##### Table of Contents







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q/A







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to
.

Commission File No. 0-7152





DEVCON INTERNATIONAL CORP.

(Exact name of registrant as specified in its
charter)







|                                                               |  |                                      |  |                                                         
|-------------------------------------------------------------- |  | ------------------------------------ |  | --------------------------------------------------------
|FLORIDA                                                        |  | 59-0671992                           |  | 3270;7381                                               
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.) |  | (Primary Standard Industrial Classification Code Number)

595 SOUTH FEDERAL HIGHWAY, SUITE 500

BOCA RATON, FLORIDA 33432

(Address of principal executive offices)

(561) 208-7200

(Registrants telephone number, including area code)





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  x    NO   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   ̈    Accelerated Filer   ̈    Non-Accelerated Filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES   ̈    NO  x

As of May 10, 2007 the number of shares
outstanding of the registrants Common Stock was 6,219,609.









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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

INDEX



|        |  |                       |  |                                                                                                                                     |  |     
|------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                       |  |                                                                                                                                     |  | Page
|Part I  |  | Financial Information |  |                                                                                                                                    
|        |  |                       | 
|        |  | Item 1                |  | Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) (as restated) and December 31, 2006 (as restated)            |  | 3   
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2007 (as restated) and 2006 (unaudited) |  | 5   
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2007 (as restated) and 2006 (unaudited) |  | 6   
|        |  |                       | 
|        |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                      |  | 8   
|        |  |                       | 
|        |  | Item 2                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                               |  | 27  
|        |  |                       | 
|        |  | Item 3                |  | Quantitative and Qualitative Disclosures About Market Risk                                                                          |  | 33  
|        |  |                       | 
|        |  | Item 4                |  | Controls and Procedures                                                                                                             |  | 33  
|        |  |                      
|Part II |  | Other Information     |  |                                                                                                                                    
|        |  |                       | 
|        |  | Item 1                |  | Legal Proceedings                                                                                                                   |  | 35  
|        |  |                       | 
|        |  | Item 1A               |  | Risk Factors                                                                                                                        |  | 38  
|        |  |                       | 
|        |  | Item 2                |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                         |  | 38  
|        |  |                       | 
|        |  | Item 3                |  | Default Upon Senior Securities                                                                                                      |  | 38  
|        |  |                       | 
|        |  | Item 4                |  | Submission of Matters to a Vote of Security Holders                                                                                 |  | 38  
|        |  |                       | 
|        |  | Item 5                |  | Other Information                                                                                                                   |  | 38  
|        |  |                       | 
|        |  | Item 6                |  | Exhibits                                                                                                                            |  | 38  



2



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##### Table of Contents

Part I Financial Information



|Item 1. | Financial Statements
|------- | --------------------

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Amounts shown in thousands except share and per share data)



|                                                                                                   |  |                           |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                   |  | March 31,2007 (Unaudited) |         |   | December 31,2006 |  
|                                                                                                   |  | (as restated)             |         |   | (as restated)    |  
|ASSETS                                                                                             |  |                           |         |   |                  |   |         |  
|Current assets:                                                                                    |  |                           |         |   |                  |   |         |  
|Cash and cash equivalents                                                                          |  | $                         | 6,605   |   |                  | $ | 5,015   |  
|Accounts receivable, net of allowance for doubtful accounts of $(2,008) and $(2,026), respectively |  |                           | 18,121  |   |                  |   | 18,288  |  
|Accounts receivable, related party                                                                 |  |                           | 321     |   |                  |   | 506     |  
|Notes receivable                                                                                   |  |                           | 2,715   |   |                  |   | 2,617   |  
|Costs and estimated earnings in excess of billings                                                 |  |                           | 1,334   |   |                  |   | 1,485   |  
|Prepaid expenses                                                                                   |  |                           | 1,323   |   |                  |   | 1,501   |  
|Assets held for sale                                                                               |  |                           | 3,081   |   |                  |   | 844     |  
|Other current assets                                                                               |  |                           | 9,488   |   |                  |   | 10,257  |  
|                                                                                                   |  |                           |         |   |                  |   |         |  
|Total current assets                                                                               |  |                           | 42,988  |   |                  |   | 40,513  |  
|Property, plant and equipment:                                                                     |  |                           |         |   |                  |   |         |  
|Land                                                                                               |  |                           | 53      |   |                  |   | 369     |  
|Buildings                                                                                          |  |                           | 200     |   |                  |   | 251     |  
|Leasehold improvements                                                                             |  |                           | 1,562   |   |                  |   | 1,759   |  
|Equipment                                                                                          |  |                           | 2,669   |   |                  |   | 8,443   |  
|Furniture and fixtures                                                                             |  |                           | 1,046   |   |                  |   | 1,219   |  
|Construction in process                                                                            |  |                           | 230     |   |                  |   | 1,083   |  
|                                                                                                   |  |                           |         |   |                  |   |         |  
|Total property, plant and equipment                                                                |  |                           | 5,760   |   |                  |   | 13,124  |  
|Less accumulated depreciation                                                                      |  |                           | (1,832  | ) |                  |   | (1,842  | )
|                                                                                                   |  |                           |         |   |                  |   |         |  
|Total property, plant and equipment, net                                                           |  |                           | 3,928   |   |                  |   | 11,282  |  
|Investments in unconsolidated joint ventures and affiliates                                        |  |                           | 339     |   |                  |   | 339     |  
|Notes receivable, net of current portion                                                           |  |                           | 1,447   |   |                  |   | 1,926   |  
|Customer lists, net of amortization $(28,248) and $(24,367) respectively                           |  |                           | 66,963  |   |                  |   | 70,788  |  
|Goodwill                                                                                           |  |                           | 76,606  |   |                  |   | 76,577  |  
|Other intangible assets, net of amortization $(508) and $(425), respectively                       |  |                           | 2,707   |   |                  |   | 2,790   |  
|Other long-term assets                                                                             |  |                           | 10,006  |   |                  |   | 8,682   |  
|                                                                                                   |  |                           |         |   |                  |   |         |  
|Total assets                                                                                       |  | $                         | 204,984 |   |                  | $ | 212,897 |  
|                                                                                                   |  |                           |         |   |                  |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements.



3



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DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (continued)

(Amounts shown in thousands except share and per share data)



|                                                                                                                                                                               |  |                          |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                               |  | March 31,2007(Unaudited) |         |   | December 31,2006 |  
|                                                                                                                                                                               |  | (as restated)            |         |   | (as restated)    |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |                          |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                           |  |                          |         |   |                  |   |         |  
|Accounts payable, trade and other                                                                                                                                              |  | $                        | 5,437   |   |                  | $ | 6,664   |  
|Accrued operational fees and taxes                                                                                                                                             |  |                          | 2,718   |   |                  |   | 2,551   |  
|Accrued expenses and other liabilities                                                                                                                                         |  |                          | 5,164   |   |                  |   | 6,618   |  
|Deferred revenue                                                                                                                                                               |  |                          | 10,200  |   |                  |   | 10,413  |  
|Accrued expense, retirement and severance                                                                                                                                      |  |                          | 1,105   |   |                  |   | 671     |  
|Current installments of long-term debt                                                                                                                                         |  |                          | 79      |   |                  |   | 76      |  
|Billings in excess of costs and estimated earnings                                                                                                                             |  |                          | 1,142   |   |                  |   | 1,037   |  
|Derivative instruments                                                                                                                                                         |  |                          | 5,516   |   |                  |   | 4,462   |  
|Income tax payable                                                                                                                                                             |  |                          | 297     |   |                  |   | 286     |  
|                                                                                                                                                                               |  |                          |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                      |  |                          | 31,658  |   |                  |   | 32,778  |  
|Long-term debt, excluding current installments                                                                                                                                 |  |                          | 88,675  |   |                  |   | 89,202  |  
|Retirement and severance, excluding current portion                                                                                                                            |  |                          | 2,615   |   |                  |   | 2,716   |  
|Long term deferred tax liability                                                                                                                                               |  |                          | 4,210   |   |                  |   | 5,018   |  
|Other long-term liabilities, excluding current portion                                                                                                                         |  |                          | 9,358   |   |                  |   | 7,592   |  
|                                                                                                                                                                               |  |                          |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                              |  | $                        | 136,516 |   |                  | $ | 137,306 |  
|                                                                                                                                                                               |  |                         
|Commitments and contingencies (Note 17)                                                                                                                                        |  |                          |         |   |                  |   |         |  
|                                                                                                                                                                               |  |                         
|Series A Convertible Preferred Stock, $1,000 stated value, 10,000,000 shares authorized, 45,000 share outstanding                                                              |  |                          | 41,373  |   |                  |   | 41,168  |  
|                                                                                                                                                                               |  |                         
|Stockholders equity:                                                                                                                                                          |  |                          |         |   |                  |   |         |  
|Common stock, $0.10 par value. Shares authorized 50,000,000, shares issued 6,219,162 in 2007 and 6,033,882 in 2006, shares outstanding
6,219,128 in 2007 and 6,033,848 in 2006 |  |                          | 622     |   |                  |   | 603     |  
|Additional paid-in capital                                                                                                                                                     |  |                          | 31,408  |   |                  |   | 31,845  |  
|Retained (deficit) earnings                                                                                                                                                    |  |                          | (3,675  | ) |                  |   | 3,207   |  
|Accumulated other comprehensive loss  cumulative translation adjustment                                                                                                       |  |                          | (1,260  | ) |                  |   | (1,232  | )
|Treasury stock, at cost, 34 shares in 2007 and 2006                                                                                                                            |  |                          |        |   |                  |   |        |  
|                                                                                                                                                                               |  |                          |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                     |  |                          | 27,095  |   |                  |   | 34,423  |  
|                                                                                                                                                                               |  |                          |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $                        | 204,984 |   |                  | $ | 212,897 |  
|                                                                                                                                                                               |  |                          |         |   |                  |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements.



4



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DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Amounts shown in thousands
except share and per share data)

(Unaudited)



|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | --------- | - | ------------- | - | --------- | -
|                                                                                                                                                            |  | For The Three Months Ended |          
|                                                                                                                                                            |  | March 31,2007              |           |   | March 31,2006 |  
|                                                                                                                                                            |  | (as restated)              |           |   |               |  
|Security revenue                                                                                                                                            |  | $                          | 14,185    |   |               | $ | 10,603    |  
|Cost of Sales (exclusive of amortization and depreciation shown below):                                                                                     |  |                            | 6,064     |   |               |   | 4,598     |  
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Gross profit                                                                                                                                                |  |                            | 8,121     |   |               |   | 6,005     |  
|Operating expenses                                                                                                                                          |  |                            |           |   |               |   |           |  
|Selling, general and administrative                                                                                                                         |  |                            | 6,792     |   |               |   | 5,759     |  
|Amortization and depreciation                                                                                                                               |  |                            | 4,497     |   |               |   | 3,709     |  
|Severance and retirement                                                                                                                                    |  |                            |          |   |               |   | 229       |  
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Operating loss                                                                                                                                              |  |                            | (3,168    | ) |               |   | (3,692    | )
|Other income (expense)                                                                                                                                      |  |                            |           |   |               |   |           |  
|Joint venture equity earnings                                                                                                                               |  |                            |          |   |               |   | (35       | )
|Interest expense                                                                                                                                            |  |                            | (2,659    | ) |               |   | (3,941    | )
|Interest income                                                                                                                                             |  |                            | 127       |   |               |   | 76        |  
|Derivative financial instrument expense                                                                                                                     |  |                            | (1,054    | ) |               |   | (1,535    | )
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Loss from continuing operations before income taxes                                                                                                         |  |                            | (6,754    | ) |               |   | (9,127    | )
|Income tax (benefit) expense                                                                                                                                |  |                            | (613      | ) |               |   | 531       |  
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Net loss from continuing operations                                                                                                                         |  | $                          | (6,141    | ) |               | $ | (9,658    | )
|Loss from discontinued operations, net of income tax (benefit) expense of $0 and ($581) for the three months ended March 31, 2007 and
2006, respectively    |  |                            | (512      | ) |               |   | (126      | )
|(Loss) gain on disposal of discontinued operations, net of income tax expense of $0 and $0 for the three months ended March 31, 2007 and
2006, respectively |  |                            | (230      | ) |               |   | 1,013     |  
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Net loss                                                                                                                                                    |  | $                          | (6,883    | ) |               | $ | (8,771    | )
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Preferred Dividends                                                                                                                                         |  |                            | (1,125    | ) |               |   |          |  
|Accretion of Preferred Stock                                                                                                                                |  |                            | (205      | ) |               |   |          |  
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Net loss available to common shareholders                                                                                                                   |  | $                          | (8,213    | ) |               | $ | (8,771    | )
|                                                                                                                                                            |  |                            |           |   |               |   |           |  
|Basic (loss) income per share:                                                                                                                              |  |                            |           |   |               |   |           |  
|Continuing operations                                                                                                                                       |  | $                          | (0.99     | ) |               | $ | (1.61     | )
|Discontinued operations                                                                                                                                     |  | $                          | (0.12     | ) |               | $ | 0.15      |  
|Net loss                                                                                                                                                    |  | $                          | (1.11     | ) |               | $ | (1.46     | )
|Net loss available to common shareholders                                                                                                                   |  | $                          | (1.32     | ) |               | $ | (1.46     | )
|Diluted (loss) income per share:                                                                                                                            |  |                            |           |   |               |   |           |  
|Continuing operations                                                                                                                                       |  | $                          | (0.99     | ) |               | $ | (1.61     | )
|Discontinued operations                                                                                                                                     |  | $                          | (0.12     | ) |               | $ | 0.15      |  
|Net loss                                                                                                                                                    |  | $                          | (1.11     | ) |               | $ | (1.46     | )
|Net loss available to common shareholders                                                                                                                   |  | $                          | (1.32     | ) |               | $ | (1.46     | )
|Weighted average number of shares outstanding:                                                                                                              |  |                            |           |   |               |   |           |  
|Basic                                                                                                                                                       |  |                            | 6,200,024 |   |               |   | 6,006,156 |  
|Diluted                                                                                                                                                     |  |                            | 6,200,024 |   |               |   | 6,006,156 |  

See accompanying notes to the unaudited condensed consolidated financial statements.



5



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DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Amounts shown in thousands
except share and per share data)

(Unaudited)



|                                                                                          |  |                            |        |   |               |   |        |  
|----------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------- | - | ------ | -
|                                                                                          |  | For The Three Months Ended |       
|                                                                                          |  | March 31,2007              |        |   | March 31,2006 |  
|                                                                                          |  | (as restated)              |        |   |               |  
|Cash flows from operating activities:                                                     |  |                            |        |   |               |   |        |  
|Net loss                                                                                  |  | $                          | (6,883 | ) |               | $ | (8,771 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                            |        |   |               |   |        |  
|Stock-based compensation expense                                                          |  |                            | 44     |   |               |   | 117    |  
|Depreciation and amortization                                                             |  |                            | 4,519  |   |               |   | 4,679  |  
|Loan origination cost amortization                                                        |  |                            | 92     |   |               |   | (139   | )
|Deferred income tax (benefit)                                                             |  |                            | (613   | ) |               |   | (1,356 | )
|Provision for doubtful accounts and notes                                                 |  |                            | (17    | ) |               |   | 60     |  
|(Gain) loss on sale of property and equipment                                             |  |                            | 188    |   |               |   | (1,368 | )
|Minority interest in loss of consolidated subsidiaries                                    |  |                            |       |   |               |   | 35     |  
|Change in fair value of derivative financial instrument                                   |  |                            | 1,054  |   |               |   | 1,535  |  
|Amortization of debt discount                                                             |  |                            |       |   |               |   | 1,562  |  
|Changes in operating assets and liabilities:                                              |  |                            |        |   |               |   |        |  
|Accounts receivable                                                                       |  |                            | 185    |   |               |   | 711    |  
|Accounts receivable  related party                                                       |  |                            | 185    |   |               |   | (183   | )
|Notes receivable                                                                          |  |                            | (243   | ) |               |   | 357    |  
|Notes receivable  related party                                                          |  |                            |       |   |               |   | 867    |  
|Costs and estimated earnings in excess of billings                                        |  |                            | 151    |   |               |   | 1,328  |  
|Costs and estimated earnings in excess of billings, related party                         |  |                            |       |   |               |   | 20     |  
|Inventories                                                                               |  |                            | (22    | ) |               |   | (16    | )
|Prepaid expenses and other current assets                                                 |  |                            | 136    |   |               |   | 1,338  |  
|Other long-term assets                                                                    |  |                            | (1,322 | ) |               |   | 1,909  |  
|Accounts payable, accrued expenses and other liabilities                                  |  |                            | (1,979 | ) |               |   | (1,524 | )
|Deferred revenue                                                                          |  |                            | (213   | ) |               |   | 928    |  
|Billings in excess of costs and estimated earnings                                        |  |                            | 105    |   |               |   | 120    |  
|Billings in excess of costs and estimated earnings, related party                         |  |                            |       |   |               |   | 214    |  
|Income tax payable                                                                        |  |                            | 11     |   |               |   | (6     | )
|Other long-term liabilities                                                               |  |                            | 2,100  |   |               |   | 808    |  
|                                                                                          |  |                            |        |   |               |   |        |  
|Net cash (used in) provided by operating activities                                       |  | $                          | (2,522 | ) |               | $ | 3,225  |  

See accompanying notes to the unaudited condensed consolidated financial statements.



6



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DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows

(Amounts shown in thousands except share and per share data)

(Unaudited)



|                                                                                                 |  |                           |       |   |               |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------- | ----- | - | ------------- | - | ------- | -
|                                                                                                 |  | For The Three MonthsEnded |      
|                                                                                                 |  | March 31,2007             |       |   | March 31,2006 |  
|                                                                                                 |  | (as restated)             |       |   |               |  
|Cash flows from investing activities:                                                            |  |                           |       |   |               |   |         |  
|Purchases of property, plant and equipment                                                       |  | $                         | (337  | ) |               | $ | (1,069  | )
|Cash used in business acquisition and purchase of customer lists, net of cash acquired           |  |                           | (263  | ) |               |   | (66,917 | )
|Proceeds from disposition of property, plant and equipment                                       |  |                           | 127   |   |               |   | 455     |  
|Proceeds from disposition of business                                                            |  |                           | 4,508 |   |               |   | 4,573   |  
|Payments received on notes related to the sale of assets                                         |  |                           | 507   |   |               |   | 8       |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Net cash provided by (used in) investing activities                                              |  |                           | 4,542 |   |               |   | (62,950 | )
|Cash flows from financing activities:                                                            |  |                           |       |   |               |   |         |  
|Proceeds from issuance of common stock                                                           |  |                           | 98    |   |               |   | 60      |  
|Proceeds from issuance of notes                                                                  |  |                           |      |   |               |   | 45,000  |  
|Net borrowing from revolving credit facility                                                     |  |                           |      |   |               |   | 35,657  |  
|Cash payments on debt issue costs                                                                |  |                           |      |   |               |   | (3,995  | )
|Principal payments on debt                                                                       |  |                           | (519  | ) |               |   | (8,003  | )
|                                                                                                 |  |                           |       |   |               |   |         |  
|Net cash (used in) provided by financing activities                                              |  | $                         | (421  | ) |               | $ | 68,719  |  
|Effect of exchange rate changes on cash                                                          |  |                           | (9    | ) |               |   | (77     | )
|                                                                                                 |  |                           |       |   |               |   |         |  
|Net increase in cash and cash equivalents                                                        |  | $                         | 1,590 |   |               | $ | 8,917   |  
|Cash and cash equivalents, beginning of year                                                     |  | $                         | 5,015 |   |               | $ | 4,634   |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Cash and cash equivalents, end of period                                                         |  | $                         | 6,605 |   |               | $ | 13,551  |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Supplemental disclosures of cash flow information:                                               |  |                           |       |   |               |   |         |  
|Cash paid for interest                                                                           |  | $                         | 3,507 |   |               | $ | 1,625   |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Cash paid for income taxes                                                                       |  | $                         |      |   |               | $ | 86      |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Supplemental non-cash disclosures:                                                               |  |                           |       |   |               |   |         |  
|Reduction of note receivable                                                                     |  | $                         | 639   |   |               | $ | 80      |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Issuance of Warrants                                                                             |  | $                         |      |   |               | $ | 4,818   |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Issuance of derivative financial instrument                                                      |  | $                         |      |   |               | $ | 3,743   |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Issuance of common stock in lieu of cash payment of dividends payable related to Preferred Stock |  | $                         | 769   |   |               | $ |        |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Accretion of deferred financing costs and debt discount charged to additional paid-in capital    |  | $                         | 205   |   |               | $ |        |  
|                                                                                                 |  |                           |       |   |               |   |         |  
|Accrued preferred stock dividends charged to additional paid-in capital                          |  | $                         | 1,125 |   |               | $ |        |  
|                                                                                                 |  |                           |       |   |               |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements.



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DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2007



|(1) | INTERIM FINANCIAL STATEMENTS
|--- | ----------------------------

The accompanying
unaudited condensed consolidated financial statements include the accounts of Devcon International Corp. and its subsidiaries (the Company), required to be consolidated in accordance with U.S. generally accepted accounting principles
(GAAP). The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the 2006 Annual Report on Form 10-K/A except for the accounting policy relating to accounting
for uncertainty in income taxes, and should be read in conjunction with the consolidated financial statements and notes thereto.

The
unaudited condensed consolidated financial statements for the three months ended March 31, 2007 and 2006 included herein have been prepared in accordance with the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended,
and Article 10 of Regulation S-X under the Securities Act of 1933, as amended. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

In the
opinion of management, the accompanying unaudited condensed consolidated financial statements contain only normal reoccurring adjustments necessary to present fairly the Companys financial position as of March 31, 2007, and the results of
its operations and cash flows for the three months ended March 31, 2007 and 2006. Certain prior year amounts have been restated or reclassified to conform to the current period presentation.

Devcon International Corp. (the Company) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the three months ended Match
31, 2007 (the Original Filing). This Amendment No. 1 is being filed to restate the Consolidated Balance Sheet as of March 31, 2007 and December 31, 2006 and the related Consolidated Statements of Operations and Cash Flows for the three
months ended March 31, 2007. This Form 10-Q/A also reflects an amendment in Item 2 of Managements Discussion and Analysis of Financial Condition and Results of Operations Other Income (Expense) presented in the
Companys Form 10-Q for the three months ended March 31, 2007 as compared to the same period in 2006.

Background of Restatement

The Company was in the process of reviewing the fair market valuation and accounting treatment of certain derivative liabilities as well as the carrying
value of the related Series A Convertible Preferred Stock when it was noted that the fair valuation model applied did not adequately capture and value certain features of the conversion option embedded within the Series A Convertible Preferred
Stock. The substantive changes reflected in this Amendment are (1) the re-valuation of the derivative liability 2) adjustment to the carrying value of the Series A Convertible Preferred Stock and 3) reclassification of Series A Convertible Preferred
Stock dividends payable and accretion charges to net loss available to common shareholders.



|(2) | SIGNIFICANT ACCOUNTING POLICIES
|--- | -------------------------------

a) Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the Companys tax positions are more likely than not of being sustained upon audit based on the technical merits of
the tax position. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company did not have any unrecognized tax benefits and there was no effect
on the financial condition or results of operations as a result of implementing FIN 48. The Company does not have any interest and penalties in the statement of operations for the three months ended March 31, 2007. The tax years 2004-2006
remain subject to examination by major tax jurisdictions.

b) The Company accounts for internal-use software development costs in
accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position 98-1,Accounting for the Cost of Software Developed or Obtained for Internal Use, or SOP 98-1. SOP 98-1 specifies that
software costs, including internal payroll costs, incurred in connection with the development or acquisition of software for internal use is charged to technology development expense as incurred until the project enters the application development
phase. Costs incurred in the application development phase are capitalized and will be depreciated using the straight-line method over an estimated useful life of three years, beginning when the software is ready for use. During the three months
ended March 31, 2007 and 2006, the amounts capitalized were insignificant.



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|(3) | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
|--- | -----------------------------------------------------

In connection with the Companys review of the fair market valuation and accounting treatment of certain derivative liabilities as well as the carrying value of the related Series A Convertible Preferred Stock it was noted that the
fair valuation model applied did not adequately capture and value certain features of the conversions option embedded within the Series A Convertible Preferred Stock. The substantive changes reflected in this Amendment are: (1) the re-valuation of
the derivative liability 2) adjustment to the carrying value of the Series A Convertible Preferred Stock and 3) reclassification of Series A Convertible Preferred Stock dividends payable and accretion charges to net loss available to common
shareholders.

Valuation of Derivative Liability

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of Series A Convertible Preferred Stock, par value $.10 per
share, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share. Upon the issuance of the Series A Convertible Preferred Stock, the following embedded derivatives were identified
within the Series A Convertible Preferred Stock: i) the ability to convert the Preferred Stock for common stock; ii) the option of the Company to satisfy dividends payable on the Series A Convertible Preferred Stock in common stock in lieu of cash;
iii) the potential increase in the dividend rate of the Preferred Stock in the event a certain level of net cash proceeds from the sale of the our construction and material division assets are not realized within a specified time frame (referred to
as the legacy asset rate adjustment) and (iv) a change in control redemption right. The embedded derivatives within the Series A Convertible Preferred Stock (Series A) were bifurcated and valued as a single compound derivative liability
at $5.8 million at the date of issuance. Upon further review it was concluded that the valuation model used did not properly address a capping feature in the conversion option. Using a binomial model it was concluded that the embedded derivatives
within the Series A Convertible Preferred Stock that were bifurcated should have been valued at $0.5 million. At March 31, 2007, the Company had originally calculated the fair value of the embedded derivative to be $5.5 million. Based on the
change in the valuation model the revised fair value of the embedded derivative at March 31, 2007 was determined to be $5.5 million, thus the balance sheet did not require an adjustment. The change in the fair value of the embedded derivative
impacted the carrying value of the Series A Convertible Preferred Stock as shown below in the restatement tables. At December 31, 2006, the Company had originally calculated the fair value of the embedded derivative to be $8.4 million. Based on
the change in the valuation model the revised fair value of the embedded derivative at December 31, 2006 was determined to be $4.5 million. The change in the fair value of the embedded derivative impacted the carrying value of the Series A
Convertible Preferred Stock as shown below in the restatement tables.

Reclassification of Dividends Payable and Accretion Charges

The Series A Convertible Preferred Stock accrues dividends in accordance with the Securities Purchase Agreement. The dividends accrued for the three
months ended March 31, 2007 were incorrectly charged to interest expense instead of deducted from net loss available for common stockholders in accordance with FASB Statement No. 128, Earnings per Share. The accretion of the discount on the
Series A Convertible Preferred Stock was also incorrectly charged to interest expense instead of deducted from net loss available for common stockholders. In addition, issuance expenses related to preferred stock with redemption features that are
not classified as liabilities in accordance with FASB Statement No. 150 Financial Instruments with Characteristics of Both Liabilities and Equity,should be deducted from such preferred stock or from additional paid-in capital arising in
connection with the sale of the stock. The accretion should be charged to retained earnings (unless declared out of paid-in capital). Therefore, the amortization of the issuance costs related to the Series A Convertible Preferred Stock was
reclassified from interest expense and deducted from net loss available for common stockholders.

The following sets forth the unaudited condensed
consolidated balance sheet as of March 31, 2007 and the unaudited condensed consolidated statement of operations for the three months ended March 31, 2007 as originally reported and as restated.

Condensed Consolidated Balance sheet:



|                                                                           |  |                     |        |   |                               |   |       |                                   |  |   |                          |   |  |                  |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------- | ------ | - | ----------------------------- | - | ----- | --------------------------------- |  | - | ------------------------ | - |  | ---------------- | ------ | - |  | - | ------ | -
|                                                                           |  | DerivativeLiability |        |   | Long-termDeferredTaxLiability |   |       | Series AConvertiblePreferredStock |  |   | AdditionalPaid-InCapital |   |  | RetainedEarnings |       
|As originally reported                                                     |  | $                   | 5,516  |   |                               | $ | 3,896 |                                   |  | $ | 41,354                   |   |  | $                | 32,738 |   |  | $ | (4,672 | )
|Reflect adjustment to restate 12/31/06 balances                            |  |                     | (3,928 | ) |                               |   | 336   |                                   |  |   | 5,295                    |   |  |                  |       |   |  |   | (1,703 | )
|Adjust the estimated fair market value of the derivative                   |  |                     | 3,928  |   |                               |   |      |                                   |  |   | (5,267                   | ) |  |                  |       |   |  |   | 1,339  |  
|Reclassification of accretion of deferred issuance and debt discount costs |  |                     |       |   |                               |   |      |                                   |  |   |                         |   |  |                  | (205   | ) |  |   | 205    |  
|Reclassification of dividends payable                                      |  |                     |       |   |                               |   |       |                                   |  |   |                         |   |  |                  | (1,125 | ) |  |   | 1,125  |  
|Adjustment to true up the Discount on Series A Convertible Preferred Stock |  |                     |       |   |                               |   |      |                                   |  |   | (9                       | ) |  |                  |       |   |  |   | 9      |  
|Tax effect of restatement adjustments                                      |  |                     |       |   |                               |   | (22   | )                                 |  |   |                         |   |  |                  |       |   |  |   | 22     |  
|                                                                           |  |                     |        |   |                               |   |       |                                   |  |   |                          |   |  |                  |        |   |  |   |        |  
|As restated                                                                |  | $                   | 5,516  |   |                               | $ | 4,210 |                                   |  | $ | 41,373                   |   |  | $                | 31,408 |   |  | $ | (3,675 | )
|                                                                           |  |                     |        |   |                               |   |       |                                   |  |   |                          |   |  |                  |        |   |  |   |        |  



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Condensed Consolidated Statement of Operations:



|                                                                           |  |                 |        |   |                                      |   |        |                  |  |   |          |   |  |                                        |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------- | ------ | - | ------------------------------------ | - | ------ | ---------------- |  | - | -------- | - |  | -------------------------------------- | ------ | - |  | - | ------ | -
|                                                                           |  | InterestExpense |        |   | DerivativeFinancialInstrumentExpense |   |        | IncomeTaxBenefit |  |   | Net Loss |   |  | Net LossAvailable toCommonShareholders |       
|As originally reported                                                     |  | $               | 3,998  |   |                                      | $ | 2,393  |                  |  | $ | (591     | ) |  | $                                      | (9,583 | ) |  | $ |       |  
|Adjust the estimated fair market value of the derivative                   |  |                 |       |   |                                      |   | (1,339 | )                |  |   |         |   |  |                                        | 1,339  |   |  |   |       |  
|Reclassification of accretion of deferred issuance and debt discount costs |  |                 | (205   | ) |                                      |   |       |                  |  |   |         |   |  |                                        | 205    |   |  |   | (205   | )
|Reclassification of dividends payable                                      |  |                 | (1,125 | ) |                                      |   |       |                  |  |   |         |   |  |                                        | 1,125  |   |  |   | (1,125 | )
|Adjustment to true up the Discount on Series A Convertible Preferred Stock |  |                 | (9     | ) |                                      |   |       |                  |  |   |         |   |  |                                        | 9      |   |  |   |       |  
|Tax effect of restatement adjustments                                      |  |                 |       |   |                                      |   |       |                  |  |   | (22      | ) |  |                                        | 22     |   |  |   |       |  
|                                                                           |  |                 |        |   |                                      |   |        |                  |  |   |          |   |  |                                        |        |   |  |   |        |  
|As restated                                                                |  | $               | 2,659  |   |                                      | $ | 1,054  |                  |  | $ | (613     | ) |  | $                                      | (6,883 | ) |  | $ | (1,330 | )
|                                                                           |  |                 |        |   |                                      |   |        |                  |  |   |          |   |  |                                        |        |   |  |   |        |  



|(4) | RECENT ACCOUNTING PRONOUNCEMENTS
|--- | --------------------------------

In September
2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measures. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about
fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on its future consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting
date. SFAS No. 159 is effective for the Company on January 1, 2008. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on its future results of operations and financial position.



|(5) | LIQUIDITY
|--- | ---------

In order to finance the March 2006
Guardian acquisition, the Company issued to accredited institutional investors under the terms of a Securities Purchase Agreement, or SPA, dated as of February 10, 2006, an aggregate principal amount of $45 million of notes along with warrants
to acquire an aggregate of 1,650,943 shares of the Companys common stock at an exercise price of $11.925 per share.

On
October 20, 2006, under the terms of the SPA, these investors received, in exchange for the notes, an aggregate of 45,000 shares of the Companys Series A convertible preferred stock (Series A Convertible Preferred Stock), par
value $.10 per share, with a liquidation preference equal to $1,000 convertible into common stock at a conversion price equal to $9.54 per share. In connection with the issuance of these securities, the Company entered into a Registration Rights
Agreement, under the terms of which the Company agreed to use best efforts to cause a registration statement to be declared effective by the Securities and Exchange Commission no later than January 25, 2007. This registration statement would
register the resale of the shares of the common stock issuable upon conversion of the Series A Convertible Preferred Stock, exercise of the warrants and in payment of the dividend obligations under the Certificate of Designations governing the
Series A Convertible Preferred Stock. The Registration Rights Agreement provides that, to the extent the Company failed to cause this registration statement to be declared effective by the Securities and Exchange Commission by the effectiveness
deadline, registration delay payments in the amount of one percent (1.0%) of the aggregate purchase price must be paid to the investors for the Series A Convertible Preferred Stock, or $450,000, for every 30 days (pro-rated for periods totaling
less than thirty days) this effectiveness failure remains.



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On October 23, 2006, the Company filed a registration statement to register the resale of these
shares. The Securities and Exchange Commission reviewed this registration statement and, as a consequence of recent clarifications by the Staff of Rule 415 under the Securities Act of 1933, as amended, the Company encountered difficulties
determining when all of these shares may be registered and sold by the investors. Accordingly, the Company was unable to cause this registration statement to be declared effective by the Securities and Exchange Commission.

Under the terms of the Registration Rights Agreement, these registration delay payments accrue from January 26, 2007 until the earlier of the
Company successfully obtaining a waiver or amendment of these registration delay payments or the registration statement being declared effective. The registration delay payments are not payable until every thirtieth day after the effectiveness
failure. Accordingly, the first registration delay payment was due on February 26, 2007. In addition, under the Certificate of Designations governing the Series A Convertible Preferred Stock, (a) the failure of the applicable Registration
Statement to be declared effective by the Securities and Exchange Commission on the date that is sixty (60) days after the applicable effectiveness deadline or (b) the Companys failure to pay to the investors any amounts when and as
due under the Certificate of Designations or any other transaction document contemplated in the Certificate of Designations is defined as a Triggering Event allowing the Required Holders, as defined below, to require the Company to
redeem all shares of their Series A Convertible Preferred Stock by the fifth business day after transmitting notice to the Company of their desired redemption. Under the terms of the Certificate of Designations, this redemption would be effected by
the Company being required to pay in cash an amount equal to 115.0% of the face value of all or a portion, as applicable, of the outstanding shares of the Series A Convertible Preferred Stock, plus all accrued but unpaid interest and dividends. To
the extent the stock price at the time of this redemption request multiplied by the number of shares into which the Series A Convertible Preferred Stock is convertible exceeds this cash payment amount, the redemption would be effected by payment of
this higher amount increased by the same 15.0% premium, plus all accrued but unpaid interest and dividends. In order to be able to register a portion of these shares the Company began discussions with the investors to amend the terms of the Series A
Convertible Preferred Stock in the form of an Amended Certificate of Designations.

In furtherance of these negotiations, on April 2,
2007, effective as of March 30, 2007, the Company entered into Forbearance and Amendment Agreements (the Forbearance Agreements) with investors constituting the Required Holders, i.e. investors holding a majority of the
shares of the Series A Convertible Preferred Stock. Under the terms of these Forbearance Agreements, each of the Required Holders agreed that for a period of time ending no later than January 2, 2008, they shall each forbear from
(a) taking any remedial action with respect to the effectiveness failure, (b) declaring the occurrence of any Triggering Event with respect to the effectiveness failure and from delivering any notice of redemption with respect
to these matters or (c) demanding any amounts due and payable with respect to the effectiveness failure, including any registration delay payments. The Forbearance Agreements also contain agreements to amend the Certificate of Designations to
revise specified terms of the Series A Convertible Preferred Stock, including a reduction in the conversion price of the Series A Convertible Preferred Stock to $6.75, allowance for the accrual of dividends on the Series A Convertible Preferred
Stock at a rate equal to 10% per annum, which dividends may be payable in kind, and a revision of the definition of the Leverage Ratio defined in the Certificate of Designations to provide for the Leverage Ratio to be calculated as
a multiple of Performing RMR as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant set forth in the Certificate of Designations to require this Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30,
2008. The parties to the Forbearance Agreement also agreed to allow dividends to accrue without being paid until the expiration of the forbearance period. The Forbearance Agreement also required the Company to withdraw the registration statement as
soon as practicable. This withdrawal was effected on April 14, 2007.

If the Company is unable to obtain a permanent waiver or
amendment of the registration delay payments and is unable or unwilling to pay these registration delay payments to the investors or if the Company is unable to obtain a permanent waiver or amendment of the Companys obligation to cause the
registration statement described above to be declared effective by the Securities and Exchange Commission, the investors may allege a Triggering Event under the Certificate of Designations has occurred, granting them the right to redeem the face
value of the Series A Convertible Preferred Stock equaling, in the aggregate, $45,000,000 in cash plus a 15.0% premium, plus all accrued but unpaid interest and dividends (or a 15.0% premium over an amount equal to the stock price multiplied by the
number of shares into which the Series A Convertible Preferred Stock is convertible, to the extent this number is higher), plus all accrued but unpaid interest and dividends.

The Company has filed a proxy statement to hold a shareholder meeting by July 1, 2007 (if the Proxy is not reviewed by the Securities and Exchange
Commission, or October 1, 2007, if it is), to solicit the shareholder approval of the Amended Certificate of Designations. Upon filing of the Amended and Restated Certificate of Designations with the Secretary of the State of Florida, the
Forbearance Agreement will expire. If not approved by the shareholders, the $45 million may become due upon the expiration of the Forbearance Agreement and the Company will need to arrange for alternative financing. The Companys ability to
obtain alternative financing cannot be assured at this time. See Note 18- Subsequent Events - Forbearance and Amendment Agreements.



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|(6) | ACQUISITIONS
|--- | ------------

On March 6, 2006, the Company
completed the acquisition of Guardian International, Inc. (Guardian) under the terms of an Agreement and Plan of Merger, dated as of November 9, 2005, between the Company, an indirect wholly-owned subsidiary of the Company and
Guardian in which the Company acquired all of the outstanding capital stock of Guardian for an estimated aggregate cash purchase price of approximately $65.5 million, excluding transaction costs of $1.7 million. This purchase price consisted of
(i) approximately $24.6 million paid to the holders of the common stock of Guardian, (ii) approximately $23.3 million paid to redeem two series of Guardians preferred stock, (iii) approximately $13.3 million used to assume and
pay specified Guardian debt obligations and expenses and (iv) approximately $1.0 million used to satisfy specified expenses incurred by Guardian in connection with the merger. The balance of the purchase consideration, approximately $3.3
million, was placed in escrow. Subject to reconciliation based upon RMR and net working capital levels as of closing and subject to other possible adjustments, Guardian common shareholders received a partial pro-rata distribution from escrow in July
2006, with the balance pending resolution of certain specific income tax matters.

In order to finance the acquisition of Guardian, the
Company increased the amount of cash available under its CapitalSource Revolving Credit Facility from $70 million to $100 million and used $35.6 million under this facility, together with the net proceeds from the issuance of notes and warrants, to
purchase Guardian and repay the $8 million CapitalSource Bridge Loan. The Company issued to certain investors, under the terms of a Securities Purchase Agreement, dated as of February 10, 2006, an aggregate principal amount of $45 million of
notes along with warrants to acquire an aggregate of 1,650,943 shares of the Companys common stock at an exercise price of $11.925 per share. On October 20, 2006, the notes were exchanged for Series A Convertible Preferred Stock.



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The Company recorded the acquisition using the purchase method of accounting. The purchase price
allocation is based upon a valuation study as to fair value. Additionally, the purchase price allocation reflects adjustments since the acquisition date resulting from information subsequently obtained to complete an estimate of the fair value of
the acquired assets and liabilities. Through March 31, 2007, the net effect of those adjustments was $2.9 million additional value allocated to Goodwill, primarily related to the estimated value of deferred tax liabilities. The 2006 results of
operations included for the acquisition are for the period March 6, 2006 to March 31, 2006, as compared to results of operations for the three months ended March 31, 2007.

The purchase price allocation is as follows:



|                                       |  |                        |         |  
|-------------------------------------- |  | ---------------------- | ------- | -
|Purchase Price Allocation Guardian     |  | (dollars in thousands) |        
|Cash                                   |  | $                      | 930     |  
|Accounts receivable                    |  |                        | 2,377   |  
|Inventory                              |  |                        | 1,376   |  
|Other assets                           |  |                        | 135     |  
|Net fixed assets                       |  |                        | 1,097   |  
|Customer contracts                     |  |                        | 14,000  |  
|Customer relationships                 |  |                        | 30,000  |  
|Trade name                             |  |                        | 1,400   |  
|Accounts payable and other liabilities |  |                        | (3,511  | )
|Deferred revenue                       |  |                        | (2,782  | )
|Deferred tax liability                 |  |                        | (11,018 | )
|Goodwill                               |  |                        | 32,463  |  
|                                       |  |                        |         |  
|Total Purchase Price Allocation        |  | $                      | 66,467  |  
|                                       |  |                        |         |  

Acquired deferred revenue results from customers who are billed for monitoring and maintenance
services in advance of the period in which the services are provided, on a monthly, quarterly or annual basis. This deferred revenue would be recognized as monitoring and maintenance services are provided pursuant to the terms of subscriber
contracts.

The following table shows the proforma consolidated results of the Company and Guardian, as though the Company had completed this acquisition
at the beginning of each period reported on:



|                                     |  |                |           |  
|------------------------------------ |  | -------------- | --------- | -
|                                     |  | March 31, 2006 |          
|Revenue                              |  | $              | 15,645    |  
|Net loss                             |  | $              | (8,500    | )
|Loss per common share  basic        |  | $              | (1.37     | )
|Loss per common share  diluted      |  | $              | (1.37     | )
|Weighted average shares outstanding: |  |                |           |  
|Basic                                |  |                | 6,200,024 |  
|Diluted                              |  |                | 6,200,024 |  



|(7) | DISCONTINUED OPERATIONS
|--- | -----------------------

On March 30, 2007,
the Companys Board of Directors passed a resolution which would authorize management to sell the remaining assets of the Construction, Materials and Utilities Divisions upon such terms and conditions, including price, as management determines
to be appropriate. The Board resolution has provided the Companys management with the authority and commitment to establish a plan to sell these assets which are immediately available for sale. The Company has begun to embark on a plan to
identify potential buyers which we expect to finalize within one year of the date of the board resolution. Therefore, in accordance with FASB No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets (FASB No.
144), at March 31, 2007, the Company has classified the related assets as held for sale and the related operations have been treated as discontinued operations for all periods presented.

On March 21, 2007, the Company completed the transactions contemplated by a certain Asset Purchase Agreement, dated as of March 12, 2007
(Asset Purchase Agreement), by and between the Company and BitMar Ltd., a Turks and Caicos corporation and



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successor-in-interest to Tiger Oil, Inc., a Florida corporation (Purchaser), consisting of the sale of fixed assets, inventory and customer lists
constituting a majority of the assets of the Companys construction division (Construction Division), for approximately $5.3 million, subject to a holdback of $525,000 to be retained for resolution of certain indemnification matters
in the form of a non-negotiable promissory note bearing a term of 120 days. The Company retained working capital of $8.0 million, including approximately $1.7 million in notes receivable, as of March 31, 2007. The majority of the Companys
leasehold interests were retained by the Company with the Purchaser assuming only the Companys shop location at Southwest 10th Street, Deerfield Beach, Florida and entering into a 90-day sublease of the headquarters of the Construction
Division located at 1350 East Newport Center Drive in Deerfield Beach, Florida. The Company is currently negotiating a sublease beyond 90 days with the Buyer. In addition, the Company entered into a three-year noncompetition agreement under the
terms of which the Company agreed not to engage in business competitive with that of the Construction Division in any country, territory or other area bordering the Caribbean Sea and the Atlantic Ocean (Territory), excluding any
production and distribution of ready-mix concrete, crushed stone, sand, concrete block, asphalt and bagged cement throughout the Territory and also agreed to other standard provisions concerning the non-solicitation of customers and employees of the
Construction Division. In addition, Seller and Purchaser entered into a Transition Services Agreement (Transition Services Agreement) under the terms of which, Seller has agreed to make available certain of Sellers employees and
independent contractors and other non-employees to assist Purchaser with the operation of the Construction Division through September 16, 2007.

As a
result of this transaction, in the fourth quarter of 2006, the Company recognized an impairment charge on the construction assets of approximately $2.8 million. An additional loss on the sale of these assets of $230,367 was recorded in the three
months ended March 31, 2007 upon final transfer of assets to the Purchaser. The Company established an accrued liability of $242,853 for the Deerfield lease in accordance with FASB No. 146 Accounting for Costs Associated with Exit or
Disposal Activities (FASB No. 146). This accrued liability is included in other long term liabilities in the accompanying condensed consolidated balance sheet and charged to discontinued operations. The Company also accrued
employee severance and retention costs in accordance with FASB No. 146. This amounted to $759,742 and the severance portion is included in accrued expense, retirement and severance and the payroll related benefits are included in accrued
expenses and other liabilities in the accompanying condensed consolidated balance sheet. During the three months ended September 30, 2007, the Company accrued an additional $391,000 which comprised of costs associated with additional
contingencies, unanticipated jurisdictional employment requirements, and costs associated with closure of certain plant facilities. All of these amounts were charged to discontinued operations.

As of February 28, 2007 the buyer assumed performance of the contracts transferred pursuant to the sale agreement, (i.e., all rights benefits duties
and obligations for work performed after this date become the responsibility of the buyer). The Company is in the process of assigning several of these customer contracts to the buyer, and will continue to recognize revenue of these contracts during
this interim period. In these cases the Buyer will be performing as a subcontractor, for which the buyer has indemnified the Company from any new contact completion risks relating to these contracts.

Donald L. Smith, Jr., the Companys former Chairman and Chief Executive Officer and a current director of the Company and Donald L. Smith, III, a
former officer of the Company, are principals of the Purchaser. Other than the Asset Purchase Agreement, Transition Services Agreement, and the Companys relationship with Donald L. Smith, Jr. and Donald L. Smith, III, there is no material
relationship between the Company and the Purchaser of which the Company is aware.

On June 27, 2006, the Company sold its
Boca-Raton-based third-party monitoring operations.

On May 2, 2006, the Company sold its fixed assets and substantially all of the
inventory of Puerto Rico Crushing Company (PRCC) in a sale agreement with Mr. Jose Criado, through a company controlled by Mr. Criado. As part of the sale, Mr. Criado assumed substantially all employee-related severance
costs and liabilities arising from the lease agreement (including reclamation and leveling) for the quarry land for a purchase price of $700,000 in cash and a two-year 5% note in an amount equal to the value of inventory as of the closing date,
which was $27,955.

On March 2, 2006, the Company entered into a Stock Purchase Agreement with A. Hadeed or his nominee and Gary
ORourke, under which the Company completed the sale of all of the issued and outstanding common shares of Antigua Masonry Products (AMP). In connection with this sale, the purchasers acknowledged that preferred shares of AMP with a face
value equal to EC 1,436,485 (US $532,032) as of the date of the sale (collectively, the Preferred Shares) were outstanding and owned beneficially and of record by certain third parties and that such Preferred Shares were reflected as
debt on AMPs books and records. The purchasers further acknowledged that their acquisition of AMP was subject to the Preferred Shares and that the purchasers have sole responsibility of satisfying and discharging all obligations represented by
such Preferred Shares. Under the terms of this Stock Purchase Agreement, the purchasers acquired 493,051 common shares of AMP for a purchase price equal to $5.1 million, subject to certain adjustments. This purchase price was paid entirely in cash.
In addition, the transaction included transfers of certain assets from the Antigua operations to the Company, as well as pre-closing transfers to AMP of certain preferred shares in AMP that were owned by the Company.



14



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##### Table of Contents

The accompanying Condensed Consolidated Statements of Operations for all the quarters presented have been
adjusted to classify all non-electronic security services divisions as discontinued operations. Selected statement of operations data for the Companys discontinued operations is as follows:



|                                                                |  |                                                           |       |   |      |   |        |  
|--------------------------------------------------------------- |  | --------------------------------------------------------- | ----- | - | ---- | - | ------ | -
|                                                                |  | (dollars in thousands)For the three monthsended March 31, |      
|                                                                |  | 2007                                                      |       |   | 2006 |  
|Total revenue                                                   |  | $                                                         | 9,019 |   |      | $ | 16,583 |  
|                                                                |  |                                                           |       |   |      |   |        |  
|Pre-tax (loss) from discontinued operations                     |  |                                                           | (512  | ) |      |   | (707   | )
|Pre-tax (loss) gain on disposal of discontinued operations      |  |                                                           | (230  | ) |      |   | 1,013  |  
|                                                                |  |                                                           |       |   |      |   |        |  
|(Loss) income before income taxes                               |  |                                                           | (742  | ) |      |   | 306    |  
|Income tax provision (benefit)                                  |  |                                                           |      |   |      |   | (581   | )
|                                                                |  |                                                           |       |   |      |   |        |  
|(Loss) income from discontinued operations, net of income taxes |  | $                                                         | (742  | ) |      | $ | 887    |  
|                                                                |  |                                                           |       |   |      |   |        |  

A summary of the total assets of discontinued operations included in the accompanying condensed
consolidated balance sheet is as follows:



|                                      |  |                        |        |                  |   |       
|------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------
|                                      |  | (dollars in thousands)
|                                      |  | March 31,2007          |        | December 31,2006
|Cash                                  |  | $                      | 1,130  |                  | $ | 1,953 
|Accounts receivable, net of allowance |  |                        | 10,173 |                  |   | 8,416 
|Notes receivable, net                 |  |                        | 1,743  |                  |   | 2,162 
|Inventory                             |  |                        | 1,600  |                  |   | 1,730 
|Other assets                          |  |                        | 6,080  |                  |   | 6,518 
|Assets held for sale                  |  |                        | 2,993  |                  |   |      
|Property and equipment, net           |  |                        |       |                  |   | 8,333 
|                                      |  |                        |        |                  |   |       
|Total assets                          |  | $                      | 23,719 |                  | $ | 29,112
|                                      |  |                        |        |                  |   |       



|(8) | DEBT
|--- | ----



|                                                                                                                                                                                             |  |                        |        |                  |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------
|                                                                                                                                                                                             |  | (dollars in thousands)
|                                                                                                                                                                                             |  | March 31,2007          |        | December 31,2006
|                                                                                                                                                                                             |  |                       
|Installment notes payable in monthly installments through 2008, bearing interest at a weighted average rate of 6.7% and secured by equipment
with a carrying value of approximately $250,000 |  | $                      | 134    |                  | $ | 158   
|Secured note payable due November 9, 2008, bearing interest at the LIBOR rate plus a margin ranging from 3.25% to 5.75%                                                                      |  |                        | 88,620 |                  |   | 89,120
|                                                                                                                                                                                             |  |                        |        |                  |   |       
|Total debt outstanding                                                                                                                                                                       |  | $                      | 88,754 |                  | $ | 89,278
|                                                                                                                                                                                             |  |                        |        |                  |   |       
|Total current maturities on long-term debt                                                                                                                                                   |  | $                      | 79     |                  | $ | 76    
|                                                                                                                                                                                             |  |                        |        |                  |   |       
|Total long-term debt excluding current maturities                                                                                                                                            |  | $                      | 88,675 |                  | $ | 89,202
|                                                                                                                                                                                             |  |                        |        |                  |   |       

On February 10, 2006, the Company issued to certain investors, under the terms of a
Securities Purchase Agreement (SPA), an aggregate principal amount of $45 million of notes (the Notes) along with warrants to acquire an aggregate of 1,650,943 shares of the Companys common stock at an exercise price of
$11.925 per share. In order to finance the acquisition of Guardian which took place on March 6, 2006, the Company increased the amount of cash available under its Credit Agreement from $70 million to $100 million and used $35.6 million under
this facility together with the net proceeds from the issuance of the notes and warrants to purchase Guardian and repay the $8 million CapitalSource Bridge Loan Agreement.



The Credit Agreement contains a number of non-financial covenants imposing
restrictions on the Companys electronic security services divisions ability to, among other things, i) incur more debt, ii) pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to
make such payments to the borrower; iii) use assets as security in other transactions, iv) merge or consolidate with others or v) guarantee obligations of others. The Credit Agreement also contains financial covenants that require the Companys
subsidiaries which comprise the electronic security services division to meet a number of financial ratios and tests. Failure to comply with the obligations in the Credit Agreement could result in an event of default, which, if not cured or waived,
could permit acceleration of this indebtedness or of other indebtedness, allowing senior lenders to foreclose on the Companys electronic security services assets. At March 31, 2007, the Company was not in compliance with the fixed charge
coverage ratio financial covenant of the Credit Agreement. On May 10, 2007, the Company received a waiver and the fourth amendment to the Credit Agreement which amended the fixed charge coverage ratio calculation from using interest paid in
cash to accrued interest. See Note 18- Subsequent Events - Capital Source Credit Agreement.

At March 31, 2007, the Company had $11.4
million of unused facility under the Credit Agreement and zero borrowing capacity as it had violated a certain debt covenant. The effective interest on all debt outstanding was 11.08% and 11.07% for the three months ended March 31, 2007 and
2006, respectively.



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##### Table of Contents

|(9) | SERIES A CONVERTIBLE PREFERRED STOCK
|--- | ------------------------------------

On
February 10, 2006, the Company issued to certain investors, under the terms of the SPA, the Notes along with warrants to acquire an aggregate of 1,650,943 shares of the Companys common stock at an exercise price of $11.925 per share.

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate
of 45,000 shares of Series A Convertible Preferred Stock, par value $0.10 per share with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share for each share of Series A Convertible
Preferred Stock.

The Series A Convertible Preferred Stock has an 8% dividend rate payable quarterly in cash or stock at the option of the
Company, on April 1, July 1, October 1, and January 1. The dividend rate is subject to adjustment as defined in the SPA. The Series A Convertible Preferred Stock is convertible into the Companys common stock at a price of
$9.54 or 90% of the lowest Closing Bid Price for the last 3 trading days, if in default. The conversion price is subject to adjustment for anti-dilution transactions, as defined. Shares may be redeemed in cash if 1) the shares are not
registered, 2) at maturity on or about October 20, 2012, in three equal installments payable in cash on the 4th, 5th and 6th anniversary of the issuance date, 3) at the option of the holder, for cash, on May 11, 2009 or
4) at the option of the Company, for cash, on or after May 11, 2009. The Series A Convertible Preferred Stock has a mandatory conversion into Common Stock, at the option of the Company, after 2 years from date of issuance, if the common
stock price exceeds 175% of the conversion price for 60 consecutive trading days.

The Series A Convertible Preferred Stock was issued at a
discount of $0.5 million on October 20, 2006. The Company is amortizing the discount over the term of the Series A Convertible Preferred Stock using the effective interest rate method. For the three months ended March 31, 2007, the
amortization of the discount on the Series A Convertible Preferred Stock amounted to less than $0.1 million and was charged to net loss available to common shareholders.

The Series A Convertible Preferred Stock is classified outside stockholders equity as it may be mandatorily redeemable at the option of the holder or upon the occurrence of an event that is not solely within the
control of the Company. Any preferred dividends as well as the accretion of the $0.5 million discount are deducted from net income (loss) available to common shareholders. In connection with entering into the Notes, Warrants and Preferred Stock
arrangements, the Company paid fees totaling $3.9 million. These fees were accounted for as deferred financing costs and are amortized on a straight line basis over 4.0 years. For the three months ended March 31, 2007, the Company amortized
approximately $0.2 million of these costs. These amounts were charged to additional paid-in capital and deducted from net loss available to common shareholders. The unamortized balance of deferred financing costs at March 31, 2007 and
December 31, 2006 amounted to $3.1 million and $3.3 million, respectively, and are recorded as a reduction of the carrying value of the Series A Convertible Preferred Stock in the accompanying condensed consolidated balance sheet. The Series A
Preferred Stock is accreted to its liquidation value based on the effective interest method over the period to the earliest redemption date. In addition, it was determined that the Series A Convertible Preferred Stock has several embedded
derivatives that met the requirements for bifurcation at the date of issuance. (See Note 10-Derivative Instruments.)



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##### Table of Contents

The issuance of the Series A Convertible Preferred Stock and of the warrants could cause the issuance of
greater than 20% of the Companys outstanding shares of common stock upon the conversion of the Series A Convertible Preferred Stock and the exercise of the warrants. The creation of a new class of preferred stock was subject to shareholder
approval under Florida law, while, for various reasons related to the potential issuance of greater than 20% of the Companys outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock required shareholder
approval under the rules of Nasdaq. Holders of more than 50% of the Companys common stock approved the foregoing. The approval became effective after the Securities and Exchange Commission rules and regulations relating to the delivery of an
information statement on Schedule 14C to our shareholders was satisfied.

On April 2, 2007, effective as of March 30, 2007, the
Company entered into the Forbearance Agreements with certain institutional investors (the Required Holders) holding, in the aggregate, a majority of the Companys previously-issued Series A Convertible Preferred Stock.

Under the terms of these Forbearance Agreements, the Required Holders have agreed that for a period of time ending no later than January 2, 2008,
they shall each refrain from taking any remedial action with respect to the Companys failure (the Effectiveness Failure) to have declared effective by the Securities and Exchange Commission a registration statement registering the
resale of the shares of the Companys common stock underlying the Series A Preferred Shares and warrants as required by a Registration Rights Agreement, dated February 10,2006, by and between the Company, the Required Holders and the
remaining holder of the Series A Convertible Preferred Stock (the Registration Rights Agreement). The parties also agreed to refrain from declaring the occurrence of any Triggering Event with respect to the Effectiveness
Failure and from delivering any Notice of Redemption at Option of Holder with respect thereto or demanding any amounts due and payable with respect to the Effectiveness Failure, including without limitation, any Registration Delay Payments. No
remedial actions were taken by the Required Holders.

The Forbearance Agreements also contain agreements to amend the governing Certificate
of Designations to revise certain terms of the Series A Preferred Shares, including, without limitation, a reduction in the conversion price of the Series A Preferred Shares to $6.75, allowance for the accrual of dividends on the Series A Preferred
Shares at a rate equal to 10% per annum, which dividends may be payable in kind, and a revision of the definition of the Leverage Ratio. The revised definition shall provide for the Leverage Ratio to be calculated as a multiple of recurring
monthly revenue (Performing RMR) as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant to require the Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. The parties to the
Forbearance Agreement also agreed to allow dividends to accrue but not be payable until the expiration of the Forbearance Period. The revised terms to the Series A Convertible Preferred Stock will become effective upon the approval of the Restated
Certificate of Designations by a majority of the Companys shareholders at the Companys annual meeting which is scheduled to be held on June 30, 2007. See Note 18 - Subsequent Events - Forbearance and Amendment Agreements. At March
31, 2007 and December 31, 2006, the Company accrued $1.1 million and $0.9 million, respectively, of dividends payable which is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. For the
three months ended March 31, 2007, $1.1 million of dividends payable were declared from and charged to additional paid-in capital and deducted from net loss available to common shareholders.

Notwithstanding these Forbearance Agreements, on April 3, 2007, an institutional investor who holds shares of the Companys Series A
Convertible Preferred Stock, but was not a party to the Forbearance Agreements, transmitted a notice of redemption to the Company alleging the Company failed to timely pay certain Registration Delay Payments constituting a Triggering Event which
gave such investor the right to require the Company to redeem all shares of Series A Convertible Preferred Stock held by such investor. The Company disagrees that this investor has such redemption right and intends to vigorously contest the actions
taken by this investor to enforce such alleged right. The investor holds shares of the Companys Series A Convertible Preferred Stock with a face value equal to $7,000,000. The Company does not believe that a liability for any registration
delay payments in accordance with the Registration Rights Agreement is warranted. See Note 18 - Subsequent Events - Settlement with Preferred Stockholder.



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##### Table of Contents

|(10) | DERIVATIVE INSTRUMENTS
|---- | ----------------------

Derivative financial
instruments, such as warrants and embedded derivative instruments of a host instrument, which risk and rewards of such derivatives are not clearly and closely related to the risk and rewards of the host instrument, are generally required to be
bifurcated and separately valued from the host instrument with which they relate.

The following freestanding and embedded derivative
financial instruments were identified with the issuance of the Notes : i) the warrants, which is a freestanding derivative, and ii) the right to purchase the Series A Convertible Preferred Stock upon issuance (the Right to Purchase),
which is a freestanding derivative instrument within the SPA. The Company valued the warrants and the Right to Purchase at March 6, 2006, their date of issuance, using an appropriate option pricing model (the Model). The warrants, which
were issued in connection with the issuance of the Notes, are detachable and have a three-year life expiring on March 6, 2009. The Company evaluated the classification of the Warrants in accordance with Emerging Issues Task Force No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Companys Own Stock (EITF No. 00-19), and concluded that the warrants do not meet the criteria under EITF 00-19 for equity
classification since there is no limit as to the number of shares that will be issued in a cashless exercise and the Company is economically compelled to deliver registered shares since the maximum liquidating damages is a significant percentage of
the proceeds from the issuance of the securities. The Rights to Purchase are deemed to be issued in connection with the issuance of the Notes, and have a life which expires on the date the Preferred Stock is issued. The Model determined an $8.6
million aggregate value for these derivatives and this value has been recorded as derivative instrument liability and classified as current or long term in accordance with respective maturity dates. The Model assumptions for initial valuation of the
Warrants and Rights to Purchase the Preferred Stock as of the issuance date were a risk free rate of 4.77% and 4.77%, respectively, and volatility for the Companys common stock of 50% and 30%, respectively. The volatility factors differ
because of the specific terms related to the warrants and the conversion rights. Since these derivatives are associated with the Notes, the face value of the Notes was recorded net of the $8.6 million attributed to these derivative liabilities.
Accordingly, the Company accreted the $8.6 million carrying value of the Notes, using the effective rate method, over the life of the Notes and for the three months ended March 31, 2006 recorded a non-cash charge amounting to $1.6 million to
interest expense.

Additionally, the derivative liability amounts related to Notes have been re-valued at each balance sheet date with the
resulting change in value being recorded as income or expense to arrive at net income. For the three months ended March 31, 2006, the change in the fair value of the derivative liability amounted to $1.5 million.

On October 20, 2006, pursuant to the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares
of Series A Convertible Preferred Stock, par value $.10 per share, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share. Upon the issuance of the Series A Convertible Preferred
Stock, the following embedded derivatives were identified within the Series A Convertible Preferred Stock: i) the ability to convert the Preferred Stock for common stock; ii) the option of the Company to satisfy dividends payable on the Series A
Convertible Preferred Stock in common stock in lieu of cash; iii) the potential increase in the dividend rate of the Preferred Stock in the event a certain level of net cash proceeds from the sale of the our construction and material division assets
are not realized within a specified time frame (referred to as the legacy asset rate adjustment) and (iv) a change in control redemption right. The embedded derivatives within the Series A Convertible Preferred Stock were bifurcated and valued as a
single compound derivative liability at $0.5 million at the date of issuance. On April 2, 2007, the Company entered into a Forbearance Agreement with respect to the Series A Convertible Preferred Stock with some of the institutional investors, which
among other amended terms eliminated the legacy rate adjustment and provide for payment of dividends in cash, therefore, at December 31, 2006, the legacy rate adjustment and the dividend put option derivatives were deemed to have zero value. The
Company recorded a $3.2 million charge related to the write off of this net derivative asset.

The Model assumptions for revaluation of the
Warrants and the embedded derivatives at March 31, 2007 and December 31, 2006 were a risk free rate of 4.65%, and volatility for the Companys common stock of 45%. For the three months ended March 31, 2007, an expense of $1.1 million has been
recorded with respect to the re-valuation of these derivatives liabilities and warrants. At March 31, 2007 and December 31, 2006, the derivative liability amounted to $5.5 million and $4.5 million, respectively, of which $0.3 million and $0.8
million related to the Warrants.



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##### Table of Contents

|(11) | CAPITAL STOCK
|---- | -------------

The following table sets forth the
computation of basic and diluted share data:



|                                                                                  |  |                            |  |               
|--------------------------------------------------------------------------------- |  | -------------------------- |  | --------------
|                                                                                  |  | For The Three Months Ended
|                                                                                  |  | March 31, 2007             |  | March 31, 2006
|Common stock:                                                                     |  |                            |  |               
|Weighted average number of shares outstanding  basic                             |  | 6,200,024                  |  | 6,006,156     
|Effect of dilutive securities:                                                    |  |                            |  |               
|Options and Warrants                                                              |  |                           |  |              
|                                                                                  |  |                            |  |               
|Weighted average number of shares outstanding  diluted                           |  | 6,200,024                  |  | 6,006,156     
|                                                                                  |  |                            |  |               
|Options, warrants and common stock equivalents not included above (anti-dilutive) |  | 10,791,074                 |  | 6,083,268     
|Shares outstanding:                                                               |  |                            |  |               
|Beginning outstanding shares                                                      |  | 6,033,848                  |  | 6,001,888     
|Repurchase of shares                                                              |  |                           |  |              
|Issuance of shares                                                                |  | 185,280                    |  | 12,485        
|                                                                                  |  |                            |  |               
|Ending outstanding shares                                                         |  | 6,219,128                  |  | 6,014,373     
|                                                                                  |  |                            |  |               
|                                                                                  | 
|                                                                                  |  | For The Three Months Ended
|                                                                                  |  | March 31, 2007             |  | March 31, 2006
|Preferred stock:                                                                  |  |                            |  |               
|Shares outstanding:                                                               |  |                            |  |               
|Beginning outstanding shares                                                      |  | 45,000                     |  |              
|Issuance of shares                                                                |  |                           |  |              
|                                                                                  |  |                            |  |               
|Ending outstanding shares                                                         |  | 45,000                     |  |              
|                                                                                  |  |                            |  |               



|(12) | STOCK OPTION PLANS
|---- | ------------------

The Company uses the
Black-Scholes option pricing model to estimate the fair value of stock options granted in accordance with SFAS 123R. The Company granted 15,000 stock options as of March 31, 2007 and zero as of March 31, 2006. The per share
weighted-average fair value of stock options granted during 2007 was $4.15, on the grant date, using the Black-Scholes option-pricing model with the following assumptions:



|                          |  |           |   |  |           |  
|------------------------- |  | --------- | - |  | --------- | -
|                          |  | 2007      |   |  | 2006      |  
|Expected dividend yield   |  |          |   |  |          |  
|Expected price volatility |  | 41.80     | % |  | 41.30     | %
|Risk-free interest rate   |  | 5.10      | % |  | 5.10      | %
|Expected life of options  |  | 4.0 years |   |  | 4.0 years |  

The Company determined stock-based compensation cost based on fair value at the grant date for stock options under
SFAS 123R. Compensation cost in the amount of $44,000 and $117,000 is included in the results of operations in the condensed consolidated financial statements for the three months ended March 31, 2007 and 2006, respectively.



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##### Table of Contents

The Company adopted stock option plans for officers and employees in 1986, 1992 and 1999, and amended the
1999 plan in 2003. While each plan terminates 10 years after the adoption date, issued options have their own schedule of termination. Until 1996, 2002 and 2009, options to acquire up to 300,000, 350,000, and 600,000 shares, respectively, of common
stock may be granted at no less than fair market value on the date of grant.

On September 22, 2006, the Companys Board of
Directors adopted the Devcon International Corp. 2006 Incentive Compensation Plan (2006 Plan). The terms of the Plan provide for grants of stock options, stock appreciation rights or SARs, restricted stock, deferred stock, other
stock-related awards and performance awards that may be settled in cash, stock or other property. The purpose of the 2006 Plan is to provide a means for the Company to attract key personnel to provide services to provide a means whereby those key
persons can acquire and maintain stock ownership, and provide annual and long term performance incentives to expend their maximum efforts in the creation of shareholder value. The effective date of the plan coincides with the date of shareholder
approval which occurred on November 10, 2006. After the effective date of the 2006 Plan no further awards may be made under the Devcon International Corp. 1999 Stock Option Plan.

Under the 2006 Plan, the total number of shares of the Companys common stock that may be subject to the granting of awards is equal to 800,000
shares, plus the number of shares with respect to which awards previously granted thereunder that terminate without being exercised, and the number of shares that are surrendered in payment of any awards or any tax withholding requirements. On
February 16, 2007, 15,000 options were granted to directors, officers and employees under the 2006 Plan.

All stock options granted
pursuant to the 1986 Plan not already exercisable, vest and become fully exercisable (1) on the date the optionee reaches 65 years of age and for the six-month period thereafter or as otherwise modified by the Companys Board of Directors,
(2) on the date of permanent disability of the optionee and for the six-month period thereafter, (3) on the date of a change of control and for the six-month period thereafter and (4) on the date of termination of the optionee from
employment by the Company without cause and for the six-month period after termination. Stock options granted under the 1992 and 1999 Plan vest and become exercisable in varying terms and periods set by the Compensation Committee of the Board of
Directors. Options issued under the 1992 and 1999 Plan expire after 10 years.

The Company adopted a stock-option plan for directors in
1992 that terminated in 2002. Options to acquire up to 50,000 shares of common stock were granted at no less than the fair-market value on the date of grant. The 1992 Directors Plan provided each director an initial grant of 8,000 shares and
additional grants of 1,000 shares annually immediately subsequent to their reelection as a director. Stock options granted under the Directors Plan have 10-year terms, vest and become fully exercisable six months after the issue date. As the
directors plan was fully granted in 2000, the directors have received their annual options since then from the employee plans.

A
summary of stock option activity is as follows for the three months ended March 31, 2007:



|                                      |  |                |   |  |                             |     
|------------------------------------- |  | -------------- | - |  | --------------------------- | ----
|                                      |  | Employee Plans
|                                      |  | Shares         |   |  | Weighted Avg.Exercise Price
|Balance at December 31, 2006          |  | 657,150        |   |  | $                           | 6.10
|Granted                               |  | 15,000         |   |  | $                           | 4.15
|Exercised                             |  | (52,500        | ) |  | $                           | 1.86
|Forfeiture                            |  | (135,000       | ) |  | $                           | 5.51
|Expired                               |  | (61,500        | ) |  | $                           | 7.07
|                                      |  |                |   |  |                             |     
|Options outstanding at March 31, 2007 |  | 423,150        |   |  | $                           | 6.61
|Options exercisable at March 31, 2007 |  | 279,843        |   |  |                             |     
|                                      |  |               
|Available for future grant            |  | 707,500        |   |  |                             |     

At March 31, 2007, there was approximately $220,997 of total unrecognized compensation cost
related to unvested stock options granted under our stock option plan. This unrecognized compensation cost is expected to be recognized over a weighted average period of 2.83 years.



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##### Table of Contents

|(13) | INCOME TAXES
|---- | ------------

In February 2006, one of the
Companys Antiguan subsidiaries declared and paid a $3.6 million gross dividend, of which $1.2 million was withheld for Antiguan withholding taxes. The withholding taxes were deemed paid by utilization of a portion of a $7.5 million tax credit
received as part of a Satisfaction Agreement which was entered into between the Company, its Antiguan subsidiaries and the Government of Antigua and Barbuda in December of 2004. Accordingly, in the first quarter of 2006, the Company recognized a
noncash foreign tax expense in the amount of $ 1.2 million, which was offset by deferred tax benefit of $0.6 million associated with a net operating loss generated by the Companys construction operations in the Virgin Islands and
the utilization of a $0.6 million foreign tax credit.

For the three months ending March 31, 2007 the Company realized a tax benefit
of $0.6 million for continuing operations. The benefit was due to an increase in the deferred tax assets of $2.1 million that was offset by an increase in the valuation allowance of $1.5 million. Tax expense for discontinued operations was zero for
the three months ending March 31, 2007.



|(14) | SEGMENT REPORTING
|---- | -----------------

On March 30, 2007, the
Board of Directors approved a board resolution to authorize management to sell the remaining assets of the Construction, Materials and Utilities Divisions upon such terms and conditions, including price, as management determines to be appropriate.
The board resolution to discontinue all non-security services businesses eliminated the requirement to disclose segment operations as the Companys only segment will be the electronic security services division.



|(15) | RELATED PERSON TRANSACTIONS
|---- | ---------------------------

The Companys
policies and procedures provide that related person transactions be approved in advance by either the audit committee or a majority of disinterested directors.

On March 21, 2007, the Company completed the transactions contemplated by a certain Asset Purchase Agreement, dated as of March 12, 2007 (Asset Purchase Agreement). These assets were sold to
BitMar, Ltd, a Turks and Caicos corporation and a successor-in-interest to Tiger Oil, Inc., a Florida corporation. Donald L. Smith Jr., the Companys former Chairman and Chief Executive Offer and a current director of the Company and Donald L.
Smith III, a former officer of the Company, are principals of BitMar, Ltd. (See Note 7-Discontinued Operations)

On January 23, 2006,
the Company entered into a stock purchase agreement with Donald L. Smith, Jr., a director and former Chairman and Chief Executive Officer, under the terms of which the Company agreed to sell to Mr. Smith all of the issued and



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outstanding shares of two of our subsidiaries, Antigua Masonry Products, Ltd., an Antigua corporation, or AMP, and M21 Industries, Inc., which subsidiaries
collectively comprised the operations of the Companys materials division in Antigua, for an aggregate purchase price equal to approximately $5 million, subject to adjustments provided in the stock purchase agreement. The stock purchase
agreement permitted $1,725,000 of the purchase price to be paid by cancellation of a note payable by the Company to Mr. Smith. The Company retained the right to review other offers to purchase these Antigua operations. The parties to the stock
purchase agreement elected to exercise their right to negotiate the sale of the Companys materials division in Antigua with a third party. As a result, on March 2, 2006, the Company entered into a stock purchase agreement with A. Hadeed
or his nominee and Gary ORourke and terminated the stock purchase agreement entered into with Mr. Smith on January 23, 2006. The terms of the new stock purchase agreement provided for a purchase price equal to approximately $5.1
million, subject to adjustments provided in the stock purchase agreement. The entire purchase price was paid in cash. In addition, the terms of the new stock purchase agreement excluded M21 Industries, Inc. from the sale but contemplated transfers
of certain assets from the Antigua operations to Devcon as well as the pre-closing transfer to AMP of certain preferred shares in AMP that were owned by Devcon. The purchaser agreed to pay all taxes incurred as a result of the transaction. The
Company completed the sale of its materials division in Antigua on May 2, 2006.

The Company has entered into a retirement agreement
with Mr. Richard Hornsby, former Senior Vice President and Director. He retired from the Company at the end of 2004. During 2005 he received his full salary. From 2006, he will receive annual payments of $32,000 for life. The net present value
of the future obligation was estimated at $253,844 and $276,933 at March 31, 2007 and at December 31, 2006, respectively. These amounts are included in Retirement and Severance in the accompanying condensed consolidated balance sheet.

The Company has an on-going Management Services Agreement, (the Management Agreement), with Royal Palm Capital Management,
LLLP (Royal Palm), to provide management services. Royal Palm Capital Management, LLLP is an affiliate of Coconut Palm Capital Investors I Ltd. (Coconut Palm) who has invested $18 million into the Company for purposes of the
Company entering into the electronic security services industry. Richard Rochon, the Companys Chairman, and Mario Ferrari, one of the Companys directors, are principals of Coconut Palm and Royal Palm. Mr. Rochon has also been the
Companys acting Chief Executive Officer since the resignation of Steven Ruzika effective January 22, 2007. Robert Farenhem, a principal of Royal Palm, was the Companys interim Chief Financial Officer from April 18, 2005 through
December 20, 2005, and once again from February 16, 2007 through May 1, 2007, as a result of the resignation of George Hare. In addition, the Company leases certain office space to Royal Palm.



|                                          |  |                                      |         |   |      |   |         |  
|----------------------------------------- |  | ------------------------------------ | ------- | - | ---- | - | ------- | -
|                                          |  | For the three months ended March 31, |        
|                                          |  | 2007                                 |         |   | 2006 |  
|Management service fee paid to Royal Palm |  | $                                    | 90,000  |   |      | $ | 90,000  |  
|Rental income charged to Royal Palm       |  |                                      | (22,500 | ) |      |   | (22,500 | )
|                                          |  |                                      |         |   |      |   |         |  
|                                          |  | $                                    | 67,500  |   |      | $ | 67,500  |  
|                                          |  |                                      |         |   |      |   |         |  

The Company leases from the wife of Mr. Donald L. Smith, Jr., a director and former
Chairman and Chief Executive Officer of the Company, a 1.8-acre parcel of real property in Deerfield Beach, Florida. This property is being used for the Companys equipment logistics and maintenance activities. The property is subject to a
5-year lease entered into in January 2002 providing for rent of $95,000 per year. This rent was based on comparable rental contracts for similar properties in Deerfield Beach, as evaluated by management. There has been a verbal agreement to extend
this lease for a year. This lease has been assumed by the purchaser of the construction division assets of which Mr. Donald Smith is a part. Rent expense amounted to $19,875 and $23,850 for the three months ended March 31, 2007 and 2006,
respectively.



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|(16) | COMPREHENSIVE INCOME (LOSS)
|---- | ---------------------------

Comprehensive
income presents a measure of all changes in shareholders equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The following table provides a reconciliation of net loss as reported in the
condensed consolidated Statements of Operations to comprehensive loss.



|                             |  |                            |        |   |               |   |        |  
|---------------------------- |  | -------------------------- | ------ | - | ------------- | - | ------ | -
|                             |  | For The Three Months Ended |       
|                             |  | March 31,2007              |        |   | March 31,2006 |  
|                             |  | (As restated)              |        |   |               |  
|Net loss                     |  | $                          | (6,883 | ) |               | $ | (8,771 | )
|Foreign currency translation |  |                            | (28    | ) |               |   | (6     | )
|                             |  |                            |        |   |               |   |        |  
|Total comprehensive loss     |  | $                          | (6,911 | ) |               | $ | (8,777 | )
|                             |  |                            |        |   |               |   |        |  



|(17) | COMMITMENTS AND CONTINGENCIES
|---- | -----------------------------

Commitments

Resignation of Chief Executive Officer. On January 22, 2007, Mr. Stephen J. Ruzika resigned as Chief Executive Officer of the Company.
On January 26, 2007, the Company entered into an Advisory Services Agreement with Mr. Ruzika, which became effective on January 22, 2007. Also on January 22, 2007, the Board of Directors of the Company appointed Richard C.
Rochon, the Companys Chairman of the Board, to the position of Acting Chief Executive Officer of the Company. Mr. Rochon has been the Companys Chairman since January 24, 2006, and a director of the Company since 2004.
Mr. Rochon is Chairman and Chief Executive Officer of Royal Palm Capital Partners, a private investment and management firm. He is also a Principal of Royal Palm Capital Management, LLLP, an affiliate of Royal Palm Capital Partners.

Resignation of Chief Financial Officer. On February 9, 2007, Mr. George M. Hare resigned as Chief Financial Officer of the Company.
On February 13, 2007, the Board of Directors of the Company appointed Robert C. Farenhem, a Principal of Royal Palm Capital Management, LLLP, to the position of interim Chief Financial Officer of the Company. Mr. Farenhem has been a
Principal and the Chief Financial Officer of Royal Palm Capital Partners since April 2003 and has been a director and officer of Coconut Palm Acquisition Corp., a blank check company, since April 29, 2005. Between April 18, 2005 and
December 20, 2005, Mr. Farenhem was the Companys interim Chief Financial Officer. On February 14, 2007, the Company entered into a Separation Agreement with Mr. Hare outlining the terms of his separation from the Company,
as well as a consulting arrangement pursuant to which Mr. Hare would be available to the Company in a consulting capacity.

At
March 31, 2007 the Company recorded a charge of approximately $225,000 which represented the total liability related to both of these agreements.



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Legal Matters

Series A Convertible Preferred Stockholder

On January 31, 2007, an investor who holds 7,000 of the 45,000
outstanding shares of our Series A Convertible Preferred Stock, but was not a party to certain Forbearance Agreements entered into by the other two holders of the Series A Convertible Preferred Stock, transmitted a notice of redemption to us
alleging we failed to timely pay certain registration delay payments purportedly owed to this investor constituting a Triggering Event which purportedly gave this investor the right to require us to redeem all shares of Series A
Convertible Preferred Stock held by this investor. On April 3, 2007, after the other investors had entered into the Forbearance Agreements with us, this same investor transmitted a second notice of redemption to us again alleging the Company had
failed to timely pay the registration delay payments to this investor purportedly constituting a Triggering Event which gave such investor the right to require us to redeem all shares of Series A Convertible Preferred Stock held by this investor.
The investor had given the Company the option of accepting certain restructuring terms which it did not believe would be in the best interests of our shareholders or redeeming the shares of Series A Convertible Preferred Stock that are held by this
investor.

On April 25, 2007, this investor filed a lawsuit (the Lawsuit) in the United States District Court for the Southern
District of New York repeating these allegations and requesting specific performance compelling us to redeem all 7,000 shares of Series A Convertible Preferred Stock from and pay any delinquent registration delay payments to this investor or, in the
alternative, damages for breach of contract. The investor held shares of the Companys Series A Convertible Preferred Stock with a face value equal to $7,000,000. The Company did not believe that a liability for any registration delay payments
in accordance with the Registration Rights Agreement was warranted as it believed the lawsuit to be without merit.

On August 16, 2007, the
Company entered into a Settlement Agreement and Release of Claims (the Settlement Agreement) pursuant to which, subject to the payment of the Settlement Amount set forth below, the Company resolved all claims against the Company set
forth in the Lawsuit. Pursuant to the Settlement Agreement, on September 28, 2007, the Company paid one of the plaintiffs in the Lawsuit an amount equal to $7.4 million which included all accrued dividends since January 1, 2007 (the Settlement
Amount) and the plaintiffs returned all shares of the Companys Series A Convertible Preferred Stock held by them to the Company. In return, all parties to the Lawsuit entered into mutual releases releasing each other from any and all
claims.

Yellow Cedar

In the fall of
2000, VICBP, a subsidiary, was under contract with the Virgin Islands Port Authority, or VIPA, for the construction of the expansion of the St. Croix Airport. During the project, homeowners and residents of the Yellow Cedar Housing Community,
located next to the end of the expansion project, claimed to have experienced several days of excessive dust in their area as a result of the ongoing construction work and have claimed damage to their property and personal injury. The
homeowners of Yellow Cedar have filed two separate lawsuits for unspecified damages against VIPA and VICBP as co-defendants. In both cases VICBP, as defendant, has agreed to indemnify VIPA for any civil action as a result of the construction work.
VICBP brought a declaratory judgment action in the District Court of the Virgin Islands to determine whether there is coverage under the primary policy. On October 23, 2007, the declaratory judgment was ruled in favor of insurers and we have
since filed an Appeal of the Denial. If the Appeal of the Denial for the Companys Summary Judgment is favorable to us, VICBP would be liable for the $50 per claim and the original $50,000 deductible. However, this was satisfied when the
initial claims were resolved with claimants. Additionally, the Company will recover its legal expenses for pursuing the Summary Judgment.

VICBP cannot accurately estimate actual damages to the claimants since a significant part of the property damage claims were resolved prior to the litigation and credible evidence of the bodily injury portion of the lawsuit has not been
presented. Additionally, because the legal process continues, VICBP is unable to determine how all of the facts of this matter will be resolved under St. Croix environmental law. As a result of all the uncertainties, the outcome cannot be reasonably
determined at this time and the Company is unable to estimate the loss, if any, in accordance with FASB No. 5, Accounting for Contingencies (FASB No. 5). However, the Company does not believe that the outcome
will have a material adverse effect on the consolidated financial position, results of operations or its cash flows.

Petit

On July 25, 1995, the Companys subsidiary, Societe des Carrieres de Grande Case, or SCGC, entered into an agreement with Mr. Fernand
Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, collectively referred to as, Petit, to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for
the same and additional property. Another Company subsidiary, Bouwbedrijf Boven Winden, N.A., or BBW, entered into a materials supply agreement with Petit on July 31, 1995. This materials supply agreement was amended on October 27, 1999
and under the terms of this amendment the Company became a party to the materials supply agreement.

In May 2004, the Company advised Petit
that the Company would possibly be removing our equipment within the time frames provided in our agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised the Company in writing that
Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that Petit would not renew the 1999 lease when it expired on October 27, 2004. Petit refused to accept
the remainder of the quarterly payment from us in the amount of $45,000.

Without prior notice to BBW, Petit obtained orders to impound BBW
assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded included bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets have been impounded on Sint
Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by us if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7
million is due for quarry restoration and $3.7 million is due for pain and suffering for a total claim amounting to $14.0 million. The materials supply agreement provided that it could be terminated by us on July 31, 2004.



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In February 2005, SCGC, BBW and Devcon entered into agreements with Petit, which provided for the
following:



| |  |  | The purchase by SCGC of three hectares of land located within the quarry property previously leased from Petit for approximately $1.1 million;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A two-year lease of approximately 15 hectares of land (the 15 Hectare Lease), on which SCGC operates a crusher, ready-mix concrete plant and aggregates
storage at a total cost of $100,000, which arrangement was entered into February 2005;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The granting of an option to SCGC to purchase two hectares of land (the 2 Hectare Option) prior to December 31, 2006 for $2 million, with $1
million due on each of September 30, 2006 and December 31, 2008, subject to the terms below:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against us and our subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC does not exercise the option to purchase and Petit is subsequently awarded a judgment, SCGC has the option to offset approximately $1.2
million against the judgment amount and transfer ownership of the three hectare parcel purchased by SCGC back to Petit;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The granting of an option to SCGC to purchase five hectares of land (the 5 Hectare Option) prior to June 30, 2010 for $3.6 million, payable $1.8
million on June 30, 2010 and $1.8 million on June 30, 2012; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The granting of an option to SCGC to extend the 15 Hectare Lease through June 30, 2010 (with annual rent of $55,000) if the 2 Hectare Option is exercised and
subsequent extensions, if the 5 Hectare Option is exercised, of the lease (with annual rent of $65,000) equal to the terms of mining authorizations obtained from the French Government agencies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In February 2005 the Company purchased the three hectares of land for $1.1 million in cash and executed the 15 Hectare Lease.

In September 2006 the Company exercised the 2 Hectare Option and transferred $1 million in cash to the appropriate agent of Petit. It is currently our
intention to make the additional $1 million payment required under the option agreement on December 31, 2008 to the appropriate agent of Petit.

As of May 16, 2007, Petit has refused to accept the $1 million payment unless Devcon International Corp., the parent company, agrees to guarantee payment of the $1 million due on December 31, 2008. As Devcon
International Corp. was not referenced in or party to the 2 Hectare Option, the Company believes that Petits request is without merit. Currently, the $1 million remains on deposit with the appropriate third-party escrow agent pending the
outcome of this dispute.

Under the terms of the 15 Hectare Lease, Petit agreed that an adjacent 6,000 square meter parcel, on which
SCGCs aggregate wash plant, scale, maintenance building and administrative offices are located, was included. SCGC has been operating its aggregate wash plant, scale, maintenance building and administrative offices on the adjacent property
without incident or dispute with Petit for several years. Subsequent to refusing to accept the $1 million option payment, Petit has taken steps to impede SCGCs ability to access the 6,000 square meters of property, resulting in SCGCs
inability to access the aggregate wash plant, scale, maintenance building and administrative facilities required to carry out its mining operation. Petit now claims that the 6,000 square meters is located elsewhere on the parcel. During the first
quarter of 2007, there were no mining operations and sales of mined aggregate to third parties was ceased. In late 2006, the Company began importing aggregate from third party vendors in anticipation of the Petit non compliance. In March 2007, Petit
blocked access to our ready-mix operation. Accordingly, the ready-mix operation has ceased and the Company is attempting to enforce easements to the owned and leased parcels. Under St. Martin labor compensation laws, the Company does not incur the
full cost of employee salaries if they are prevented from working under situations such as this dispute.

The Company has engaged French
legal counsel to pursue SCGCs rights under the agreements executed in February 2005. At this time, it is the Companys position that any asserted claims would arise from SCGC since it is suffering losses due to its inability to utilize
its quarry and ready-mix operation. Any claim would be considered a gain contingency and therefore under SFAS No. 5 would not be recorded.



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On April 26, 2007, the Civil Court of Basse-Terre rendered its decision in the framework of the
procedure on the merit concerning the completion of the sale of the real property subject to the 2 Hectare Option. The court decision mainly provides that:

- SCGC validly exercised the 2 Hectare Option;

- the sale of the real property shall be completed under
the conditions provided for in the 2 Hectare Option dated as of February 2005 and therefore the Civil Court appoints the chairman of the Notary chamber of Guadeloupe with a view to (i) preparing a draft deed of sale in accordance
with the provisions of the 2 Hectare Option within 30 days as from the requirement made by the most diligent party and (ii) inviting the parties for the execution of the deed of sale within 30 days as from the delivery of his draft deed to the
parties;

- the notary (SCP Mouial, Ricour-Brunier, Balzame, Jacques-Richardson and Herbert) is prevented from releasing the $1
million currently placed in escrow otherwise than to the benefit of the abovementioned notary;

- Petit shall attend the closing
meeting as requested by said notary and execute the deed of sale so prepared. Otherwise a penalty of  500 per day for delay would have to be paid by Petit;

- as a consequence of the exercise of the option to purchase, the 15 Hectare Lease is renewed until June 30, 2010; and

- Petit shall pay to SCGC an amount of  7,000 in accordance with Article 700 of the French Civil Procedure Code.

General

The Company is subject to certain
Federal, state and local environmental laws and regulations. Management believes that the Company is in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse effect on the
Companys consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse effect in the foreseeable future.

(18) SUBSEQUENT EVENTS

On April 27, 2007, Mr. Lakey resigned from his position as the
Companys Chief Operating Officer and President  Construction and Materials and entered into an Advisory Services Agreement (the Advisory Services Agreement) with the Company, which became effective on such date. The Advisory
Services Agreement outlined the terms of his separation from the Company as well as a consulting arrangement pursuant to which Mr. Lakey would remain involved with the Company in an advisory capacity. The Company expects to record a charge of
approximately $104,000 related to this agreement.

On May 1, 2007, the Board of Directors of the Company appointed Mr. Robert C. Farenhem
to the position of President of the Company and appointed Robert W. Schiller, the Companys former Vice President-Finance, to the position of Chief Financial Officer of the Company.

Forbearance and Amendment Agreements.On April 2, 2007, effective as of March 30, 2007, the Company entered into Forbearance
and Amendment Agreements (the Forbearance Agreements) with certain institutional investors (the Required Holders) holding, in the aggregate, a majority of the Companys previously-issued Series A Convertible Preferred
Stock (the Series A Preferred Stock).

Under the terms of these Forbearance Agreements, the Required Holders agreed that
for a period of time ending no later than January 2, 2008, they shall each refrain from taking any remedial action with respect to the Companys failure (the Effectiveness Failure) to have declared effective by the United
States Securities and Exchange Commission a registration statement registering the resale of the shares of Devcons common stock underlying the Series A Preferred Shares and warrants as required by a Registration Rights Agreement, dated
February 20, 2005, by and between the Company, the Required Holders and the remaining holder of the Series A Preferred Shares (the Registration Rights Agreement). The parties also agreed to refrain from declaring the occurrence of
any Triggering Event with respect to the Effectiveness Failure and from delivering any Notice of Redemption at Option of Holder with respect thereto or demanding any amounts due and payable with respect to the Effectiveness Failure,
including without limitation, any Registration Delay Payments. No remedial actions were taken by the Required Holders.

Pursuant to the
terms of these Forbearance Agreements, the Company agreed to submit to its shareholders for approval at the Companys annual shareholder meeting a form of Amended and Restated Certificate of Designations (the Amended Certificate of
Designations) setting forth certain revised terms of the Series A Preferred Stock as described in the Forbearance Agreements. On June 29, 2007, the Companys shareholders approved the Amended Certificate of Designations at the
Companys annual shareholder meeting. The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date.

In connection with the filing of the Amended Certificate of Designations, the Company and the parties to the Forbearance Agreements entered into an
Amended and Restated Securities Purchase Agreement, dated as of July 13, 2007 (the Amended Securities Purchase Agreement), and an Amended and Restated Registration Rights Agreement, dated as of July 13, 2007 (the Amended
Registration Rights Agreement).

The Amended Securities Purchase Agreement contains terms similar to the original Securities Purchase
Agreement entered into among the parties on February 10, 2006 except that one holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Companys common stock, par value $.10 (the Common Stock). The
Amended Certificate of Designations also included a reduction in the conversion price of the Series A Preferred Shares to $6.75, allowance for the accrual of dividends on the Series A Preferred Shares at a rate equal to 10% per annum, which
dividends may be payable in kind, and a revision of the definition of the Leverage Ratio. The revised definition shall provide for the Leverage Ratio to be calculated as a multiple of recurring monthly revenue (Performing RMR) as opposed
to EBITDA and a revision of the Maximum Leverage Ratio covenant to require the Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. In addition, each of the parties to the Amended Securities Purchase Agreement waived
certain rights to receive Registration Delay Payments and certain other provisions set forth in the governing documents. In addition, the parties executed an Amended and Restated Registration Rights Agreement which removed the obligation to have
declared effective by the United States Securities and Exchange Commission by January 2, 2008 a registration statement registering the resale of the shares of Devcons common stock underlying the Series A Convertible Preferred Shares and
warrants as required by the Registration Rights Agreement, dated February 20, 2005.

With respect to the other holder of the Series A
Convertible Preferred Stock, which did not enter into the Forbearance Agreements but had filed a lawsuit against the Company, on August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the Settlement
Agreement) pursuant to which the Company resolved all claims against the Company set forth in the lawsuit such holder filed. See Settlement with Preferred Stockholder below.

On June 29, 2007, the Companys shareholders approved the Amended Certificate of Designations at the Companys annual shareholder meeting.
The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date. In connection with the filing of the Amended Certificate of Designations, the Company and the parties
to the Forbearance Agreements entered into the Amended SPA and the Amended and Restated Registration Rights Agreement. The Amended SPA contains terms similar to the original SPA entered into among the parties on February 10, 2006, except that one
holder agreed to sell back to the Company warrants to purchase 1,284,067 shares of the Companys common stock, and the parties thereto acknowledged and agreed that the Companys dividend payment obligations with respect to the Preferred
Stock accruing from January 1, 2007 through the Closing date (July 13, 2007) of the Amended SPA have been satisfied by adding such dividends to the Stated Value of the shares of Preferred Stock. Thus, the Company now has the option of
paying the dividends in-kind and not to deplete cash resources for these dividend payments. At September 30, 2007, approximately $2.9 million of accrued dividends were paid in-kind and reclassified to the carrying value of the Preferred Stock.
The Company filed the Amended Certificate of Designations with the Secretary of State of Florida on July 13, 2007, effective as of such date.

CapitalSource Credit Agreement. On September 25, 2007, certain subsidiaries (the Borrowers) of the Company entered into a Consent and Fifth Amendment (the Fifth Amendment) with CapitalSource Finance LLC
(CapitalSource). The Fifth Amendment to the Credit Agreement dated as of November 10, 2005, as amended, increased the total commitment to $105.0 million from $100.0 million (with the borrowers having the ability to increase this
commitment further to $125.0 million), extended the maturity date of the Credit Agreement to September 25, 2010, and adjusted the interest rate and certain financial and other covenants provided therein. The proceeds from the Credit Agreement
were used to partially fund the redemption of certain shares of the Companys Preferred Stock in connection with settlement arrangements the Company had entered into to settle all claims set forth in the lawsuit (the Lawsuit)
disclosed under the caption Series A Convertible Preferred Stockholder in Part II. Other InformationItem 1Legal Proceedings.

Repurchase Plan. On July 24, 2007, the Companys Board of Directors approved the repurchase of up to $5.0 million of its common stock between July 24, 2007 and December 31, 2008. At
September 30, 2007, the Company had repurchased 163,834 shares for a total cost of $0.6 million.

Settlement with Preferred
Stockholder. On August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the Settlement Agreement) pursuant to which, subject to the payment of the Settlement Amount set forth below, the Company
resolved all claims against the Company set forth in the lawsuit (the Lawsuit) disclosed under the Caption Series A Convertible Preferred Stockholder in Part II. Other InformationItem 1Legal
Proceedings. Pursuant to the Settlement Agreement, on September 28, 2007, the Company paid one of the plaintiffs in the Lawsuit an amount equal to $7.4 million, which included accrued dividends since January 1, 2007, (the Settlement
Amount), and the plaintiffs returned all shares of the Companys Preferred Stock held by them to the Company. In return, all parties to the Lawsuit entered into mutual releases releasing each other from any and all claims.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited
condensed consolidated financial statements, as well as the financial statements and related notes included in our 2006 Form 10-K/A. The following Managements Discussion and Analysis of Financial Condition and Results of Operations describes
the principal factors affecting results of operations, financial resources, liquidity, contractual cash obligations, and critical accounting estimates.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in our filings with the Securities and
Exchange Commission and in our reports to stockholders. Generally, the inclusion of the words believe, expect, intend, estimate, anticipate, will, and similar expressions
identify statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe
harbor protection provided by those sections. All statements addressing operating performance, events, or developments that we expect or anticipate will occur in the future, including statements relating to sales growth, earnings or earnings per
share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act.

The forward-looking statements are and will be based upon our managements then-current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

By their nature, all forward-looking statements involve risks and uncertainties. Actual results, including our revenues from our electronic security
services and construction and materials operations, expenses, gross margins, cash flows, financial condition, and net income, as well as factors such as our competitive position, inventory levels, backlog, the demand for our products and services,
customer base and the liquidity and needs of customers, may differ materially from those contemplated by the forward-looking statements or those currently being experienced by our Company for a number of reasons, including but not limited to those
set forth under Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2006

OVERVIEW

In 2004 we embarked on a new strategy, which was to become a leading regional provider of electronic security alarm monitoring services, providing service
and electronic monitoring of alarm systems to residential single and multi-family homes, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and healthcare and educational
facilities, as well as installation of electronic security alarm systems. We also have wholesale customers where we monitor security systems owned by independent security companies. Through our electronic security services division, we engage in the
electronic monitoring of our installed base of security systems, as well as the installation of new monitored security systems added to our installed base, both in residential and commercial buildings.

In order to execute our new strategy, we began a process of reviewing in detail the operations of our materials and construction division, which were
incurring operating losses. This strategic review and shift in operational focus resulted in a series of acquisitions and divestitures which together allowed us to pursue our objective of becoming a leading regional provider of electronic security
services. The acquisitions and divestitures were as follows:

Acquisitions:



| |  |  | On July 30, 2004, we acquired the issued and outstanding capital stock of Security Equipment Company, Inc. (SEC).
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | On February 28, 2005, we acquired certain assets and assumed certain liabilities of Starpoint from Adelphia Communications.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 10, 2005, we acquired the issued and outstanding capital stock of Coastal Security Systems (Coastal).
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | On March 6, 2006, we acquired the issued and outstanding capital stock of Guardian.
| | - |  | -----------------------------------------------------------------------------------

Dispositions:



| |  |  | On September 30, 2005, we sold our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 2, 2006, we sold all of the issued and outstanding common shares of AMP
| | - |  | --------------------------------------------------------------------------------



| |  |  | On May 2, 2006, we sold the fixed assets and substantially all of the inventory of our joint venture assets of Puerto Rico Crushing Company (PRCC),
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 27, 2006, we sold our Boca Raton-based third-party monitoring operations.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | On March 21, 2007, we sold the majority of our construction assets, construction inventory and customer lists of the construction division.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS

In the following managements discussion and analysis, the net operating results of our significant dispositions noted above, along with all non-electronic security services are recorded as discontinued
operations for all periods presented.

On March 6, 2006, the Company completed the acquisition of Guardian International, Inc. (Guardian)
under the terms of an Agreement and Plan of Merger, dated as of November 9, 2006, between the Company, an indirect wholly-owned subsidiary of the Company and Guardian in which the Company acquired all of the outstanding capital stock of
Guardian. Thus, the three months ended March 31, 2006, only includes one month of Guardian operations.

Comparison of the three months ended
March 31, 2007 with the three months ended March 31, 2006

Customer account attrition has a direct impact on our results of operations
since it affects our revenue, amortization expense and cash flows. We monitor attrition monthly and on a six month annualized basis. We define attrition as a ratio, the numerator of which is gross number of lost customer accounts for a given period.
In our calculation we make adjustments to lost accounts for the net change, either positive or negative, for accounts greater than 90 days and re-signs and third party gains. Below is a rollforward of our RMR for the three months ended
March 31, 2007 and 2006, respectively.



|                                          |  |                                     |           |   |      |   |           |  
|----------------------------------------- |  | ----------------------------------- | --------- | - | ---- | - | --------- | -
|                                          |  | For the Three MonthsEnded March 31, |          
|                                          |  | 2007                                |           |   | 2006 |  
|Beginning RMR Balance                     |  | $                                   | 3,519,271 |   |      | $ | 2,471,491 |  
|                                          |  |                                    
|RMR Added                                 |  |                                     | 62,689    |   |      |   | 68,444    |  
|Price Increase                            |  |                                     | 42,896    |   |      |   | 8,660     |  
|RMR Loss (less Change of Ownership)       |  |                                     | (82,791   | ) |      |   | (55,465   | )
|                                          |  |                                     |           |   |      |   |           |  
|Net Gain                                  |  |                                     | 22,794    |   |      |   | 21,639    |  
|                                          |  |                                    
|Acquired Dealer RMR                       |  |                                     | 8,192     |   |      |   | 12,450    |  
|Accounts Lost/Charged Back under contract |  |                                     | (440      | ) |      |   | (1,490    | )
|Special Events:                           |  |                                     |           |   |      |   |           |  
|Guardian/Mutual/Stat-Land Acquisition     |  |                                     |          |   |      |   | 1,482,931 |  
|Sale of Wholesale Accounts                |  |                                     |          |   |      |   | (21,300   | )
|                                          |  |                                     |           |   |      |   |           |  
|Ending RMR Balance                        |  | $                                   | 3,549,817 |   |      | $ | 3,965,721 |  
|                                          |  |                                     |           |   |      |   |           |  

Revenue from the electronic security services division is comprised of the monitoring and service of security
systems at subscribers premises, billable services performed on a time and materials basis, or services revenue, and net installation revenue after taking into effect the requirements of SAB 104, which requires the deferral of certain revenue
and related costs until services have been fulfilled.

Included in cost of sales for the electronic security services division are the direct costs
incurred to monitor and service security systems installed at subscriber premises, as well as the net direct costs incurred with the installation of new security systems, excluding depreciation and amortization which are included in our selling,
general and administrative expenses.



|                                                        |  |                            |        |      |   |       
|------------------------------------------------------- |  | -------------------------- | ------ | ---- | - | ------
|                                                        |  | (dollars in thousands)    
|                                                        |  | For The Three Months Ended
|                                                        |  | 2007                       |        | 2006
|Revenue                                                 |  | $                          | 14,185 |      | $ | 10,603
|Cost of Sales (excluding depreciation and amortization) |  |                            | 6,064  |      |   | 4,598 
|                                                        |  |                            |        |      |   |       
|Gross Profit.                                           |  | $                          | 8,121  |      | $ | 6,005 
|                                                        |  |                            |        |      |   |       

In March 2006, we continued to reinvest the proceeds from the sale of our materials businesses into the electronic
security services business by acquiring all of the outstanding capital stock of Hollywood, Florida based Guardian. This acquisition was accounted for utilizing the purchase method of accounting. In addition in June 2006, the Company sold the Coastal
wholesale business.



| |  |  | Included in the 2007 revenues is approximately $4.4 million or 31.0% related to three months of Guardian revenues in 2007 versus approximately one month of activity
in 2006. This increase was partially offset by an approximate $1.0 million decrease in revenue associated with the June 2006 sale of the Coastal wholesale business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Included in the 2007 cost of sales is approximately $2.0 million or 33.0% related to three months of Guardian costs versus approximately one months worth of
cost in 2006. This increase was partially offset by approximately $.5 million in cost reductions from consolidation of acquired operations, such as the multiple monitoring stations into one facility.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in gross profit of $2.1 million or 35.3% is a result of three months of Guardian activity in 2007 versus one month in 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

Operating expenses:



|                                  |  |                                      |        |                      |      |   |      |   |                      |  |      |  
|--------------------------------- |  | ------------------------------------ | ------ | -------------------- | ---- | - | ---- | - | -------------------- |  | ---- | -
|                                  |  | (dollars in thousands)               |       
|                                  |  | For The Three Months Ended March 31, |       
|                                  |  | 2007                                 |        | % of DivisionRevenue |      |   | 2006 |   | % of DivisionRevenue | 
|Selling, General & Administrative |  | $                                    | 6,792  |                      | 47.9 | % |      | $ | 5,988                |  | 56.5 | %
|Amortization and Depreciation     |  |                                      | 4,497  |                      | 31.7 | % |      |   | 3,709                |  | 35.0 | %
|                                  |  |                                      |        |                      |      |   |      |   |                      |  |      |  
|Total Operating Expenses          |  | $                                    | 11,289 |                      | 79.6 | % |      | $ | 9,697                |  | 91.5 | %
|                                  |  |                                      |        |                      |      |   |      |   |                      |  |      |  



| |  |  | SG&A expenses increased by $.8 million to $6.8 million for the three months ended March 31, 2007 as compared to 2006. The increase primarily relates to $.7
million for three months worth of expense related to Guardian versus 2006. However proportionately SG&A expenses decreased as a percentage of revenue by 8.6% to 47.9% for the three months ended March 31, 2007 from 56.5% in 2006. This
overall decrease relates to the stabilization of the electronic security services business as we continue to streamline the back office functions for the various acquisitions we have made in the past two years.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Amortization and Depreciation expenses increased by $.8 million to $4.5 million for the three months ended March 31, 2007 as compared to 2006. Included in this
increase is $1.8 million for the two additional months worth of expense related to Guardian versus 2006. This increase is partially offset by $1.2 million decrease in amortization of the customer list that was purchased from Adelphia and
Coastal. However, the percentage of amortization and depreciation expense as a percentage of revenue as decreased by 3.3% to 31.7% from 35.0% in 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Other Income (Expense):



|                       |  |                                     |        |   |      |   |        |  
|---------------------- |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                       |  | (dollars in thousands)              |       
|                       |  | For The Three Months EndedMarch 31, |       
|                       |  | 2007                                |        |   | 2006 |  
|                       |  | (As restated)                       |        |   |      |  
|Other income (expense) |  | $                                   | (3,586 | ) |      | $ | (5,435 | )
|                       |  |                                     |        |   |      |   |        |  

Other expense decreased for the three months ended March 31, 2007 by $1.8 million as compared to 2006
primarily as a result of the $1.3 million reduction in interest expense coupled with a $0.4 million decrease in the charge for the change in the fair value of the derivative instruments.

Income tax (benefit) expense from continuing operations:



|                             |  |                                     |      |   |      |   |    
|---------------------------- |  | ----------------------------------- | ---- | - | ---- | - | ---
|                             |  | (dollars in thousands)             
|                             |  | For The Three Months EndedMarch 31,
|                             |  | 2007                                |      |   | 2006
|                             |  | (As restated)                       |      |   |     
|Income tax (benefit) expense |  | $                                   | (613 | ) |      | $ | 531

For the three months ended March 31, 2007, the Company realized an income tax benefit of $0.6
million from continuing operations. The income tax benefit was due to an increase in the deferred tax assets of $2.1 million that was offset by an increase in the valuation allowance of $1.5 million.

Discontinued Operations:



|                                                                      |  |                                     |      |   |      |   |       |  
|--------------------------------------------------------------------- |  | ----------------------------------- | ---- | - | ---- | - | ----- | -
|                                                                      |  | (dollars in thousands)              |     
|                                                                      |  | For The Three Months EndedMarch 31, |     
|                                                                      |  | 2007                                |      |   | 2006 |  
|(Loss) from discontinued operations, net of income taxes              |  | $                                   | (512 | ) |      | $ | (126  | )
|(Loss) gain on sale from discontinued operations, net of income taxes |  |                                     | (230 | ) |      |   | 1,013 |  
|                                                                      |  |                                     |      |   |      |   |       |  
|(Loss) Income from discontinued operations, net of income taxes       |  | $                                   | (742 | ) |      | $ | 887   |  
|                                                                      |  |                                     |      |   |      |   |       |  

As indicated earlier, our significant dispositions, excluding the third-party monitoring
operations, have been recorded as discontinued operations.



| |  |  | On September 30, 2005, we sold our U.S. Virgin Islands ready-mix concrete, aggregates, concrete block and cement materials and supplies business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 2, 2006, we sold all of the issued and outstanding common shares of AMP. This sale resulted in a gain from discontinued operations, net of income
taxes of $1.0 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On May 2, 2006, we sold the fixed assets and substantially all of the inventory of our joint venture assets of PRCC.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | On June 27, 2006, we sold our Boca Raton-based third-party monitoring operations.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | On March 21, 2007, we sold the majority of our construction assets, construction inventory and customer lists of the construction division. This sale resulted
in a loss from discontinued operations, net of income taxes of $0.2 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

Adequacy of Capital Resources

We generally fund our working capital
needs from operations and bank borrowings. In the electronic security services business, monitoring services are typically billed in advance on either a monthly, quarterly or annual basis. Installations of new security systems for residential
customers typically result in a net investment in the customer, whereas installations of new security systems for commercial projects may have neutral to positive cash flow. As of March 31, 2007, our liquidity and capital resources included
cash and cash equivalents of $6.6 million, working capital of $11.3 million and available lines of credit of zero. Total outstanding liabilities were $136.5 million as of March 31, 2007, compared to $137.3 million at December 31, 2006. We
expect to convert a significant portion of our working capital into cash over the next 6 months as we collect the remaining accounts receivable related to the completed construction contracts.



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##### Table of Contents

Cash flow used in operating activities for the three months ended March 31, 2007 was $2.5 million compared with $3.2
million provided by operating activities for the three months ended March 31, 2006. The primary uses of cash for operating activities during the three months ended March 31, 2007 was related to an increase in long term assets of $1.3
million resulting from deferred cost and revenue for SAB 104, and a decrease in accounts payable and accrued expenses of $0.9 million related to day-to-day operations. The primary sources of cash from operating activities was a result of a
$2.1 million increase in other long term liabilities related to deferred cost and revenue for SAB 104.

Net cash provided by investing activities
was $4.5 million in 2007, resulting from the sale of the construction division that took place on March 21, 2007 (See Note 7-Discontinued Operations).

Net cash used by financing activities was $0.4 million resulting from the principal payment of existing debt in the amount of $0.5 million offset by cash provided as a result of common shares issued. Our uses of cash over the next twelve
months will be principally for working capital needs, capital expenditures and for debt service which consists primarily of estimated interest payments of $7.6 million on our outstanding senior debt. We estimate the capital expenditures will
be $0.2 million related to the integration of our back office systems onto a consistent platform and $0.5 million related to the reimbursement of our monitoring center in New York.

Cash flows from discontinued operations are included in the consolidated statement of cash flows within operating, investing and financing activities. The absence of cash flows from discontinued operations is not
expected to impact future liquidity or capital resources.

We believe we can fund our planned business activities during the next twelve months with the
sources of cash described above.

Liquidity

In order to finance the March 2006 Guardian acquisition, the Company issued to accredited institutional investors under the terms of the SPA dated as of February 10, 2006, an aggregate principal amount of $45 million of notes along
with warrants to acquire an aggregate of 1,650,943 shares of the Companys common stock at an exercise price of $11.925 per share.

On
October 20, 2006, under the terms of the SPA, these investors received, in exchange for the notes, an aggregate of 45,000 shares of the Companys Series A Convertible Preferred Stock, par value $.10 per share, with a liquidation preference
equal to $1,000 convertible into common stock at a conversion price equal to $9.54 per share. In connection with the issuance of these securities, the Company entered into a Registration Rights Agreement, under the terms of which the Company agreed
to use best efforts to cause a registration statement to be declared effective by the Securities and Exchange Commission no later than January 25, 2007. This registration statement would register the resale of the shares of the common stock
issuable upon conversion of the Series A Convertible Preferred Stock; exercise of the warrants and in payment of the dividend obligations under the Certificate of Designations governing the Series A Convertible Preferred Stock. The Registration
Rights Agreement provides that, to the extent the Company failed to cause this registration statement to be declared effective by the Securities and Exchange Commission by the effectiveness deadline, registration delay payments in the amount of one
percent (1.0%) of the aggregate purchase price must be paid to the investors for the Series A Convertible Preferred Stock, or $450,000, for every 30 days (pro-rated for periods totaling less than thirty days) this effectiveness failure remains.

On October 23, 2006, the Company filed a registration statement to register the resale of these shares. The Securities and Exchange
Commission reviewed this registration statement and, as a consequence of recent clarifications by the Staff of Rule 415 under the Securities Act of 1933, as amended, the Company encountered difficulties determining when all of these shares may be
registered and sold by the investors. Accordingly, the Company was unable to cause this registration statement to be declared effective by the Securities and Exchange Commission.



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##### Table of Contents

Under the terms of the Registration Rights Agreement, these registration delay payments accrue from
January 26, 2007 until the earlier of the Company successfully obtaining a waiver or amendment of these registration delay payments or the registration statement being declared effective. The registration delay payments are not payable until
every thirtieth day after the effectiveness failure. Accordingly, the first registration delay payment was due on February 26, 2007. In addition, under the Certificate of Designations governing the Series A Convertible Preferred Stock,
(a) the failure of the applicable Registration Statement to be declared effective by the Securities and Exchange Commission on the date that is sixty (60) days after the applicable effectiveness deadline or (b) the Companys
failure to pay to the investors any amounts when and as due under the Certificate of Designations or any other transaction document contemplated in the Certificate of Designations is defined as a Triggering Event allowing the Required
Holders, as defined below, to require us to redeem all shares of their Series A Convertible Preferred Stock by the fifth business day after transmitting notice to us of their desired redemption. Under the terms of the Certificate of Designations,
this redemption would be effected by the Company being required to pay in cash an amount equal to 115.0% of the face value of all or a portion, as applicable, of the outstanding shares of the Series A Convertible Preferred Stock, plus all accrued
but unpaid interest and dividends. To the extent the stock price at the time of this redemption request multiplied by the number of shares into which the Series A Convertible Preferred Stock is convertible exceeds this cash payment amount, the
redemption would be effected by payment of this higher amount increased by the same 15.0% premium, plus all accrued but unpaid interest and dividends. In order to be able to register a portion of these shares the Company began discussions with the
investors to amend the terms of the Series A Convertible Preferred Stock in the form of an Amended Certificate of Designations.

In
furtherance of these negotiations, on April 2, 2007, effective as of March 30, 2007, the Company entered into the Forbearance Agreements with investors constituting the Required Holders, i.e. investors holding a majority of the
shares of the Series A Convertible Preferred Stock. Under the terms of the Forbearance Agreements, each of the Required Holders agreed that for a period of time ending no later than January 2, 2008, they shall each forbear from (a) taking
any remedial action with respect to the effectiveness failure, (b) declaring the occurrence of any Triggering Event with respect to the effectiveness failure and from delivering any notice of redemption with respect to these matters
or (c) demanding any amounts due and payable with respect to the effectiveness failure, including any registration delay payments. The Forbearance Agreements also contain agreements to amend the Certificate of Designations to revise specified
terms of the Series A Convertible Preferred Stock, including a reduction in the conversion price of the Series A Convertible Preferred Stock to $6.75, allowance for the accrual of dividends on the Series A Convertible Preferred Stock at a rate equal
to 10% per annum, which dividends may be payable in kind, and a revision of the definition of the Leverage Ratio defined in the Certificate of Designations to provide for the Leverage Ratio to be calculated as a multiple of
Performing RMR as opposed to EBITDA and a revision of the Maximum Leverage Ratio covenant set forth in the Certificate of Designations to require this Maximum Leverage Ratio to equal 38x Performing RMR, commencing on June 30, 2008. The parties
to the Forbearance Agreements also agreed to allow dividends to accrue without being paid until the expiration of the forbearance period. The Forbearance Agreements also required the Company to withdraw the registration statement as soon as
practicable. This withdrawal was effected on April 14, 2007.

If the Company is unable to obtain a permanent waiver or amendment of
the registration delay payments and is unable or unwilling to pay these registration delay payments to the investors or if the Company is unable to obtain a permanent waiver or amendment of the Companys obligation to cause the registration
statement described above to be declared effective by the Securities and Exchange Commission, the investors may allege a Triggering Event under the Certificate of Designations has occurred, granting them the right to redeem the face value of the
Series A Convertible Preferred Stock equaling, in the aggregate, $45,000,000 in cash plus a 15.0% premium, plus all accrued but unpaid interest and dividends (or a 15.0% premium over an amount equal to the stock price multiplied by the number of
shares into which the Series A Convertible Preferred Stock is convertible, to the extent this number is higher), plus all accrued but unpaid interest and dividends.

The Company has filed a proxy statement to hold a shareholder meeting by July 1, 2007 (if the Proxy is not reviewed by the Securities and Exchange Commission, or October 1, 2007, if it is), to solicit the shareholder
approval of the Amended Certificate of Designations. Upon filing of the Amended and Restated Certificate of Designations with the Secretary of the State of Florida, the Forbearance Agreement will expire. If not approved by the shareholders, the $45
million may become due upon the expiration of the Forbearance Agreement and the Company will need to arrange for alternative financing. The Companys ability to obtain alternative financing cannot be assured at this time. See Note 18-Subsequent
Events - Forbearance and Amendment Agreements.



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##### Table of Contents

Debt and Other Obligations

Credit Agreement.On February 10, 2006, the Company issued to certain investors, under the terms the SPA, an aggregate principal amount of $45 million of Notes along with warrants to acquire an aggregate of 1,650,943 shares of
the Companys common stock at an exercise price of $11.925 per share. In order to finance the acquisition of Guardian which took place on March 6, 2006, the Company increased the amount of cash available under its Credit Agreement from $70
million to $100 million and used $35.6 million under this facility together with the net proceeds from the issuance of the Notes and warrants to purchase Guardian and repay the $8 million CapitalSource Bridge Loan Agreement. The interest rate on the
outstanding obligations under the Credit Agreement is tied to the base rate plus a margin as specified therein or, at the borrowers option, to LIBOR plus margin amounting to 11.6%. The potential interest rate spread is base rate plus 150 to
425 basis point or LIBOR plus 325 to 575 basis points.

The Credit Agreement contains a number of non-financial covenants imposing
restrictions on the Companys electronic security services divisions ability to, among other things, i) incur more debt, ii) pay dividends, redeem or repurchase stock or make other distributions or impair the ability of any subsidiary to
make such payments to the borrower; iii) use assets as security in other transactions, iv) merge or consolidate with others or v) guarantee obligations of others. The Credit Agreement also contains financial covenants that require the Companys
subsidiaries which comprise the electronic security services division to meet a number of financial ratios and tests. Failure to comply with the obligations in the Credit Agreement could result in an event of default, which, if not cured or waived,
could permit acceleration of this indebtedness or of other indebtedness, allowing senior lenders to foreclose on the Companys electronic security services assets. At March 31, 2007, the Company was not in compliance with the fixed charge
coverage ratio financial covenant of the Credit Agreement. On May 10, 2007, the Company received a wavier and fourth amendment to the Credit Agreement which amended the calculation from using interest paid in cash to accrued interest.

At March 31, 2007, the Company had $11.4 million of unused facility under the Credit Agreement and zero borrowing capacity as it had
violated a certain debt covenant. The effective interest on all debt outstanding was 11.08%.

Securities Purchase Agreement

On October 20, 2006, under the terms of the SPA, the private placement investors received, in exchange for the Notes, an aggregate of 45,000 shares of our Series A
Convertible Preferred Stock, with a liquidation preference equal to $1,000, convertible into common stock at a conversion price equal to $9.54 per share for each share of Series A Convertible Preferred Stock.

The issuance of the new Series A Convertible Preferred Stock and of the Warrants could cause the issuance of greater than 20% of our outstanding shares of common stock
upon the conversion of the Series A Convertible Preferred Stock and the exercise of the Warrants. The creation of a new class of preferred stock was subject to shareholder approval under Florida law, while, for various reasons related to the
potential issuance of greater than 20% of our outstanding shares of common stock, the issuance of the Series A Convertible Preferred Stock required shareholder approval under the rules of Nasdaq. Holders of more than 50% of our common stock approved
the foregoing. The approval became effective after the Securities and Exchange Commission rules and regulations relating to the delivery of an information statement on Schedule 14C to our shareholders was satisfied.

We have two key debt covenants that could affect liquidity. We believe that we will remain in compliance with both covenants in 2007:



| |  |  | Debt / Performing RMR (Revolving Credit Facility & Series A Convertible Preferred Stock)  As of March 31, 2007, we had eligible Performing RMR
of $3.4 million and outstanding senior debt of $88.7 million (including accrued interest) or a ratio of 25.69x. Our proforma leverage ratio test for the Series A Convertible Preferred Stock, which will be calculated on a net debt basis,
including proforma cash from the construction sale and the $45 million face value of the Series A Convertible Preferred Stock to Performing RMR is 36.7 x. Given the continued stability of our customer base and the associated Performing RMR we
believe that a material decline in either is unlikely during 2007.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Attrition rate (Revolving Credit Facility)  Our six month annualized attrition ratio as of March 2007 was 9.8% compared to a maximum permitted ratio of 11%.
Our ratio is being negatively impacted by relatively higher attrition that occurred during October 2006. This higher attrition was caused by the cancellation of a number of wholesale customers whose contracts were not able to be assigned to the
buyer of our wholesale business and an increase in cancellations due to a downturn in the real estate market in Florida. Our attrition rate trend over the last six months is as follows:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|         |  |                         |  |            |        |         |      |  
|-------- |  | ----------------------- |  | ---------- | ------ | ------- | ---- | -
|         |  | Actual Period Attrition |  | Annualized |       
|         |  |                         |  | Performing |        | Monthly |     
|         |  | Accounts                |  | RMR        |        | Ratio % |     
|October  |  | 491                     |  | $          | 40,222 |         | 15.8 | %
|November |  | 805                     |  | $          | 23,703 |         | 8.8  | %
|December |  | 811                     |  | $          | 25,293 |         | 8.4  | %
|January  |  | 1,006                   |  | $          | 35,333 |         | 10.2 | %
|February |  | 771                     |  | $          | 25,742 |         | 7.6  | %
|March    |  | 3,427                   |  | $          | 28,262 |         | 7.8  | %



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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions. Our significant accounting policies
are described in Note 1 to the Consolidated Financial Statements, Description of Business and Summary of Accounting Policies, included in the 2006 Annual Report on Form 10-K/A. Certain of these policies require the application of
subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates and assumptions are based on historical experience, changes in the business environment and
other factors that we believe to be reasonable under the circumstances. Different estimates that could have been applied in the current period or changes in the accounting estimates that are reasonably likely can result in a material impact on our
financial condition and operating results in the current and future periods. We periodically review the development, selection and disclosure of these critical accounting estimates. The following discussion is furnished for additional insight into
certain accounting estimates that we consider to be critical. We base our estimates on historical experience and on various other factors that we believe to be reasonable, 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. Actual results may differ from these estimates.

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 requires that the Company determine whether the benefits of the Companys tax positions are more likely than not of being sustained upon audit based on the technical merits of
the tax position. The provisions of FIN 48 also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company did not have any unrecognized tax benefits and there was no effect
on the financial condition or results of operations as a result of implementing FIN 48.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

There have been no material changes to the Companys exposures to market risk since December 31, 2006. Please refer to the 2006 Annual Report on Form 10-K/A for a complete discussion of the Companys exposures to market
risks.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

The Company has carried out an evaluation under the supervision and with the participation of its management, including its
acting Chief Executive Officer and its Chief Financial Officer, who is also acting as the Companys Principal Financial and Accounting Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The
evaluation examined the Companys disclosure controls and procedures as of March 31, 2007, the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based on that
evaluation, such officers have concluded that, as of March 31, 2007, the Companys disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports filed or submitted
by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures.

In connection with the completion of its audit of, and the issuance
of an unqualified report on, the Companys consolidated financial statements for the fiscal year ended December 31, 2006, the Companys independent registered public accounting firm, Berenfeld, Spritzer, Shechter & Sheer
(BSS&S), communicated to the Companys management and Audit Committee that certain matters involving the Companys internal controls were considered to be material weaknesses, as defined under the standards
established by the Public Company Accounting Oversight Board, or PCAOB. These matters pertained to (i) inadequate policies and procedures with respect to review and oversight of financial results to ensure that accurate consolidated financial
statements were prepared and reviewed on a timely basis, (ii) inadequate number of individuals with U.S. GAAP experience and (iii) inadequate review of account reconciliations, analyses and journal entries.

In light of the material weaknesses described above, the Company performed additional analyses and other post-closing procedures to ensure the
Companys consolidated financial statements are prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this quarterly report fairly represent in all
material respects the Companys financial condition, results of operations and cash flows for the periods presented.



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Changes in Internal Controls Over Financial Reporting and Managements Remediation Initiatives

The Company is committed to continuously improving its internal controls and financial reporting. The Company is working with consultants with experience
in internal controls to assist management and the Audit Committee in reviewing the Companys current internal controls structure with a view towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.

In order to remediate the significant deficiencies and material weaknesses described above, the Companys management and its Audit Committee will be
taking the following steps:



| |  |  | Certain of the Companys procedures have been formalized and documented with respect to review and oversight of financial reporting.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has shortened the period between review cycles and continues to enhance certain mitigating controls which will provide additional analysis of financial
reporting information.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has implemented a financial reporting timeline and checklist process to assist in the timely gathering and review of financial information.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has obtained the services of qualified individuals with appropriate U.S. GAAP experience.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | The Company is integrating accounting staffs and systems between acquired subsidiaries to facilitate standardized financial accounting and reporting procedures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has implemented account reconciliation processes, and expanded senior management reviews and analyses, including the review of journal entries.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has continuously experienced turnover in key positions within the financial organization. This has delayed
the Companys ability to implement the proper measures to ensure that the internal controls over financial reporting are functioning. The Company believes the above measures have reduced the risks associated with the matters identified by the
Companys independent registered public accounting firm as material weaknesses. This process is ongoing, however, and the Companys management and its Audit Committee will continue to monitor the effectiveness of the Companys
internal controls and procedures on a continual basis and will take further action as appropriate.

In connection with the preparation of
our Form 10-Q for the quarter ended June 30, 2007, management identified certain adjustments that were required to be recorded within the Form 10-Q for the quarters ended March 31, 2007, June 30, 2007 and for the year ended
December 31, 2006. The adjustments to our financial statements involved the identification, valuation and resulting accounting for embedded derivatives and warrants associated with our Series A Convertible Preferred Stock. Our management
believes that our failure to properly value and identify these adjustments indicates the existence of certain material weaknesses in our internal control over financial reporting. As a result of the existence of those material weaknesses, our
management concluded that our disclosure controls and procedures were ineffective as of March 31, 2007.

A number of initiatives to
strengthen our internal controls over financial reporting were initiated in May 2007 and have continued since then. These include:



| |  |  | Establishment of more robust review process by senior management for high risk areas
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Implementation of specific review procedures for the review and recording of derivative instruments.
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Working closer with consultants in the identification and valuation of derivatives.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | In March 2007, we retained independent consultants trained in accounting and financial reporting who are CPAs. One of our consultants was a former partner with a
national public accounting firm and has experience with the requirements of Section 404 of the Sarbanes-Oxley Act.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hiring more staff with higher technical experience in the area of financial reporting and complex accounting issues
| | - |  | -------------------------------------------------------------------------------------------------------------------

The continued implementation of policies and procedures, as well as other initiatives to remediate the identified material weaknesses is among our
highest priorities. Management and our Audit Committee will continually assess the progress and sufficiency of these initiatives and make the appropriate adjustments as and when required. As of the date of this report, our management believes that
the plan outlined above, when completed, will remediate the material weaknesses in internal controls over financial reporting as described above.



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Part II. Other Information



|Item 1. | Legal Proceedings
|------- | -----------------

The Company is involved in
routine litigation arising in the ordinary course of its business, primarily in connection with its Construction division.

Legal Matters

Series A Convertible Preferred Stockholder

On January 31, 2007, an investor who holds 7,000 of the 45,000 outstanding shares of our Series A Convertible Preferred Stock, but was not a party to certain Forbearance Agreements entered into by the other two
holders of the Series A Convertible Preferred Stock, transmitted a notice of redemption to us alleging we failed to timely pay certain registration delay payments purportedly owed to this investor constituting a Triggering Event which
purportedly gave this investor the right to require us to redeem all shares of Series A Convertible Preferred Stock held by this investor. On April 3, 2007, after the other investors had entered into the Forbearance Agreements with us, this same
investor transmitted a second notice of redemption to us again alleging we had failed to timely pay the registration delay payments to this investor purportedly constituting a Triggering Event which gave such investor the right to require us to
redeem all shares of Series A Convertible Preferred Stock held by this investor. The investor had given us the option of accepting certain restructuring terms which we did not believe would be in the best interests of our shareholders or redeeming
the shares of Series A Convertible Preferred Stock that are held by this investor.

On April 25, 2007, this investor filed a lawsuit (the
Lawsuit) in the United States District Court for the Southern District of New York repeating these allegations and requesting specific performance compelling us to redeem all 7,000 shares of Series A Convertible Preferred Stock from and
pay any delinquent registration delay payments to this investor or, in the alternative, damages for breach of contract. The investor held shares of the Companys Series A Convertible Preferred Stock with a face value equal to $7,000,000. The
Company did not believe that a liability for any registration delay payments in accordance with the Registration Rights Agreement was warranted as it believed the lawsuit to be without merit.

On August 16, 2007, the Company entered into a Settlement Agreement and Release of Claims (the Settlement Agreement) pursuant to which,
subject to the payment of the Settlement Amount set forth below, the Company resolved all claims against the Company set forth in the Lawsuit. Pursuant to the Settlement Agreement, on September 28, 2007, the Company paid one of the plaintiffs in the
Lawsuit an amount equal to $7.4 million which included all accrued dividends since January 1, 2007 (the Settlement Amount) and the plaintiffs returned all shares of the Companys Series A Convertible Preferred Stock held by them to
the Company. In return, all parties to the Lawsuit entered into mutual releases releasing each other from any and all claims.



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##### Table of Contents

Yellow Cedar

In the fall of 2000, VICBP, a subsidiary of ours, was under contract with the Virgin Islands Port Authority, or VIPA, for the construction of the expansion of the St. Croix Airport. During the project, homeowners and
residents of the Yellow Cedar Housing Community, located next to the end of the expansion project, claimed to have experienced several days of excessive dust in their area as a result of the ongoing construction work and have claimed damage to their
property and personal injury. The homeowners of Yellow Cedar have filed two separate lawsuits for unspecified damages against VIPA and VICBP as co-defendants. In both cases VICBP, as defendant, has agreed to indemnify VIPA for any civil action as a
result of the construction work. VICBP brought a declaratory judgment action in the District Court of the Virgin Islands to determine whether there is coverage under the primary policy. On October 23, 2007, the declaratory judgment was ruled in
favor of insurers and we have since filed an Appeal of the Denial. If the Appeal of the Denial for the Companys Summary Judgment is favorable to us, VICBP would be liable for the $50 per claim and the original $50,000 deductible. However, this
was satisfied when the initial claims were resolved with claimants. Additionally, we will recover its legal expenses for pursuing the Summary Judgment.

VICBP cannot accurately estimate actual damages to the claimants since a significant part of the property damage claims were resolved prior to the litigation and credible evidence of the bodily injury portion of the
lawsuit has not been presented. Additionally, because the legal process continues, VICBP is unable to determine how all of the facts of this matter will be resolved under St. Croix environmental law. As a result of all the uncertainties, the outcome
cannot be reasonably determined at this time and the Company is unable to estimate the loss, if any, in accordance with FASB No. 5, Accounting for Contingencies (FASB No. 5). However, we do not believe that the outcome
will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Petit

On July 25, 1995, the Companys subsidiary, Societe des Carrieres de Grande Case, or SCGC, entered into an agreement with Mr. Fernand
Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, collectively referred to as, Petit, to lease a quarry located in the French side of St. Martin. Another lease was entered into by SCGC on October 27, 1999 for
the same and additional property. Another Company subsidiary, Bouwbedrijf Boven Winden, N.A., or BBW, entered into a materials supply agreement with Petit on July 31, 1995. This materials supply agreement was amended on October 27, 1999
and under the terms of this amendment the Company became a party to the materials supply agreement.

In May 2004, the Company advised Petit
that the Company would possibly be removing our equipment within the time frames provided in our agreements and made a partial quarterly payment under the materials supply agreement. On June 3, 2004, Petit advised the Company in writing that
Petit was terminating the materials supply agreement immediately because Petit had not received the full quarterly payment and also advised that Petit would not renew the 1999 lease when it expired on October 27, 2004. Petit refused to accept
the remainder of the quarterly payment from us in the amount of $45,000.

Without prior notice to BBW, Petit obtained orders to impound BBW
assets on St. Martin (the French side) and Sint Maarten (the Dutch side). The assets sought to be impounded included bank accounts and receivables. BBW has no assets on St. Martin, but approximately $341,000 of its assets have been impounded on Sint
Maarten. In obtaining the orders, Petit claimed that $7.6 million is due on the supply agreement (the full payment that would be due by us if the contract continued for the entire potential term and the Company continued to mine the quarry), $2.7
million is due for quarry restoration and $3.7 million is due for pain and suffering for a total claim amounting to $14.0 million. The materials supply agreement provided that it could be terminated by us on July 31, 2004.

In February 2005, SCGC, BBW and Devcon entered into agreements with Petit, which provided for the following:



| |  |  | The purchase by SCGC of three hectares of land located within the quarry property previously leased from Petit for approximately $1.1 million;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A two-year lease of approximately 15 hectares of land (the 15 Hectare Lease), on which SCGC operates a crusher, ready-mix concrete plant and aggregates
storage at a total cost of $100,000, which arrangement was entered into February 2005;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| |  |  | The granting of an option to SCGC to purchase two hectares of land (the 2 Hectare Option) prior to December 31, 2006 for $2 million, with $1
million due on each of September 30, 2006 and December 31, 2008, subject to the terms below:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against us and our subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC does not exercise the option to purchase and Petit is subsequently awarded a judgment, SCGC has the option to offset approximately $1.2
million against the judgment amount and transfer ownership of the three hectare parcel purchased by SCGC back to Petit;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The granting of an option to SCGC to purchase five hectares of land (the 5 Hectare Option) prior to June 30, 2010 for $3.6 million, payable $1.8
million on June 30, 2010 and $1.8 million on June 30, 2012; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The granting of an option to SCGC to extend the 15 Hectare Lease through June 30, 2010 (with annual rent of $55,000) if the 2 Hectare Option is exercised and
subsequent extensions, if the 5 Hectare Option is exercised, of the lease (with annual rent of $65,000) equal to the terms of mining authorizations obtained from the French Government agencies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In February 2005 the Company purchased the three hectares of land for $1.1 million in cash and executed
the 15 Hectare Lease.

In September 2006 the Company exercised the 2 Hectare Option and transferred $1 million in cash to the appropriate
agent of Petit. It is currently our intention to make the additional $1 million payment required under the option agreement on December 31, 2008 to the appropriate agent of Petit.

As of May 16, 2007, Petit has refused to accept the $1 million payment unless Devcon International Corp., the parent company, agrees to guarantee
payment of the $1 million due on December 31, 2008. As Devcon International Corp. was not referenced in or party to the 2 Hectare Option, the Company believes that Petits request is without merit. Currently, the $1 million remains on
deposit with the appropriate third-party escrow agent pending the outcome of this dispute.

Under the terms of the 15 Hectare Lease, Petit
agreed that an adjacent 6,000 square meter parcel, on which SCGCs aggregate wash plant, scale, maintenance building and administrative offices are located, was included. SCGC has been operating its aggregate wash plant, scale, maintenance
building and administrative offices on the adjacent property without incident or dispute with Petit for several years. Subsequent to refusing to accept the $1 million option payment, Petit has taken steps to impede SCGCs ability to access the
6,000 square meters of property, resulting in SCGCs inability to access the aggregate wash plant, scale, maintenance building and administrative facilities required to carry out its mining operation. Petit now claims that the 6,000 square
meters is located elsewhere on the parcel. During the first quarter of 2007, there were no mining operations and sales of mined aggregate to third parties was ceased. In late 2006, the Company began importing aggregate from third party vendors in
anticipation of the Petit non compliance. In March 2007, Petit blocked access to our ready-mix operation. Accordingly, the ready-mix operation has ceased and the Company is attempting to enforce easements to the owned and leased parcels. Under St.
Martin labor compensation laws, the Company does not incur the full cost of employee salaries if they are prevented from working under situations such as this dispute.



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##### Table of Contents

The Company has engaged French legal counsel to pursue SCGCs rights under the agreements executed
in February 2005. At this time, it is the Companys position that any asserted claims would arise from SCGC since it is suffering losses due to its inability to utilize its quarry and ready-mix operation.

On April 26, 2007, the Civil Court of Basse-Terre rendered its decision in the framework of the procedure on the merit concerning the completion of
the sale of the real property subject to the 2 Hectare Option. The court decision mainly provides that:



| |  |  | SCGC validly exercised the two Hectare Option;
| | - |  | ----------------------------------------------



| |  |  | the sale of the real property shall be completed under the conditions provided for in the 2 Hectare Option dated as of February 2005 and therefore the Civil
Court appoints the chairman of the Notary chamber of Guadeloupe with a view to (i) preparing a draft deed of sale in accordance with the provisions of the 2 Hectare Option within 30 days as from the requirement made by the most
diligent party and (ii) inviting the parties for the execution of the deed of sale within 30 days as from the delivery of his draft deed to the parties;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the notary (SCP Mouial, Ricour-Brunier, Balzame, Jacques-Richardson and Herbert) is prevented from releasing the $1 million currently placed in escrow
otherwise than to the benefit of the abovementioned notary;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Petit shall attend the closing meeting as requested by said notary and execute the deed of sale so prepared. Otherwise a penalty of 
500 per day for delay would have to be paid by Petit;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | as a consequence of the exercise of the option to purchase, the 15 Hectare Lease is renewed until June 30, 2010; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Petit shall pay to SCGC an amount of  7,000 in accordance with Article 700 of the French Civil Procedure Code.
| | - |  | ---------------------------------------------------------------------------------------------------------------

General

The Company is subject to certain
Federal, state and local environmental laws and regulations. Management believes that the Company is in compliance with all such laws and regulations. Compliance with environmental protection laws has not had a material adverse effect on the
Companys consolidated financial condition, results of operations or cash flows in the past and is not expected to have a material adverse effect in the foreseeable future.



|Item 1A. | Risk Factors
|-------- | ------------

Information about risk factors for
the three months ended March 31, 2007, does not differ materially from those in set forth in Part I, Item 1A, of the Companys annual report on Form 10-K/A for the fiscal year ended December 31, 2006.



|Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds
|------- | ----------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------



|             |  |                                                                                                                            
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibits:    |  |                                                                                                                            
|Exhibit 31.1 |  | Certification Pursuant to Rule 13a-14(a) & 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|Exhibit 31.2 |  | Certification Pursuant to Rule 13a-14(a) & 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|Exhibit 32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    
|Exhibit 32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    



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SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: February 29, 2008



By:

/s/ Richard RochonRichard Rochon, Acting Chief Executive Officer,(on behalf of the Registrant and as Principal Executive Officer)By:

/s/ Mark McIntoshMark McIntosh, Chief Financial Officer,(on behalf of the Registrant and as Principal Financial and Accounting Officer)




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EXHIBIT INDEX



|            |  |                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                                                        
|31.1        |  | Certification Pursuant to Rule 13a-14(a) & 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2        |  | Certification Pursuant to Rule 13a-14(a) & 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    
|32.2        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    



40