				0.20				0.07				0.03
Diluted			(0.36	)			0.03				0.19				0.07				0.03
Weighted average common shares outstanding			19,785				14,409				10,911				9,373				9,372
BALANCE SHEET DATA
Working capital		$	14,142			$	17,699			$	11,086			$	8,233			$	7,062
Total assets			43,254				42,492				23,942				17,154				15,535
Long-term debt			12,161				9,059				5,013				5,306				4,922
Cumulative Convertible Preferred Stock			2,550				2,803				—				—				—
Total stockholders’ equity			13,390				17,091				9,128				4,909				4,244

The year ended January 31, 2007 included a $919,000 non-recurring charge for an employee fraud, a $111,000 provision for impairment in value of goodwill and a $105,000 provision for impairment in value of an operating lease. The year ended January 31, 2006 included a $234,000 non-recurring charge for an employee fraud. The year ended January 31, 2003 included a $300,000 of gain from the sale of the St. Louis operation and other fixed assets and a $150,000 provision for impairment in value of goodwill.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, our audited financial statements and notes thereto, and other financial information included elsewhere in this Annual Report on Form 10-K.

Certain statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “potential”, or “continue”, the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those described above under “Risk Factors”.

Overview

Through our operating subsidiaries, we provide environmental and specialty contracting services including asbestos and lead abatement, insulation, microbial remediation, disaster response, loss mitigation and reconstruction, demolition and related services.

The following paragraphs are intended to highlight key operating trends and developments in our operations and to identify other factors affecting our consolidated results of operations for the three years ended January 31, 2007.

Contract revenues are recognized on the percentage of completion method measured by the relationship of total costs incurred to total estimated contract costs (cost-to-cost method). The majority of the Corporation’s contracts are fixed price contracts; therefore, any change in estimated costs to complete a contract will have a direct impact upon the revenues and related gross margin recognized on that particular contract.

Contract costs represent the cost of our laborers working on our contracts and related benefit costs, materials expended during the course of the contract, periodic billings from subcontractors that worked on our contracts, costs incurred for project supervision by our personnel and depreciation of machinery and equipment utilized on our contracts.

Selling, general and administrative expenses consist of the personnel at our executive offices and the costs related to operating that office and the Corporation as a whole including marketing, legal, accounting and other corporate expenses, the costs of management and administration at our branch offices, office rental, depreciation and amortization of corporate and non-operational assets and other costs related to the operation of our branch offices.

Interest expense consists primarily of interest charges on our line of credit but also includes the interest expense of term debt with our lending institution.

Interest expense for preferred dividends and accretion of discount consists of the 8% dividend on the Series C Preferred Stock sold in July 2005 as part of the private placement of our securities and accretion of the related discount.

Non-recurring charge for employee fraud consists of the costs associated with fictitious projects and other fraudulent activities previously recorded as revenue at our Seattle office.

Other income (expense) components are as described in our statement of operations.

The income tax provision is the amount accrued and payable to the federal government and the various state taxing authorities. Until fiscal 2005 no amounts have been due to the federal government as we had a net operating loss carryforward, which had been sufficient to offset taxable income in recent years. As of January 31, 2007, we again have no amounts due to the federal government as we have a net operating loss carryforward.

Critical Accounting Policies

The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our judgment about future events and related estimations and how they impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective or complex estimates and assessments and is fundamental to our results of operation. We identified our most critical accounting estimates to be:

	•		Revenue Recognition
	•		Billing Realization / Contract Receivable Collectability
	•		Claims Recognition
	•		Recoverability of Goodwill and Intangible Assets
	•		Recoverability of Deferred Tax Assets
	•		Mandatorily Redeemable Convertible Preferred Stock
	•		Income Taxes

We based our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report. We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below.

Revenue Recognition

Revenue is recognized using the percentage-of-completion method. A significant portion of our work is performed on a fixed price basis. The balance of our work is performed on variations of cost reimbursable and unit price approaches. Contract revenue is accrued based upon the percentage that actual costs to date bear to total estimated costs. We utilize the cost-to-cost method as we believe this method is less subjective than relying on assessments of physical progress. We follow the guidance of the Statement of Position 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts,” for accounting policy relating to our use of the percentage-of-completion method, estimating costs, revenue recognition and unapproved change order/claim recognition. The use of estimated costs to complete each contract, the most widely recognized method used for percentage-of-completion accounting, is a significant variable in the process of determining income earned and is a significant factor in the accounting for contracts. The cumulative impact of revisions to total cost estimates during the progress of work is reflected in the period in which these changes become known. Due to the various estimates inherent in our contract accounting, actual results could differ from these estimates.

Contract revenue reflects the original contract price adjusted for approved change orders and estimated minimum recoveries of unapproved change orders and claims. We recognize unapproved change orders and claims to the extent that related costs have been incurred when it is probable that they will result in additional contract revenue and their value can be reliably estimated. Losses expected to be incurred on contracts in progress are charged to earnings in the period such losses are known.

Billing Realization / Contracts Receivable Collectability

We perform services for a wide variety of customers including governmental entities, institutions, property owners, general contractors and specialty contractors. Our ability to render billings on in-process jobs is governed by the requirements of the contract and, in many cases, is tied to progress towards completion or the aforementioned specified mileposts. Realization of contract billings is in some cases guaranteed by a payment bond provided by the surety of our customer. In all other cases we are an unsecured creditor of our customers, except that we may perfect its rights to payment by filing a mechanics lien, subject to the requirements of the particular jurisdiction. Payments may be delayed or disputed by a customer due to contract performance issues and / or disputes with the customer. Ultimately, we have recourse to the judicial system to secure payment. All of the aforementioned matters may result in significant delays in the receipt of payment from the customer. As discussed in the previous section under “Revenue Recognition”, there can be no assurances that future events will not result in significant changes to the financial statements to reflect changing events.

We extend credit to customers and other parties in the normal course of business after a review of the potential customer’s creditworthiness. Additionally, management reviews the commercial terms of significant contracts before entering into a contractual arrangement. We regularly review outstanding receivables and provide for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, management makes an evaluation of required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required.

Claims Recognition

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that we seek to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of anticipated additional costs incurred by us. Recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. We must determine if:

	•		there is a legal basis for the claim;
	•		the additional costs were caused by circumstances that were unforeseen by us and are not the result of deficiencies in our performance;
	•		the costs are identifiable or determinable and are reasonable in view of the work performed; and
	•		the evidence supporting the claim is objective and verifiable.

If all of these requirements are met, revenue from a claim is recorded only to the extent that we have incurred costs relating to the claim.

Recoverability of Goodwill and Intangible Assets

Effective February 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets,” which states that goodwill and indefinite-lived intangible assets are no longer to be amortized but are to be reviewed annually for impairment. The goodwill impairment analysis required under SFAS No. 142 requires us to allocate goodwill to our reporting units, compare the fair value of each reporting unit with our carrying amount, including goodwill, and then, if necessary, record a goodwill impairment charge in an amount equal to the excess, if any, of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. The primary method we employ to estimate these fair values is the discounted cash flow method. This methodology is based, to a large extent, on assumptions about future events, which may or may not occur as anticipated, and such deviations could have a significant impact on the estimated values calculated. These assumptions include, but are not limited to, estimates of future growth rates, discount rates and terminal values of reporting units. See further discussion in Notes 16 and 17 to our Consolidated Financial Statements.

At January 31, 2007, goodwill and intangible assets on our balance sheet totaled $2,651,000 and $5,416,000, respectively. At January 31, 2006 goodwill and intangible assets on our balance sheet totaled $2,316,000 and $6,162,000 respectively. The goodwill and intangible assets are primarily attributable to the acquisition of the former Tri-State Restorations, Inc. (“Tri-State”) operation in June 2001 that now operates as our Los Angeles office and the acquisition of the former Flagship Services Group, Inc. (“Flagship”) operation in August 2005 that now operates as our Dallas office. The remaining goodwill and intangible assets relates to three smaller acquisitions and deferred costs relating to our bank financing. The payment of the initial purchase price for the Tri-State and Flagship acquisitions initially generated a moderate amount of goodwill but the majority was created by the subsequent payment of contingent purchase price under the asset purchase agreement which provided for a four year and eighteen-month, respectively, earn-out for the former owners based upon the net profits of the Los Angeles and Dallas offices, respectively.

During fiscal year 2007, goodwill of $111,000 was determined to be impaired due to the closure of the Seattle office. We have concluded that the net remaining recorded value of goodwill and intangible assets has not been impaired as a result of an evaluation as of January 31, 2007.

Income Taxes

We provide for income taxes under the liability method as required by SFAS No. 109 “Accounting for Income Taxes”.

Deferred income taxes result from timing differences arising between financial and income tax reporting due to the deductibility of certain expenses in different periods for financial reporting and income tax purposes.

We file a consolidated Federal Income tax return. Accordingly, federal income taxes are provided on the taxable income, if any, of the consolidated group. State income taxes are provided on a separate company basis.

Recoverability of Deferred Tax Assets

At January 31, 2007 our deferred tax assets totaled $3,480,000. At January 31, 2007, it was determined that the recognition of deferred income tax assets would be appropriate as it is more likely than not that all of the deferred tax assets would be realized. Therefore a valuation reserve is not necessary at this time.

At January 31, 2006, our deferred tax assets totaled $686,000. At that time, we had been profitable for the last four fiscal years and in fiscal 2005 we exhausted our net operating loss carryforwards, we believed at that time that we will be profitable in the future at levels which cause us to conclude that it is more likely than not that we will realize all of the deferred tax assets. Therefore, we recorded at January 31, 2006 the estimated net realizable value of the deferred tax assets at that time at our combined federal and state rates.

Mandatorily Redeemable Convertible Preferred Stock

The transaction was accounted for in accordance with FAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, FAS 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Corporation’s Own Stock” in accounting for the transaction. The preferred stock has been recorded as a liability after consulting FAS 150. Although the preferred includes conversion provisions, they were deemed to be non-substantive at the issuance date. Subsequent to the issuance, our stock price rose in part to Hurricane Katrina and the acquisition of the former Flagship operations, and a number of preferred shares were converted to common. Per FAS 150, there is to be no reassessment of the non-substantive feature.

After valuing the warrants for the purchase of our common stock issued with the convertible Preferred Shares, the beneficial conversion contained in the Preferred Shares and the costs associated with the Preferred Stock portion of the financing, the remainder was allocated to the convertible preferred stock. The difference between this initial value and the face value of the Preferred Stock will be accreted back to the Preferred Stock as preferred dividends utilizing an effective method. The accretion period is the shorter of the four-year term of the preferred or until the conversion of the preferred stock. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the accretion of the discount on the preferred stock is classified as interest expense in the Statement of Consolidated Operations.

A cumulative premium (dividend) accrues and is payable with respect to each of the Preferred Shares equal to 8% of the stated value per annum. The premium is payable upon the earlier of: (a) the time of conversion in such number of shares of Common Stock determined by dividing the accrued premium by the Conversion Price or (b) the time of redemption in cash by wire transfer of immediately available funds. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the preferred stock dividend is classified as interest expense in the Statement of Consolidated Operations.

Both the preferred and Common Stock portions of the July 2005 private placement included registration rights agreements that imposed liquidating damages in the form of a monetary remuneration should the holders be subject to blackout days (i.e. days when the holders of our Common Stock may not trade the stock) in excess of the number permitted in the registration rights agreements. On November 21, 2005 our Registration Statement on Form S-2 was declared effective by the Securities & Exchange Commission. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event. After assessing the provisions of the registration rights agreements and the related authoritive guidance, a $20,000 warrant derivative liability was provided. No gain or loss on the derivative was recorded in the year ended January 31, 2007 and the liability was recorded in accrued liabilities.

Accounting Policy Changes

In December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Should we issue employee stock options after January 31, 2006, a charge against earnings would be required as provided by SFAS 123R. The magnitude of the charge would depend upon the number of employee stock options issues, the exercise price of the stock options and the volatility of the share price of our common stock on the date the employee stock options are issued. At January 31, 2007 we had 610,450 options outstanding subject to time vesting. The aforementioned options resulted in an approximate $222,000 expense charge in fiscal 2007.

Results of Operations

Year Ended January 31, 2007 Compared to Year Ended January 31, 2006

During the year ended January 31, 2007 (“Fiscal 2007”), our contract revenues decreased $3.2 million or 4.1% to $75.0 million compared to $78.2 million in the year ended January 31, 2006 (“Fiscal 2006”). The decrease was due to the absence of significant hurricane response revenue, contract claim adjustments and closure of certain offices in the current period.

Our contract costs increased $1.0 million to $67.8 million in Fiscal 2007 from $66.8 million in Fiscal 2006. The gross margin in Fiscal 2007 thus decreased $4.2 million to $7.1 million compared to $11.3 million Fiscal 2006. Gross margin as a percentage of revenue decreased to 9.5% in 2007 from 14.5% in 2006. A change in the estimated recovery from contract claims of $0.47 million was the primary reason for the decreased margin. Other direct contract costs increased $3.0 million from $9.0 million to $12.0 million reflecting the inclusion of twelve months of the former Flagship operations in the current fiscal period versus the inclusion of five months in the prior fiscal period, the inclusion of costs for twelve months of the Tampa restoration operation which was started in February 2006, and the opening of three new offices in the last quarter of Fiscal 2006.

Selling, general and administrative expenses increased $3.4 million to $12.7 million in 2007 as compared to $9.3 million in Fiscal 2006. As a percentage of contract revenues, selling, general and administrative expense increased by 5% to 17% in Fiscal 2007 from 12% in Fiscal 2006. The significant increase is principally due to the addition of $1,037,000 to bad debt expense and the inclusion of the Flagship operations for the full year. As operations were ramped up at the three new offices opened in the second half of Fiscal 2006 and at the stand alone Tampa restoration operation, costs increased faster than revenues and had relatively high percentages of direct costs compared to revenues.

We reported a loss from operations of $5.7 million for the current fiscal period compared to income from operations of $2.0 million for the prior fiscal period, a decrease of $7.7 million as a direct result of the factors discussed above.

Interest expense increased to $1,002,000 in 2007 compared to $490,000 in 2006 as a result of increased borrowings and an increase in the prime rate of interest, to which a majority of our borrowings are tied. In Fiscal 2006, the Corporation benefited from lower borrowings as a result of the July 2005 private placement which allowed a reduction in the line of credit borrowings prior to the purchase of the Flagship operation in late August 2005 and very low interest rates in 2006.

Non-cash interest expense for preferred dividends and accretion of the discount relates to the private placement of $5.5 million of redeemable convertible preferred stock in July 2005 and the subsequent issuance of $1.375 million of redeemable convertible preferred stock from the exercise of the over-allotment option. As the preferred shares are mandatorily redeemable, the actual dividend and the accretion of the discount associated with the preferred stock are required to be reflected as interest expense. The current fiscal period had a $2,072,000 expense, which included the actual dividend of $345,000 and the accretion of the discount associated with the preferred stock of $1,727,000. The accretion of the discount included a $1,214,000 charge due to the conversion of 2,203 shares of preferred stock into 2,325,631 shares of our common stock. The unamortized discount on those shares was expensed, as required, at the time of conversion. The prior fiscal period had a $1,119,000 expense, which included the actual dividends of $277,000 and the accretion of the discount associated with the preferred stock of $842,000. The accretion of the discount included a $501,000 charge due to the conversion of 860 shares of preferred stock into 860,000 shares of our common stock. The unamortized discount on those shares was expensed, as required, at the time of conversion.

For the current fiscal year, we recorded a $919,000 non-recurring charge relative to employee fraud at its Seattle office. This charge arises following an internal investigation commenced in October 2006 into operations at the Corporation’s Seattle office, which indicated fraudulent activities undertaken by one or more former employees. The current year charge includes $222,000 of professional costs incurred as part of the investigation and restatement of our financial statements. The prior fiscal year had a $234,000 non-recurring charge relative to the aforementioned employee fraud.

During the third quarter of Fiscal 2007, we determined that the goodwill related to its Northwestern operation was impaired. Therefore, a non-cash provision of $111,000 was made to reduce the goodwill related to that operation to zero.

During the fourth quarter of Fiscal 2007, we determined that the operating lease for its Phoenix operation was impaired as the office was closed in February 2007. Therefore, a provision of $105,000 was made for the remaining payments due under the operating lease.

Because of our loss before taxes in the current fiscal year, a current tax benefit of $2.6 million was recorded as a result of carrying back the current period’s loss to fiscal years ended January 31, 2005 and 2006 thereby generating a refund of both federal and state income taxes. In the previous fiscal year a tax benefit of $261,000 was recorded.

At January 31, 2007 and at January 31, 2006, the Corporation assessed its recent operating history and concluded that recognition of the valuation allowance against deferred income tax assets was not required in either year, therefore the entire valuation allowance of $430,000 was recognized as a deferred tax benefit at the end of both years. In making these evaluations, we concluded that it was more likely than not that the deferred income tax assets would be realized. The deferred benefit for federal income taxes reflects the effect of carrying back the current year’s loss to fiscal years ended January 31, 2005 and 2006 thereby generating a refund of federal income taxes previously paid and the realization of a portion of the net operating loss carryforwards for both federal and state purposes and the federal Research & Development Tax Credit.

At January 31, 2007, the Corporation has approximately $3.8 million of net operating loss carryforwards for federal income tax purposes expiring in 2027 and approximately $0.5 million of federal credit carryforwards, primarily Research and Development Tax Credits, expiring from 2022 to 2027.

Year Ended January 31, 2006 Compared to Year Ended January 31, 2005

During Fiscal 2006, our contract revenues increased by 30% to $78.2 million compared to $60.4 million in the year ended January 31, 2005 (“Fiscal 2005”). The increase was partly due to the acquisition of the former Flagship operation, which was included subsequent to its acquisition in late August 2005. Additionally, there was an increase in contract activity at our Charlotte, New York, Los Angeles, Tampa and Ft. Lauderdale offices as compared to the prior fiscal period. The increase was attributable to an increase in volume of work placed under contract and performed by these offices. Both fiscal periods had a significant amount of disaster response revenues.

Our gross margin increased to $11.3 million in Fiscal 2006 compared to $9.8 million in the Fiscal 2005. Gross margin as a percentage of revenue decreased to 14.5% for the current year from 16.2% for the prior year. The increase in gross margin of $1.59 million is due to a higher volume of work performed at a lower gross margin percentage. The current fiscal year had four significant projects totaling $13.5 million in revenue with a total negative gross margin of $0.5 million. These asbestos abatement projects in our New York, Pittsburgh, Los Angeles and Seattle offices encountered unexpected conditions and cost overruns and resulted in the overall lower margin percentage experienced in the current fiscal year.

Selling, general and administrative expenses increased to $9.3 million in the current fiscal year as compared to $6.9 million in the prior fiscal year. This increase was due to personnel and salary increases in the current fiscal year as compared to the prior fiscal year, an overall increase in various operating expenses, the inclusion of the former Flagship operations subsequent to its acquisition in August 2005 and the inclusion of the former Lange operations subsequent to its acquisition in November 2005 and the opening of new offices in New Orleans, LA, Bakersfield, CA and Las Vegas, NV. As a percentage of contract revenues, selling, general and administrative expense increased by 0.5% to 12.0% for the current fiscal period from 11.5% for the prior year fiscal period.

Our reported income from operations of $2.01 million for the Fiscal 2006 compared to income from operations of $2.96 million for Fiscal 2005, decreasing by $0.95 million or 32%, as a direct result of the factors discussed above.

Interest expense increased to $0.49 million in the current year as compared to $0.39 million in the prior year as a result of continual increases in the prime rate of interest, to which a majority of our borrowings are tied and increases in the balance outstanding on the line of credit to fund a higher level of operations.

Interest expense for preferred dividends and accretion of the discount relates to the private placement in July 2005 of $5.5 million of redeemable convertible preferred stock and the subsequent issuance of $1.375 million of redeemable convertible preferred stock from the exercise of the over-allotment option. As the preferred shares are mandatorily redeemable, the actual dividend of $277,000 and the accretion of the discount associated with the preferred stock of $842,000 are required to be reflected as interest expense. The accretion of the discount included a $501,000 charge due to the conversion of 860 shares of preferred stock into 860,000 shares of our common stock. The remaining unamortized discount is required to be expensed at the time of conversion.

The Corporation recorded a $234,000 non-recurring charge relative to an employee fraud at its Seattle office. This charge arises following an internal investigation commenced in October 2006 into operations at the Corporation’s Seattle office, which indicated suspected fraudulent activities undertaken by one or more former employees.

Our other income for the year ended January 31, 2006 included a $0.05 million gain from our sale of our 50% interest in the IAQ venture, which had been accounted for under the equity method of accounting.

During the year ended January 31, 2006, we had a net income tax benefit of $0.26 million consisting of a $0.32 million provision for current federal income taxes, a $0.11 million for current state income taxes, a $0.58 million benefit for deferred federal income taxes and a $0.11 million benefit for deferred state income taxes. The provision for current federal income taxes reflects the effect of a $0.43 million benefit for the federal Research and Development tax credit which was recently quantified for the income tax returns filed for the years ended January 31, 2002 through January 31, 2006 resulting in the amendment of the aforementioned returns. While we did not pay any federal income taxes for fiscal 2002, 2003 and 2004, the effect of the credit was carried forward to the Fiscal 2006 return, resulting in the utilization of a portion of the credit in the current year. The remainder of approximately $0.29 million will be carried forward to Fiscal 2007.

Additionally, we recognized a $0.43 million deferred federal benefit from the reversal of the valuation allowance against our net deferred tax assets, as we no longer feel that a significant uncertainty exists as to the future realization of those net deferred income tax assets. While we had been profitable since the fiscal year ending January 31, 2003, our federal net operating loss carryforward was only fully utilized in the quarter ended January 31, 2005. As our operations are subject to a high degree of volatility due to the nature of our business we only concluded that the uncertainty had been resolved in the most recent fiscal quarter.

Liquidity and Capital Resources

Fiscal 2007

During Fiscal 2007, we experienced a decrease in cash and cash equivalents of $72,000 as cash and cash equivalents decreased from $230,000 at January 31, 2006 to $158,000 at January 31, 2007. The decrease in cash and cash equivalents in Fiscal 2007 was attributable to $808,000 cash used by operating activities and $812,000 used by investing activities, which were nearly offset by $1,548,000 cash provided by financing activities.

The $808,000 of cash utilized by operating activities consisted primarily of a net loss of $7.2 million adjusted for $2.1 million of non-cash charges: depreciation ($1,049,000), amortization ($786,000), deferred income tax benefit ($2,794,000), accrued interest and dividends on preferred stock ($1,727,000), impairment charges ($216,000), a net increase in allowance for uncollectible accounts ($850,000), and the provision for the cost of stock based compensation ($296,000).

After adjusting for these non-cash charges and credits, the resulting cash basis net loss of $5.0 million, was partially offset by a $4.2 million reduction in the working capital utilized by us which consisted primarily of a reduction in accounts receivable ($1,296,000), an increase in accounts payable ($915,000), a decrease in billing in excess of costs ($1,377,000) and net changes in other current asset and current liability accounts ($604,000) resulting in a net use of $808,000 cash in operating activities.

The $812,000 used in investing activities was primarily related to the purchase of property, plant and equipment.

The $1,548,000 of cash provided by financing activities consisted of net bank borrowings ($2,350,000), proceeds from the exercise of stock options and warrants ($861,000), recording of non-cash preferred stock dividends which accumulate until conversion or maturity ($345,000) reduced by the earnout payments related to the Flagship acquisition ($845,000), and further reduced by insurance premium financing which has been contracted for and will paid out over the next several months ($1,157,000).

Fiscal 2006

During Fiscal 2006, we experienced a decrease in cash and cash equivalents of $0.1 million as cash and cash equivalents decreased from $0.33 million at January 31, 2005 to $0.23 million at January 31, 2006. The decrease in cash and cash equivalents in fiscal 2006 was attributable to cash outflows of $4.1 million from operating activities and $7.1 million from investing activities, which were partially offset by cash provided by financing activities of $11.1 million.

Cash utilized by operating activities totaled $4.1 million during Fiscal 2006. Cash outflows included, a $9.3 million increase in accounts receivable caused by the significant increase in billings, a $0.23 million increase in costs and estimated earnings in excess of billings on uncompleted contracts, a $0.73 million increase in prepaid income taxes, a $0.18 million decrease in billings in excess of costs and estimated earnings on uncompleted contracts, a $0.31 million decrease in current income tax liabilities and a $0.69 million net benefit for deferred income tax, which is non-cash in nature. These cash outflows were

partially offset by cash inflows including $0.5 million of net income in the current fiscal period, $0.8 million of preferred stock accretion of the discount on the preferred stock which is non-cash in nature, a $0.28 provision for uncollectible accounts, a $0.95 million decrease in other current assets, a $2.4 million increase in accounts payable, a $1.3 million increase in accrued liabilities related to the timing of payments and $1.09 million of depreciation and amortization.

Investing activities cash outflows included $5.6 million for the acquisition of the Flagship operation in August 2005 and the Lange operation in November 2005, $1.4 million for the purchase of property, plant and equipment, a $0.09 million increase in other assets and a $0.02 million of capital contributions in the IAQ joint venture prior to the sale of its interest by us. These cash outflows were partially offset by $0.06 million of proceeds from the sale of our equity investment in the IAQ joint venture.

Financing activities cash inflows consisted of $7.5 million from the private placement of our common and convertible preferred stock in July 2005 and the subsequent exercise of the over-allotment option provided to preferred stockholders (which was net of $0.84 million of costs associated with the initial private placement and the subsequent exercise of the over-allotment option), $0.3 million of preferred stock dividends which are non-cash in nature, as the dividends on the preferred stock accumulate until conversion or maturity, $3.7 million net borrowing on the line of credit, $0.4 million of proceeds from a equipment line provided by our bank, $0.34 million from the exercise of employee stock options and $0.84 million from the exercise of warrants issued as part of the July 2005 private placement. These cash inflows were partially offset by $1.6 million for the repayment of debt and insurance premium financing and $0.6 million of earnout payments related to the acquisition of businesses acquired in prior years.

Fiscal 2005

During Fiscal 2005, we experienced an increase in cash and cash equivalents of $0.3 million as cash and cash equivalents increased from $0.04 million at January 31, 2004 to $0.33 million at January 31, 2005. The increase in cash and cash equivalents in fiscal 2005 was attributable to cash inflows of $0.96 million from operating activities and of $0.3 million from financing activities partially offset by cash utilized by investing activities of $0.95 million.

Cash inflows from operating activities were generated by net income of $2.2 million, depreciation and amortization of $0.7 million, a $0.2 provision for uncollectible accounts, a $0.9 million increase in other current assets a $0.37 million increase in accounts payable, a $0.77 million increase in billings in excess of costs and estimated earnings on uncompleted contracts, a $0.3 million in current income taxes payable and a $1.3 million increase in accrued liabilities related to the timing of the payments. The cash inflows were partially offset by cash utilizations including a $4.1 million increase in accounts receivable, due to a significantly higher volume of customer billings in the current fiscal year, a $1.6 million increase in costs and estimated earnings in excess of billings on uncompleted contracts and a $0.05 million increase in inventories.

Cash inflows from financing activities of $0.3 million during Fiscal 2005 consisted of $0.45 million from the private placement of the Corporation’s common stock (which was net of $0.05 million of costs associated with registering our common stock related to the private placement), $1.2 million from the exercise of warrants issued in connection with the aforementioned private placement and $0.33 million from the exercise of employee stock options. These cash inflows were partially offset by $1.46 million in debt and insurance premium financing and $0.2 million of earnout payments related to the acquisition of businesses acquired in prior years.

Investing activities cash outflows included $0.90 million for the purchase of property, plant and equipment, a $0.015 million additional investment in the IAQ venture and $0.12 million of payments related to the acquisition of businesses completed in the current fiscal year. These cash outflows were partially offset by $0.13 million of proceeds from the sale of fixed assets.

Contractual Obligations

Our contractual obligations at January 31, 2007 are summarized as follows:

		Payment due by period
						Less Than				1-3				3-5				More Than
		Total				1 year				Years				Years				5 years
		(Thousands)
Long-Term Debt Obligations		$	11,816			$	115			$	11,509			$	34			$	158
Capital Lease Obligations			667				207				448				12				—
Operating Lease Obligations			2,132				770				1,285				77				—
Purchase Obligations			—				—				—				—				—
Other Long-Term Liabilities Reflected On Registrant’s Balance Sheet Under GAAP			4,275				—				4,275				—				—
Total		$	18,890			$	1,092			$	17,517			$	123			$	158

The 1-3 year payment due column includes $11.2 million for the line of credit which is due June 6, 2008. The line of credit interest rate is at prime. We rely significantly upon our access to credit facilities in order to operate our business. We expect to be able to maintain our existing line of credit (or to obtain replacement or additional financing) as the current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on favorable terms, if at all. An inability to maintain an adequate line of credit could result in limitations on our ability to bid for new or renew existing contracts, which could have a material adverse effect on our financial condition and results of operations. It has been the practice of our lending institution to annually extend the maturity date of the line of credit. While we are confident that this will remain the case, there can be no assurance that the lending institution will continue to extend the maturity date of the line of credit annually. In December 2005 our lender approved a temporary $2,000,000 increase in our line of credit to $13.0 million until June 6, 2006. The increase in the line of credit was required to fund the increase in revenues generated by the hurricane recovery work beginning in the third quarter of fiscal 2006.

The Corporation’s Revolving Line of Credit Agreement and subsequent amendments with its bank includes various covenants relating to matters affecting the Corporation including the required annual evaluation of the debt service coverage, debt to net worth, and tangible net worth. At January 31, 2007, we were not in compliance with all of the covenants of our debt agreement. The bank subsequently waived certain covenants and amended the credit agreement in order to enable us retroactively to be in compliance at January 31, 2007.

The 1-3 year payment due column includes $3.8 million for the face value of the Cumulative Convertible Series C Preferred Stock which is due July 1, 2009 unless it has been converted into shares of our common stock plus $462,500 of related accrued but unpaid dividends. On our Balance Sheet at January 31, 2007 the balance of the aforementioned Preferred Stock is $2.55 million as the face amount had been discounted for the beneficial conversion feature and value has been assigned to the warrants that were issued with the Preferred Stock. The Preferred Stock has an 8% coupon, which is payable at maturity in cash or converted into common shares if the preferred stock is converted before maturity. Beginning 120 days following effectiveness of the registration statement we may mandatorily convert the Preferred Shares into shares of Common Stock, if certain conditions are satisfied including, among other things: (a) if the average closing bid price of our Common Stock during any 20 consecutive trading day period is greater than 150% of the conversion price, (b) the Preferred Registration Statement is currently effective, (c) the maximum number of shares of Common Stock issued upon such mandatory conversion does not exceed 100% of the total 5 day trading volume of our Common Stock for the 5 trading day period preceding the mandatory conversion date and (d) no mandatory conversions have occurred in the previous 30 trading days.

In March 2004, we raised $0.5 million from a private placement of our Common Stock to fund general business purposes and our acquisition strategy. In connection with the private placement, we also issued warrants exercisable for an additional 3.5 million shares. The full exercise of these warrants would result in proceeds to us of $4.4 million. During fiscal 2005, warrants for the issuance of 1,500,000 shares of our common stock were exercised resulting in proceeds of $1,200,000 to us. No warrants were exercised in Fiscal 2006.

In July 2005, we raised $7.0 million from a private placement of our Common and Preferred Stock to fund general business purposes and our acquisition strategy. In connection with the private placement, we also issued an over-allotment option to the purchasers of our preferred stock, which allowed them to purchase up to an additional 25% of their original purchase. Between October and December 2005, the over-allotment option was fully exercised resulting in an additional $1.375 million. We also issued warrants exercisable for an additional 3.9 million shares. The full exercise of these warrants would result in proceeds to us of $4.8 million. During fiscal 2006, warrants for the issuance of 391,000 shares of our common stock were exercised resulting in proceeds of $434,000 to us. Additionally, 860 shares of preferred stock were converted into 895,521 shares of common stock. The conversion included the conversion of $35,521 of dividends into 35,521 shares of our common stock.

The rights and preferences of the Preferred Shares are set forth in the Certificate of Designation, Preferences and Rights of Series C Preferred Stock (the “Certificate of Designation”). The Preferred Shares have a face value of $1,000 per share and are convertible at any time at the option of the holder into shares of Common Stock (“Conversion Shares”) at the initial conversion price of $1.00 per share (the “Conversion Price”), subject to certain adjustments including (a) stock splits, stock dividends, combinations, reclassifications, mergers, consolidations, sales or transfers of the assets of the Corporation, share exchanges or other similar events, (b) certain anti-dilution adjustments. For a complete description of the terms of the Preferred Shares please see the Certificate of Designation.

Any outstanding shares of preferred stock that have not been converted to common stock at the maturity date of July 1, 2009 are payable in cash along with the related 8% per annum dividend.

We consulted FAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, FAS 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Corporation’s Own Stock” in accounting for the transaction. The preferred stock has been recorded as a liability after consulting FAS 150. Although the preferred includes conversion provisions, they were deemed to be non-substantive at the issuance date. Subsequent to the issuance, our stock price rose in part to Hurricane Katrina and the acquisition of the former Flagship operations, and a number of preferred shares were converted to common. Per FAS 150, there is to be no reassessment of the non-substantive feature.

After valuing the warrants for the purchase of our common stock issued with the convertible Preferred Shares, the beneficial conversion contained in the Preferred Shares and the costs associated with the Preferred Stock portion of the financing, the remainder was allocated to the convertible preferred stock. The difference between this initial value and the face value of the Preferred Stock will be accreted back to the Preferred Stock as preferred dividends utilizing an effective interest rate. The accretion period is the shorter of the four-year term of the preferred or until the conversion of the preferred stock. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the accretion of the discount on the preferred stock is classified as interest expense in the Statement of Consolidated Operations.

A cumulative premium (dividend) accrues and is payable with respect to each of the Preferred Shares equal to 8% of the stated value per annum. The premium is payable upon the earlier of: (a) the time of conversion in such number of shares of Common Stock determined by dividing the accrued premium by the Conversion Price or (b) the time of redemption in cash by wire transfer of immediately available funds. For the years ended January 31, 2007 and 2006 the accrued dividend was $345,000 and $277,000, respectively for both the initial private placement in July 2005 and the subsequent exercise of the over-allotment option for additional shares of Preferred Stock. Of the total accrued dividends at January 31, 2007 and 2006 of $345,000 and $277,000, respectively, conversions of Series C Preferred Stock into Common Stock resulted in the conversion of $123,000 and $36,000, respectively of dividends. Therefore, $463,000 and $241,000, respectively of dividends remain accrued at January 31, 2007 and 2006. In accordance with FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” the preferred stock dividend is classified as interest expense in the Statement of Consolidated Operations.

In connection with these transactions, the Investor entered into a Registration Rights Agreement with us. Under this agreement, we were required to file within ninety (90) days of closing a registration statement with the U.S. Securities and Exchange Commission for the purpose of registering the resale of the Shares and the Warrant Shares. Our registration statement was declared effective by the U.S. Securities and Exchange Commission on November 21, 2005. We are required to keep the registration statement effective until the earlier of two years from the Closing Date and such time as the remaining Shares and Warrant Shares may be sold under Rule 144 in any three month period, subject to permitted Black-Out Periods (as defined in the Registration Rights Agreement). In the event that the Investor is not permitted to sell its Shares as the registration statement is not effective for any period exceeding a permitted Black-Out Period, then we will be obligated to pay the Investor liquidated damages equal to 12% of the Investor’s purchase price per annum. Other than the aforementioned monetary penalty, there are no provisions requiring cash payments or settlements if registered shares cannot be provided upon conversion/exercise or the shareholders cannot sell their shares due to a blackout event. After assessing the provisions of the registration rights agreements and the related authoritive guidance a $20,000 warrant derivative liability was provided. No gain or loss on the derivative was recorded in the year ended January 31, 2007 and the liability was recorded in accrued liabilities.

On August 25, 2005, pursuant to an Asset Purchase Agreement, (the “Agreement”), we completed the acquisition of certain assets of Flagship Services, Group, Inc., Flagship Reconstruction Partners, Ltd., Flagship Reconstruction Associates – Commercial, Ltd., and Flagship Reconstruction Associates – Residential, Ltd. (“Flagship”), for $5,250,000 in cash paid at closing, a promissory note for $750,000 at an interest rate of 6% due in semi-annual installments of $375,000 plus interest, 236,027 shares of our restricted common stock valued at $250,000 ($1.06 per share), a warrant to purchase up to 250,000 shares of our restricted common stock at an exercise price of $1.00 and a warrant to purchase up to 150,000 shares of our restricted common stock at an exercise price of $1.06. The warrants were valued at $186,000 in the aggregate. The warrants expire five years from the date of closing. The aggregate purchase price of approximately $6.5 million was allocated to the fair value of the assets acquired in accordance with FAS 141 “Business Combinations” with the majority of the purchase consideration allocated to customer relationships, with the remainder allocated to subcontractor relationships, the covenant-not-to-compete, fixed assets

acquired and the remainder was allocated to goodwill. The Agreement also includes earn-out provisions over the first eighteen-month period commencing on the closing date, pursuant to which we are required to pay 35% of the net earnings of the former Flagship operation in excess of $500,000. At January 31, 2007 and 2006, $93,000 and $492,000, respectively, had been earned and accrued relative to the earn-out agreement

At January 31, 2007, we had approximately $5.6 million of costs and estimated earnings in excess of billings on uncompleted contracts. Included in this amount is approximately $3.1 million of costs related to contracts claims and unapproved change orders. Of the $21.8 million in contracts receivables, approximately $2.6 million of contracts receivable represented items being disputed or litigated. We expect to process change orders or pursue contract claims for at least the full amount of these costs relative to the aforementioned contracts.

Based upon the current operating plan, we expect that our existing cash balances and cash flows from operations will be sufficient to finance our working capital and capital expenditure requirements through Fiscal 2008. However, if events occur or circumstances change such that we fail to meet our operating plan as expected, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. If additional financing is needed, we can not be assured that such financing will be available on commercially reasonable terms or at all.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

The only market risk, as defined, that we are exposed to is interest rate sensitivity. The interest rate on the equipment note and revolving line of credit fluctuate based upon changes in the prime rate. Each 1% change in the prime rate will result in a $118,000 change in borrowing costs based upon the balance outstanding at January 31, 2007. We do not use derivative financial instruments to manage interest rate risk.

ITEM 8. Financial Statements and Supplementary Data

Our consolidated financial statements and the report of Malin Bergquist and Company LLP and Parente Randolph LLC are attached to this Annual Report on Form 10-K beginning on page F-1 and are incorporated herein by reference.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

For information regarding the Corporation’s change in independent registered public accounting firm from Parente Randolph, LLC to Malin Bergquist & Company, LLP, please refer to the Corporation’s Current Reports on Form 8-K filed with the SEC on June 24, 2005 and July 15, 2005. The Corporation has had no disagreements with its independent auditors regarding accounting or financial disclosure matters.

ITEM 9A. CONTROLS AND PROCEDURES

1. Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

An internal control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. An internal control significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is a more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. An internal control material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

During the review of our consolidated financial statements as of October 31, 2006 and for the three and nine month periods then ended, our external auditors notified our management and Audit Committee of the existence of a “material weakness” in our internal controls related to the monitoring of remote locations. The Corporation’s internal control system was designed such that general managers of remote locations had responsibility for authorizing and approving payroll charges for field employees, invoicing of customers, and collection of receivables for jobs originating in their office. This situation provided the opportunity for remote managers to engage in fraudulent activities, including fraudulent billing to customers for work never performed, payment to employees where no actual work was performed, payments received directly by former employees which were deposited in their bank accounts and preparation of supporting documentation and customer invoices submitted to the Corporate office for work that was not performed in order to substantially delay management from identifying the fraud. During the fourth quarter of fiscal 2007, we determined that it was necessary to restate our previously issued financial statements for the year ended January 31, 2006 and the quarters ended April 30, 2006 and July 31, 2006 account for errors in the financial statements related to an employee fraud at our Seattle office. Our internal investigation identified a number of fraudulent activities undertaken by one or more former employees which included fraudulent billing to customers. The nature and magnitude of these possible illegal activities may be significant and may have a material adverse effect on our financial condition and results of operations.

Our Chief Executive Officer and Principal Financial Officer concluded that the material weaknesses cited did compromise the financial reporting process resulting in the restatement of our consolidated financial statements as of January 31, 2006 and for the year then ended. To account for errors in the financial statements related to the employees fraud at our Seattle office, we restated our previously issued financial statements for the year ended January 31, 2006 and for the quarters ended April 30, 2006 and July 31, 2006.

Our management has discussed this material weakness with the Audit Committee. Our management is taking action to remediate these control deficiencies and has enhanced the monitoring and communication process with each remote location to better monitor branch operations. Specifically, we are requiring that all customer billings be sent to the customer from the corporate office. Additionally, we have enhanced the monitoring and communication process with each remote location to better monitor branch operations and we are investigating improvements to the payroll process relative to the tracking of time worked by our hourly employees. This evaluation of alternative enhancements should be completed in the fourth fiscal quarter of 2007 with implementation projected for the first fiscal quarter of fiscal 2008.

In addition during their audit of our consolidated financial statements as of January 31, 2007 and for the year then ended, our external auditors notified our management and Audit Committee of the existence of certain “material weaknesses” in our internal controls. The material weaknesses related to the lack of effective monitoring controls over financial reporting. Specifically they noted a general lack of internal review and approval regarding mechanical calculations, journal entries, and disclosure-related schedules resulting in significant adjustments to the financial statements. They also specifically stated the combination of a limited staff with adequate technical expertise and the transitional status of an interim Chief Financial Officer resulted in ineffective oversight and monitoring over the year end financial reporting process. Our Chief Financial Officer resigned suddenly on April 2, 2007, due to health reasons. They also notified us that a material weakness exists over the effective monitoring of remote locations. They stated that decentralized structure of the Corporation creates internal control difficulties specifically within the monitoring function. The Corporation has not been able to identify or effectively manage commitments, contingencies and other significant matters.

In response to the identified material weaknesses, management, with oversight from our Audit Committee, is working with our external auditors to improve our control environment and to review, remediate and implement controls and procedures to satisfy the Corporation’s requirement to be compliant with the requirements of Sarbanes Oxley by December 31, 2007. In addition, we have hired a new Chief Financial Officer with 18 years of experience in the areas of accounting and finance. We intend to continue our efforts to implement process changes to strengthen our internal controls and monitoring activities.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Based on their evaluation, our Chief Executive Officer, and Principal Financial Officer, and the Audit Committee have concluded that our disclosure controls and procedures were not effective for the reasons stated above as of the end of the period covered by this Annual Report on Form 10-K with regards to the material weakness related to monitoring of remote locations and the material weaknesses related to the monitoring controls over financial reporting.

2. Internal Control Over Financial Reporting

     (a) Management’s Annual Report on Internal Control Over Financial Reporting

In accordance with SEC Release No. 33-8618, the Corporation will omit the report of the Corporation’s management on internal control over financial reporting, and in accordance with current rules plan to file such report in our Annual Report on Form 10-K covering the fiscal year ended January 31, 2008.

     (b) Attestation Report of the Registered Public Accounting Firm

In accordance with SEC Release No. 33-8618, the Corporation will omit the attestation report of Malin, Bergquist & Company, LLP on management’s assessment of the Corporation’s internal control over financial reporting and in accordance with current rules plan to file such attestation in our Annual Report on Form 10-K covering the fiscal year ended January 31, 2009.

     (c) Changes in Internal Control Over Financial Reporting

Other than stated above, there was no changes in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected or is reasonable likely to materially affect our internal control over financial reporting. With respect to the material weakness in our internal control over the monitoring of remote locations, the Corporation’s internal control system was designed such that general managers of remote locations had responsibility for authorizing and approving payroll charges for field employees, invoicing of customers, and collection of receivables for jobs originating in their office. This situation provided the opportunity for remote managers to defraud the Corporation and substantially delay management from identifying the fraudulent time charges and invoices.

We are now requiring that all customer billings be sent to the customer from the corporate office. Additionally, we have enhanced the monitoring and communication process with each remote location to better monitor branch operations and is investigating improvements to the payroll process relative to the tracking of time worked by our hourly employees. This evaluation of alternative enhancements was completed in the fourth fiscal quarter of Fiscal 2007 with implementation projected for the first fiscal quarter of fiscal 2008.

As a consequence of the monitoring of remote locations material weakness noted above, we are applying other procedures designed to improve the reliability of our financial reporting. While our efforts to remediate this material weakness are ongoing, management believes that the financial statements included in this report are fairly stated in all material respects. We will continue to monitor the effectiveness of our internal control over financial reporting, particularly as it relates to revenue recognition, and will take further actions as deemed appropriate.

In addition, during their audit of our consolidated financial statements as of January 31, 2007 and for the year then ended, our external auditors notified our management and Audit Committee of the existence of a “material weakness” in our internal controls related to the lack of effective monitoring controls over financial reporting. Specifically they noted a general lack of internal review and approval regarding mechanical calculations, journal entries, and disclosure-related schedules resulting in significant adjustments to the financial statements. They also specifically noted that due to the sudden resignation of our Chief Financial Officer on April 2, 2007, the lack of a transition period, the limited staff with adequate technical expertise, and a transitional Chief Financial Officer, the oversight and monitoring controls over the year end financial reporting was less than fully effective.

In response to the identified material weaknesses, management, with oversight from our Audit Committee, is working with our external auditors to improve our control environment and to review, remediate and implement controls and procedures to satisfy the Corporation’s requirement to be compliant with the requirements of Sarbanes Oxley by December 31, 2007. In addition, we have hired a new Chief Financial Officer with 18 years of experience in the areas of accounting and finance. We intend to continue our efforts to implement process changes to strengthen our internal controls and monitoring activities.

ITEM 9B. Other Information

None

PART III

Item 10. Directors and Executive Officers and Corporate Governance

Except as set forth herein, the information set forth in our definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the “Exchange Act”) to be filed with the Securities and Exchange Commission is incorporated herein by reference in response to this Item 10.

Code of Ethics

We have adopted a Code of Business Ethics for directors and executive officers (including our principal executive officer and principal financial officer) (the “Code of Ethics”). A copy of the Code of Ethics is available upon request, free of charge, by contacting our Corporate Secretary at PDG Environmental, Inc., 1386 Beulah Road, Building 801, Pittsburgh, PA 15235. Pursuant to Exchange Act rules, a copy of the Code of Ethics is incorporated herein by reference as Exhibit 14 to this Annual Report on Form 10-K.

Item 11. Executive Compensation

The information set forth in our definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act to be filed with the Securities and Exchange Commission is incorporated herein by reference in response to this Item 11.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information set forth in our definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act to be filed with the Securities and Exchange Commission is incorporated herein by reference in response to this Item 12.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information set forth in our definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act to be filed with the Securities and Exchange Commission is incorporated herein by reference in response to this Item 13.

Item 14. Principal Accountant Fees and Services

The information set forth in our definitive Proxy Statement pursuant to Regulation 14A of the Exchange Act to be filed with the Securities and Exchange Commission is incorporated herein by reference in response to this Item 14.

PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1) and (2) The following consolidated financial statements and financial statement schedule of the registrant and its subsidiaries are included in Item 8.

		Page
Report of Registered Public Accounting Firm			F-1
Consolidated Balance Sheets as of January 31, 2007 and 2006			F-3
Consolidated Statements of Operations for the Years Ended January 31, 2007, 2006 and 2005			F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended January 31, 2007, 2006 and 2005			F-6
Consolidated Statements of Cash Flows for the Years Ended January 31, 2007, 2006 and 2005			F-7
Notes to Consolidated Financial Statements for the Three Years Ended January 31, 2007, 2006 and 2005			F-8
Schedule II — Valuation and Qualifying Accounts (Unaudited)			F-30

          All other schedules for PDG Environmental, Inc. and consolidated subsidiaries for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

(a) (3) Exhibits:

Included after audited financial statements

SIGNATURES

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

Date: May xx, 2007

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

/s/ John C. Regan		May xx, 2007
John C. Regan
Chairman and Chief Executive Officer
(Principal Executive Officer and Director)

Richard A. Bendis, Director		By /s/ John C. Regan
		John C. Regan, Attorney-in-Fact
		May xx, 2007
Edgar Berkey, Director		By /s/ John C. Regan
		John C. Regan, Attorney-in-Fact
		May xx, 2007
James D. Chiafullo, Director		By /s/ John C. Regan
		John C. Regan, Attorney-in-Fact
		May xx, 2007
Edwin J. Kilpela, Director		By /s/ John C. Regan
		John C. Regan, Attorney-in-Fact
		May xx, 2007

PDG ENVIRONMENTAL, INC.
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(c) AND (d)
FINANCIAL STATEMENTS, CERTAIN EXHIBITS & SCHEDULE

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of PDG Environmental, Inc.

We have audited the accompanying consolidated balance sheets of PDG Environmental, Inc. and subsidiaries (the Corporation) as of January 31, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

As discussed in Note 10 to the Consolidated Financial Statements, the Corporation adopted Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payments”, effective February 1, 2006.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PDG Environmental, Inc. and subsidiaries as of January 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Malin, Bergquist & Company, LLP

Pittsburgh, Pennsylvania
May 15, 2007

Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Stockholders of PDG Environmental, Inc.

We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity, and cash flows of PDG Environmental, Inc. and subsidiaries (the “Corporation”) for the year ended January 31, 2005. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of PDG Environmental, Inc. and subsidiaries for the year ended January 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

/s/ Parente Randolph, LLC

Pittsburgh, Pennsylvania
April 15, 2005

CONSOLIDATED BALANCE SHEETS

PDG ENVIRONMENTAL, INC.

		January 31,
		2007				2006
						As Restated (1)
ASSETS
Current Assets
Cash and cash equivalents		$	158,000			$	230,000
Contracts receivable, net of $1,290,000 allowance in 2007 and net of $440,000 allowance in 2006			21,257,000				23,903,000
Costs and estimated earnings in excess of billings on uncompleted contracts			5,607,000				5,174,000
Inventories			553,000				596,000
Prepaid income taxes			271,000				734,000
Deferred income tax asset			915,000				470,000
Other current assets			534,000				131,000
Total Current Assets			29,295,000				31,238,000
Property, Plant and Equipment
Land			42,000				42,000
Leasehold improvements			241,000				224,000
Furniture and fixtures			236,000				222,000
Vehicles			1,477,000				952,000
Equipment			8,871,000				8,270,000
Buildings			485,000				427,000
			11,352,000				10,137,000
Less: accumulated depreciation			8,795,000				7,838,000
			2,557,000				2,299,000
Intangible Assets, net of accumulated amortization of $1,405,000 in 2007 and $1,012,000 in 2006			5,416,000				6,162,000
Goodwill			2,651,000				2,316,000
Deferred Income Tax Asset			2,565,000				216,000
Contracts Receivable, Non Current			500,000				—
Other Assets			270,000				261,000
Total Assets		$	43,254,000			$	42,492,000

See accompanying notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS
PDG ENVIRONMENTAL, INC.

		January 31,
		2007				2006
						As Restated (1)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	7,403,000			$	6,488,000
Billings in excess of costs and estimated earnings on uncompleted contracts			3,421,000				2,044,000
Accrued liabilities			4,007,000				4,494,000
Current portion of long-term debt			322,000				513,000
Total Current Liabilities			15,153,000				13,539,000
Long-Term Debt			12,161,000				9,059,000
Mandatorily redeemable cumulative convertible Series C preferred stock, $1,000 par value, 6,875 shares authorized and issued and 3,812.5 and 6,015 outstanding shares at January 31, 2007 and 2006, respectively (liquidation preference of $4,275,083 at January 31, 2007)			2,550,000				2,803,000
Total Liabilities			29,864,000				25,401,000
Commitments and Contingencies
Stockholders’ Equity
Common stock, $0.02 par value, 60,000,000 shares authorized and 21,073,640 and 17,779,123 shares issued and outstanding January 31, 2007 and 2006, respectively			411,000				345,000
Common stock warrants			1,628,000				1,881,000
Paid-in capital			19,245,000				15,582,000
Accumulated deficit			(7,856,000	)			(679,000	)
Less treasury stock, at cost, 571,510 shares at January 31, 2007 and 2006			(38,000	)			(38,000	)
Total Stockholders’ Equity			13,390,000				17,091,000
Total Liabilities and Stockholders’ Equity		$	43,254,000			$	42,492,000

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

PDG ENVIRONMENTAL, INC.

		For the Years Ended January 31,
		2007				2006				2005
		As Restated (1)
Contract Revenues		$	74,977,000			$	78,181,000			$	60,362,000
Contract Costs			67,871,000				66,832,000				50,600,000
Gross Margin			7,106,000				11,349,000				9,762,000
Gain (Loss) on sale of fixed assets			(17,000	)			10,000				110,000
Selling, General and Administrative Expenses			12,750,000				9,346,000				6,912,000
Income (Loss) From Operations			(5,661,000	)			2,013,000				2,960,000
Other Income (Expense):
Interest expense			(1,002,000	)			(490,000	)			(393,000	)
Deferred interest expense for preferred dividends			(345,000	)			(277,000	)			—
Non-cash interest expense for accretion of discount on preferred stock			(1,727,000	)			(842,000	)			—
Non-recurring charge for employee fraud			(919,000	)			(234,000	)			—
Non-cash impairment charge for goodwill and operating lease			(216,000	)			—				—
Gain on sale of equity investment			—				48,000				—
Equity in income (losses) of equity investment			—				4,000				(15,000	)
Interest and other income			17,000				25,000				17,000
			(4,192,000	)			(1,766,000	)			(391,000	)
Income (Loss) Before Income Taxes			(9,853,000	)			247,000				2,569,000
Income Tax (Benefit) Provision			(2,676,000	)			(261,000	)			383,000
Net Income (Loss)		$	(7,177,000	)		$	508,000			$	2,186,000
Earnings Per Common Share — Basic:		$	(0.36	)		$	0.04			$	0.20
Earnings Per Common Share — Dilutive:		$	(0.36	)		$	0.03			$	0.19
Average Common Shares Outstanding			19,785,000				14,409,000				10,911,000
Average Dilutive Common Stock Equivalents Outstanding			—				1,797,000				871,000
Average Common Shares and Dilutive Common Stock
Equivalents Outstanding			19,785,000				16,206,000				11,782,000

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

PDG ENVIRONMENTAL, INC.
FOR THE THREE YEARS ENDED JANUARY 31, 2007

		Preferred								Common																(Deficit)				Total
		Stock				Common				Stock				Paid-in				Deferred				Treasury				Retained				Stockholders’
		Series A				Stock				Warrant				Capital				Compensation				Stock				Earnings				Equity
Balance at January 31, 2004$			14,000			$	189,000			$	—			$	8,111,000			$	(6,000	)		$	(38,000	)		$	(3,361,000	)		$	4,909,000
Private placement of 1,250,000 shares of Common Stock, net of $51,000 of issuance costs							25,000				287,000				137,000																449,000
Redemption of preferred stock			(14,000	)			1,000								13,000												(12,000	)			(12,000	)
Issuance of 62,500 shares in connection with an acquisition							1,000								58,000																59,000
Issuance of 670,500 shares under Employee Incentive Stock Option Plan							13,000								293,000																306,000
Issuance of 50,000 shares under Non-Employee Director Stock Option Plan							1,000								24,000																25,000
Issuance of 1,500,000 shares from exercise of Stock warrants							30,000				(134,000	)			1,304,000																1,200,000
Amortization of stock based compensation																			6,000												6,000
Net Income																											2,186,000				2,186,000
Balance at January 31, 2005			—				260,000				153,000				9,940,000				—				(38,000	)			(1,187,000	)			9,128,000
Private placement of 1,666,667 shares of Common Stock and 5,500 shares of Series C Preferred Stock, net of $775,000 of issuance costs							33,000				1,565,000				2,599,000																4,197,000
Exercise of Over-Allotment option for 1,375 shares of Series C Preferred Stock, net of $69,000 of issuance costs											322,000				432,000																754,000
Costs associated with March 2004 private placement															(20,000	)															(20,000	)
Issuance of 236,027 shares in connection with an acquisition							5,000				186,000				245,000																436,000
Issuance of 657,167 shares under Employee Incentive Stock Option Plan							13,000								316,000																329,000
Issuance of 20,000 shares under Non-Employee Director Stock Option Plan							1,000								6,000																7,000
Employee issuance of 100,000 shares of restricted common stock															12,000																12,000
Issuance of 790,625 shares from exercise of stock warrants							15,000				(345,000	)			1,174,000																844,000
Conversion of 860 shares of Series C Preferred Stock Into 895,521 shares of Common Stock, including 35,521 shares of Common Stock from accrued dividends							18,000								878,000																896,000
Net Income (1)																											508,000				508,000
Balance at January 31, 2006, As restated (1)			—				345,000				1,881,000				15,582,000				—				(38,000	)			(679,000	)			17,091,000

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)

PDG ENVIRONMENTAL, INC.
FOR THE THREE YEARS ENDED JANUARY 31, 2007

		Preferred								Common																(Deficit)				Total
		Stock				Common				Stock				Paid-in				Deferred				Treasury				Retained				Stockholders’
		Series A				Stock				Warrant				Capital				Compensation				Stock				Earnings				Equity
Balance at January 31, 2006 As restated (1)			—				345,000				1,881,000				15,582,000				—				(38,000	)			(679,000	)			17,091,000
Issuance of 301,000 shares under Employee Incentive Stock Option Plan							6,000								160,000																166,000
Issuance of 10,000 shares under Non-Employee Director Stock Option Plan							—								3,000																3,000
Employee issuance of 100,000 shares of restricted common stock															48,000																48,000
Issuance of 618,055 shares from exercise of stock warrants							12,000				(253,000	)			933,000																692,000
Conversion of 2,202.5 shares of Series C Preferred Stock Into 2,325,632 shares of Common Stock, including 123,132 shares of Common Stock from accrued dividends							46,000								2,280,000																2,326,000
Compensation expense under SFAS 123							—								222,000																222,000
Costs associated with July 2005 private placement															(6,000	)															(6,000	)
Issuance of 25,000 shares of restricted stock							1,000								(1,000	)															—
Incentive payment paid with 14,830 shares							1,000								24,000																25,000
Net Loss																											(7,177,000	)			(7,177,000	)
Balance at January 31, 2007		$	—			$	411,000			$	1,628,000			$	19,245,000			$	—			$	(38,000	)		$	(7,856,000	)		$	13,390,000

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
PDG ENVIRONMENTAL, INC.

		For the Years Ended January 31,
		2007				2006				2005
		(As Restated)(1)
Cash Flows From Operating Activities:
Net income (loss)		$	(7,177,000	)		$	508,000			$	2,186,000
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:
Depreciation			1,049,000				689,000				537,000
Amortization			786,000				403,000				164,000
Deferred income taxes			(2,794,000	)			(686,000	)			—
Interest expense for Series C preferred stock accretion of discount			1,727,000				842,000				—
Stock based compensation			296,000				12,000				6,000
Loss (Gain) on sale of fixed assets and equity investment			17,000				(58,000	)			(110,000	)
Provision for uncollectible accounts			850,000				282,000				200,000
Impairment charge for goodwill			111,000				—				—
Impairment charge for operating lease			105,000				—				—
Equity in (income) losses of equity investment			—				(4,000	)			15,000
			(5,030,000	)			1,988,000				2,998,000
Changes in Current Assets and Liabilities:
Accounts receivable			1,296,000				(9,278,000	)			(4,057,000	)
Costs and estimated earnings in excess of billings on uncompleted contracts			(433,000	)			(234,000	)			(1,613,000	)
Inventories			43,000				5,000				(48,000	)
Prepaid income taxes			463,000				734,000				—
Other current assets (Prepaid Insurance)			754,000				945,000				912,000
Accounts payable			915,000				2,363,000				365,000
Billings in excess of costs and estimated earnings on uncompleted contracts			1,377,000				(178,000	)			773,000
Current income taxes			—				(305,000	)			294,000
Accrued liabilities			(193,000	)			1,329,000				1,334,000
Total Changes			4,222,000				(6,087,000	)			(2,040,000	)
Net Cash Provided (Used) by Operating Activities			(808,000	)			(4,099,000	)			958,000
Cash Flows From Investing Activities:
Purchase of property, plant and equipment			(812,000	)			(1,385,000	)			(897,000	)
Acquisition of businesses			—				(5,625,000	)			(122,000	)
Additional investment in joint venture			—				(18,000	)			(15,000	)
Proceeds from sale of equity investment and fixed assets			49,000				60,000				131,000
Changes in other assets			(49,000	)			(93,000	)			(44,000	)
Net Cash Used by Investing Activities			(812,000	)			(7,061,000	)			(947,000	)
Cash Flows From Financing Activities:
Dividends paid on Series A preferred stock			—				—				(12,000	)
Non-cash Interest expense for Series C preferred dividends			345,000				277,000				—
Proceeds from private placement of common and preferred stock			(6,000	)			7,531,000				449,000
Proceeds from debt			2,874,000				4,234,000				—
Proceeds from exercise of stock options and warrants			861,000				1,180,000				1,531,000
Payment of accrued earnout liability			(845,000	)			(581,000	)			(219,000	)
Payment of premium financing			(1,157,000	)			(959,000	)			(891,000	)
Principal payments on debt			(524,000	)			(625,000	)			(572,000	)
Net Cash Provided by Financing Activities			1,548,000				11,057,000				286,000
Net increase (decrease) in cash and cash equivalents			(72,000	)			(103,000	)			297,000
Cash and cash equivalents, beginning of year			230,000				333,000				36,000
Cash and Cash Equivalents, End of Year		$	158,000			$	230,000			$	333,000
Supplementary disclosure of non-cash Investing and Financing Activity:
Increase in goodwill and accrued liabilities for earnout liability		$	442,000			$	809,000			$	522,000
Financing of annual insurance premium		$	1,157,000			$	959,000			$	891,000
Non-cash consideration paid for acquisition of business (See Note 13)		$	—			$	1,186,000			$	—
Non-cash purchase of fixed assets finance through capital leases		$	561,000			$				$

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PDG ENVIRONMENTAL, INC.

For the Three Years Ended January 31, 2007

NOTE 1 — NATURE OF BUSINESS

PDG Environmental, Inc. (the “Corporation”) is a holding Corporation which, through its wholly-owned operating subsidiaries, provides environmental and specialty contracting services including asbestos and lead abatement, insulation, microbial remediation, emergency response and restoration, loss mitigation and reconstruction, demolition and related services.

The Corporation provides these services to a diversified customer base located throughout the United States. The Corporation’s business activities are conducted in a single business segment – Environmental Services. Services are generally performed under the terms of fixed price contracts or time and materials contracts with a duration of less than one year, although larger projects may require two or more years to complete. The Corporation primarily operates in the North Eastern, Southern, and Western portions of the United States.

NOTE 2 — 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 the Corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities, and the reported amounts of revenue and expenses. The Corporation believes the most significant estimates and assumptions are associated with revenue recognition on construction contracts, valuation of acquired intangibles and valuation of contracts receivable, income taxes, stock based compensation and contingencies. If the underlying estimates and assumptions upon which the financial statements are based change in the future, actual amounts may differ from those included in the accompanying consolidated financial statements.

Principles of Consolidation:

The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. All material inter-company transactions have been eliminated in consolidation.

Revenues and Cost Recognition:

Revenues from fixed price and modified fixed price contracts are recognized on the percentage-of-completion method, measured by the relationship of total cost incurred to total estimated contract costs (cost-to-cost method). Revenues from time and materials contracts are recognized as services are performed. It is the Corporation’s policy to combine like contracts from the same owner for the purposes of revenue recognition.

Contract costs include direct labor, material and subcontractor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, depreciation, repairs and insurance. Selling, general and administrative costs are charged to expense as incurred. Bidding and proposal costs are also recognized as an expense in the period in which such amounts are incurred. Provisions for estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to estimated costs and income, and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

Claims Recognition

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that the Corporation seeks to collect from customers or others for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price or other causes of unanticipated additional costs incurred by the Corporation. Recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable

that the claims will result in additional contract revenue and if the amount can be reliably estimated. The Corporation must determine if:

	•		there is a legal basis for the claim;
	•		the additional costs were caused by circumstances that were unforeseen by the Corporation and are not the result of deficiencies in our performance;
	•		the costs are identifiable or determinable and are reasonable in view of the work performed; and
	•		the evidence supporting the claim is objective and verifiable.

If all of these requirements are met, revenue from a claim is recorded only to the extent that the Corporation has incurred costs relating to the claim.

Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the consolidated balance sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of the contract. Also included in costs and estimated earnings on uncompleted contracts are amounts the Corporation seeks or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to scope and price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on the construction costs incurred in connection with claim amounts. Claims and unapproved change orders made by the Corporation involve negotiation and, in certain cases, litigation. In the event that litigation costs are incurred by us in connection with claims or unapproved change orders, such litigation costs are expensed as incurred although the Corporation may seek to recover these costs. The Corporation believes that it has an established legal basis for pursuing recovery of these recorded unapproved change orders and claims, and it is management’s intention to pursue and litigate such claims, if necessary, until a decision or settlement is reached. Unapproved change orders and claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded claims and unapproved change orders may be made in the near-term. If the Corporation does not successfully resolve these matters, a net expense (recorded as a reduction in revenues), may be required, in addition to amounts that have been previously provided for. Claims against the Corporation are recognized when a loss is considered probable and amounts are reasonably determinable.

Cash and Cash Equivalents:

Cash and cash equivalents consist principally of currency on hand, demand deposits at commercial banks, and liquid investment funds having a maturity of three months or less at the time of purchase. The Corporation maintains demand and money market accounts at several domestic banks. From time to time, account balances may exceed the maximum available Federal Deposit Insurance Corporation coverage. As of January 31, 2007 account balances exceeded the maximum available coverage.

Contracts Receivables and Allowance for Uncollectible Accounts

Contract receivables are recorded when invoices are issued and are presented in the balance sheet net of the allowance for uncollectible accounts. Contract receivables are written off when they are determined to be uncollectible. The allowance for uncollectible accounts is estimated based on the Corporation’s historic losses, the existing economic conditions in the construction industry and the financial stability of its customers.

Payments for services are normally due within 30 days of billing, although alternate terms may be included in contracts or letters of engagement as agreed upon by the Corporation and the customer. Accounts receivable are not normally collateralized. The Corporation does not routinely charge interest on past due accounts receivable. As of January 31, 2006 and 2007, the Corporation’s risk of loss for contracts receivable was limited to the amounts recorded on the Consolidated Balance Sheets as of those dates. Specific allowances for particular accounts receivable are recorded when circumstances indicate collection is doubtful. A general allowance for all accounts receivable based on risk related to the volume and age of all other accounts receivable is recorded to provide for unforeseen circumstances. Bad debt expense is reflected in other selling, general and administrative expenses on the Consolidated Statements of Operations when allowances on accounts

F-10

receivable are increased or when accounts written off exceed available allowances.

Inventories:

Inventories consisting of materials and supplies used in the completion of contracts are stated at the lower of cost (on a first-in, first-out basis) or market.

Property, Plant and Equipment:

Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the improvements. The estimated useful lives of the related assets are generally three to thirty years. Equipment, which comprised the majority of the Corporation’s fixed assets are primarily depreciated over three to five-year lives. Depreciation expense totaled $1,049,000 and $689,000 in 2007 and 2006 respectively.

Goodwill

Goodwill is recognized for the excess of the purchase price over the fair value of tangible and identifiable intangible net assets of businesses acquired. In accordance with Statement No. 142 “Goodwill and Other Intangible Assets” goodwill is reviewed at least annually for impairment. Unless circumstances otherwise dictate, annual impairment testing is performed in the fourth quarter

Income Taxes:

The Corporation provides for income taxes under the liability method as required by SFAS No. 109.

Deferred income taxes result from timing differences arising between financial and income tax reporting due to the deductibility of certain expenses in different periods for financial reporting and income tax purposes.

The Corporation files a consolidated Federal Income tax return. Accordingly, federal income taxes are provided on the taxable income, if any, of the consolidated group. State income taxes are provided on a separate company basis.

Stock Based Compensation

We account for stock-based awards under SFAS 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined based on the number of shares granted and the quoted price of our common stock. The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Fair Value of Financial Instruments

As of January 31, 2007, the carrying value of cash and cash equivalents, contract receivables, accounts payable and notes payable and current maturities of long-term debt approximated fair value because of their short maturity.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting

for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109.” FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. FIN 48 is effective in the first quarter of 2007. The cumulative effects, if any, of applying this Interpretation will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Corporation is currently evaluating the related impact and has yet to determine whether the adoption of FIN 48 will have a material effect on the Corporation’s results of operations, cash flows, or financial condition.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both the balance sheet and income statement approach when quantifying a misstatement. SAB 108 is effective for the Corporation’s fiscal year ending January 31, 2007. The adoption of SAB 108 did not have a material effect on the Corporation’s results of operations, cash flows, or financial condition.

On February 15, 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. Statement 159 is effective as of the beginning of the Corporation’s fiscal 2009 (February 1, 2008). Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. We do not anticipate that the adoption of FASB Statement 159 will have a material effect on the Corporation’s results of operations, cash flows, or financial condition.

NOTE 4 — CONTRACTS RECEIVABLE

At January 31, 2007 and 2006, contract receivables consist of the following:

		2007				2006
						(As Restated)
Billed completed contracts		$	13,989,000			$	12,003,000
Contracts in Progress			9,058,000				12,340,000
			23,047,000				24,343,000
Less allowance for Uncollectible Accounts			(1,290,000	)			(440,000	)
Net Contracts Receivables		$	21,757,000			$	23,903,000