##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 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



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DEVCON INTERNATIONAL CORP.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                      |  |                                                         
|-------------------------------------------------------------- |  | ------------------------------------ |  | --------------------------------------------------------
|FLORIDA                                                        |  | 59-0671992                           |  | 7380;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)



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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 November 9, 2007 the number of shares outstanding of the registrants Common Stock was 6,235,612.



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

INDEX



|        |  |                       |  |                                                                                                                                             |  |           
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|        |  |                       |  |                                                                                                                                             |  | PageNumber
|Part I  |  | Financial Information |  |                                                                                                                                            
|        |  |                       | 
|        |  | Item 1                |  | Condensed Consolidated Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006                                            |  | 3         
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2007 and 2006 (unaudited)                          |  | 5         
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2007 and 2006 (unaudited)                           |  | 6         
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Stockholders Equity and Comprehensive Income for the Nine Months Ended September 30, 2007 (unaudited) |  | 7         
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited)                           |  | 8         
|        |  |                       | 
|        |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                              |  | 10        
|        |  |                       | 
|        |  | Item 2                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                       |  | 28        
|        |  |                       | 
|        |  | Item 3                |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                  |  | 37        
|        |  |                       | 
|        |  | Item 4                |  | Controls and Procedures                                                                                                                     |  | 37        
|        |  |                      
|Part II |  | Other Information     |  |                                                                                                                                            
|        |  |                       | 
|        |  | Item 1                |  | Legal Proceedings                                                                                                                           |  | 38        
|        |  |                       | 
|        |  | Item 1A               |  | Risk Factors                                                                                                                                |  | 40        
|        |  |                       | 
|        |  | Item 2                |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                 |  | 41        
|        |  |                       | 
|        |  | Item 3                |  | Default Upon Senior Securities                                                                                                              |  | 41        
|        |  |                       | 
|        |  | Item 4                |  | Submission of Matters to a Vote of Security Holders                                                                                         |  | 41        
|        |  |                       | 
|        |  | Item 5                |  | Other Information                                                                                                                           |  | 41        
|        |  |                       | 
|        |  | Item 6                |  | Exhibits                                                                                                                                    |  | 41        



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)

(Unaudited)



|                                                                                                   |  |                    |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                   |  | September 30, 2007 |         |   | December 31, 2006 |  
|                                                                                                   |  |                    |         |   | (as restated)     |  
|ASSETS                                                                                             |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                    |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                          |  | $                  | 3,849   |   |                   | $ | 5,015   |  
|Accounts receivable, net of allowance for doubtful accounts of $(2,913) and $(2,026), respectively |  |                    | 11,482  |   |                   |   | 18,288  |  
|Accounts receivable, related party                                                                 |  |                    | 321     |   |                   |   | 506     |  
|Notes receivable                                                                                   |  |                    | 1,020   |   |                   |   | 2,617   |  
|Costs and estimated earnings in excess of billings                                                 |  |                    | 175     |   |                   |   | 1,485   |  
|Prepaid expenses                                                                                   |  |                    | 1,676   |   |                   |   | 1,501   |  
|Assets held for sale                                                                               |  |                    | 2,314   |   |                   |   | 844     |  
|Other current assets                                                                               |  |                    | 9,270   |   |                   |   | 10,257  |  
|                                                                                                   |  |                    |         |   |                   |   |         |  
|Total current assets                                                                               |  |                    | 30,107  |   |                   |   | 40,513  |  
|Property, plant and equipment:                                                                     |  |                    |         |   |                   |   |         |  
|Land                                                                                               |  |                    | 53      |   |                   |   | 369     |  
|Buildings                                                                                          |  |                    | 200     |   |                   |   | 251     |  
|Leasehold improvements                                                                             |  |                    | 1,836   |   |                   |   | 1,759   |  
|Equipment                                                                                          |  |                    | 2,991   |   |                   |   | 8,443   |  
|Furniture and fixtures                                                                             |  |                    | 1,062   |   |                   |   | 1,219   |  
|Construction in process                                                                            |  |                    | 335     |   |                   |   | 1,083   |  
|                                                                                                   |  |                    |         |   |                   |   |         |  
|Total property, plant and equipment                                                                |  |                    | 6,477   |   |                   |   | 13,124  |  
|Less accumulated depreciation                                                                      |  |                    | (2,538  | ) |                   |   | (1,842  | )
|                                                                                                   |  |                    |         |   |                   |   |         |  
|Total property, plant and equipment, net                                                           |  |                    | 3,939   |   |                   |   | 11,282  |  
|Investments in unconsolidated joint ventures and affiliates                                        |  |                    | 224     |   |                   |   | 339     |  
|Notes receivable, net of current portion                                                           |  |                    | 382     |   |                   |   | 1,926   |  
|Customer lists, net of amortization $(36,135) and $(24,367) respectively                           |  |                    | 59,389  |   |                   |   | 70,788  |  
|Goodwill                                                                                           |  |                    | 76,489  |   |                   |   | 76,577  |  
|Other intangible assets, net of amortization $(673) and $(425), respectively                       |  |                    | 2,542   |   |                   |   | 2,790   |  
|Other long-term assets                                                                             |  |                    | 12,447  |   |                   |   | 8,682   |  
|                                                                                                   |  |                    |         |   |                   |   |         |  
|Total assets                                                                                       |  | $                  | 185,519 |   |                   | $ | 212,897 |  
|                                                                                                   |  |                    |         |   |                   |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements.



3



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (continued)

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

(Unaudited)



|                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                               |  | September 30,2007 |         |   | December 31,2006 |  
|                                                                                                                                                                               |  |                   |         |   | (as restated)    |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Current liabilities:                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Accounts payable, trade and other                                                                                                                                              |  | $                 | 3,688   |   |                  | $ | 6,664   |  
|Accrued operational fees and taxes                                                                                                                                             |  |                   | 2,938   |   |                  |   | 2,551   |  
|Accrued expenses and other liabilities                                                                                                                                         |  |                   | 4,175   |   |                  |   | 6,618   |  
|Deferred revenue                                                                                                                                                               |  |                   | 10,818  |   |                  |   | 10,413  |  
|Accrued expense, retirement and severance                                                                                                                                      |  |                   | 705     |   |                  |   | 671     |  
|Current installments of long-term debt                                                                                                                                         |  |                   | 52      |   |                  |   | 76      |  
|Billings in excess of costs and estimated earnings                                                                                                                             |  |                   | 92      |   |                  |   | 1,037   |  
|Derivative instruments                                                                                                                                                         |  |                   | 1,986   |   |                  |   | 4,462   |  
|Income tax payable                                                                                                                                                             |  |                   | 120     |   |                  |   | 286     |  
|                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                      |  |                   | 24,574  |   |                  |   | 32,778  |  
|Long-term debt, excluding current installments                                                                                                                                 |  |                   | 94,449  |   |                  |   | 89,202  |  
|Retirement and severance, excluding current portion                                                                                                                            |  |                   | 2,213   |   |                  |   | 2,716   |  
|Long term deferred tax liability                                                                                                                                               |  |                   | 1,236   |   |                  |   | 5,018   |  
|Other long-term liabilities, excluding current portion                                                                                                                         |  |                   | 11,536  |   |                  |   | 7,592   |  
|                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                              |  | $                 | 134,008 |   |                  | $ | 137,306 |  
|Commitments and contingencies (Note 15)                                                                                                                                        |  |                   |         |   |                  |   |         |  
|Series A Convertible Preferred Stock, $1,000 stated value, 10,000,000 shares authorized, 38,000 and 45,000 shares outstanding in 2007 and
2006, respectively                   |  |                   | 38,195  |   |                  |   | 41,168  |  
|Stockholders equity:                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Common stock, $0.10 par value. Shares authorized 50,000,000, shares issued 6,235,612 in 2007 and 6,033,882 in 2006, shares outstanding
6,071,778 in 2007 and 6,033,848 in 2006 |  |                   | 624     |   |                  |   | 603     |  
|Additional paid-in capital                                                                                                                                                     |  |                   | 28,404  |   |                  |   | 31,845  |  
|Retained (deficit) earnings                                                                                                                                                    |  |                   | (13,900 | ) |                  |   | 3,207   |  
|Accumulated other comprehensive loss  cumulative translation adjustment                                                                                                       |  |                   | (1,237  | ) |                  |   | (1,232  | )
|Treasury stock, at cost, 163,834 and 34 shares in 2007 and 2006                                                                                                                |  |                   | (575    | ) |                  |   |        |  
|                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                     |  |                   | 13,316  |   |                  |   | 34,423  |  
|                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                     |  | $                 | 185,519 |   |                  | $ | 212,897 |  
|                                                                                                                                                                               |  |                   |         |   |                  |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements.



4



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##### Table of Contents

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 |          
|                                                                                                                                                                 |  | September 30,2007          |           |   | September 30,2006 |  
|Revenue                                                                                                                                                          |  | $                          | 14,263    |   |                   | $ | 13,845    |  
|Cost of Sales (exclusive of depreciation and amortization shown below):                                                                                          |  |                            | 6,143     |   |                   |   | 6,236     |  
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Gross profit                                                                                                                                                     |  |                            | 8,120     |   |                   |   | 7,609     |  
|Operating expenses                                                                                                                                               |  |                            |           |   |                   |   |           |  
|Selling                                                                                                                                                          |  |                            | 1,086     |   |                   |   | 1,261     |  
|General and administrative                                                                                                                                       |  |                            | 4,914     |   |                   |   | 5,711     |  
|Depreciation and amortization                                                                                                                                    |  |                            | 4,252     |   |                   |   | 5,010     |  
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Operating loss                                                                                                                                                   |  |                            | (2,132    | ) |                   |   | (4,373    | )
|Other income (expense)                                                                                                                                           |  |                            |           |   |                   |   |           |  
|Interest expense                                                                                                                                                 |  |                            | (2,619    | ) |                   |   | (5,983    | )
|Interest income                                                                                                                                                  |  |                            | 39        |   |                   |   | 49        |  
|Change in fair value of derivative instrument                                                                                                                    |  |                            | 364       |   |                   |   | 496       |  
|Other                                                                                                                                                            |  |                            | 6         |   |                   |   |          |  
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Loss from continuing operations before income taxes                                                                                                              |  |                            | (4,342    | ) |                   |   | (9,811    | )
|Income tax (benefit)                                                                                                                                             |  |                            | (901      | ) |                   |   | (1,711    | )
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Net loss from continuing operations                                                                                                                              |  |                            | (3,441    | ) |                   |   | (8,100    | )
|(Loss) from discontinued operations, net of income tax (benefit) expense of $(678) and $375 for the three months ended September 30, 2007
and 2006, respectively |  |                            | (1,243    | ) |                   |   | (3,142    | )
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Net loss                                                                                                                                                         |  | $                          | (4,684    | ) |                   | $ | (11,242   | )
|Preferred Dividends                                                                                                                                              |  |                            | (1,102    | ) |                   |   |          |  
|Accretion of Preferred Stock                                                                                                                                     |  |                            | (710      | ) |                   |   |          |  
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Net loss available for common stockholders                                                                                                                       |  | $                          | (6,496    | ) |                   | $ | (11,242   | )
|                                                                                                                                                                 |  |                            |           |   |                   |   |           |  
|Basic (loss) per share:                                                                                                                                          |  |                            |           |   |                   |   |           |  
|Continuing operations                                                                                                                                            |  | $                          | (0.55     | ) |                   | $ | (1.34     | )
|Discontinued operations                                                                                                                                          |  | $                          | (0.20     | ) |                   | $ | (0.52     | )
|Net loss                                                                                                                                                         |  | $                          | (0.75     | ) |                   | $ | (1.86     | )
|Net loss available for common stockholders                                                                                                                       |  | $                          | (1.05     | ) |                   | $ | (1.86     | )
|Diluted (loss) per share:                                                                                                                                        |  |                            |           |   |                   |   |           |  
|Continuing operations                                                                                                                                            |  | $                          | (0.55     | ) |                   | $ | (1.34     | )
|Discontinued operations                                                                                                                                          |  | $                          | (0.20     | ) |                   |   | (0.52     | )
|Net loss                                                                                                                                                         |  | $                          | (0.75     | ) |                   | $ | (1.86     | )
|Net loss available for common stockholders                                                                                                                       |  | $                          | (1.05     | ) |                   | $ | (1.86     | )
|Weightedaverage number of shares outstanding:                                                                                                                    |  |                            |           |   |                   |   |           |  
|Basic                                                                                                                                                            |  |                            | 6,202,769 |   |                   |   | 6,033,879 |  
|Diluted                                                                                                                                                          |  |                            | 6,202,769 |   |                   |   | 6,033,879 |  

See accompanying notes to the unaudited condensed consolidated financial statements



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (continued)

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

(Unaudited)



|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | --------- | - | ------------------ | - | --------- | -
|                                                                                                                                                                       |  | For The Nine Months Ended |          
|                                                                                                                                                                       |  | September 30, 2007        |           |   | September 30, 2006 |  
|Revenue                                                                                                                                                                |  | $                         | 42,245    |   |                    | $ | 39,451    |  
|Cost of Sales (exclusive of depreciation and amortization shown below):                                                                                                |  |                           | 18,237    |   |                    |   | 17,490    |  
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Gross profit                                                                                                                                                           |  |                           | 24,008    |   |                    |   | 21,961    |  
|Operating expenses                                                                                                                                                     |  |                           |           |   |                    |   |           |  
|Selling                                                                                                                                                                |  |                           | 3,568     |   |                    |   | 3,575     |  
|General & administrative                                                                                                                                               |  |                           | 15,855    |   |                    |   | 15,415    |  
|Depreciation and amortization                                                                                                                                          |  |                           | 13,137    |   |                    |   | 14,061    |  
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Operating loss                                                                                                                                                         |  |                           | (8,552    | ) |                    |   | (11,090   | )
|Other income (expense)                                                                                                                                                 |  |                           |           |   |                    |   |           |  
|Interest expense                                                                                                                                                       |  |                           | (7,918    | ) |                    |   | (17,512   | )
|Interest income                                                                                                                                                        |  |                           | 115       |   |                    |   | 175       |  
|Change in fair value of derivative instrument                                                                                                                          |  |                           | 2,308     |   |                    |   | 7,315     |  
|Other                                                                                                                                                                  |  |                           | 16        |   |                    |   | (35       | )
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Loss from continuing operations before income taxes                                                                                                                    |  |                           | (14,031   | ) |                    |   | (21,147   | )
|Income tax (benefit)                                                                                                                                                   |  |                           | (1,855    | ) |                    |   | (3,228    | )
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Net loss from continuing operations                                                                                                                                    |  |                           | (12,176   | ) |                    |   | (17,919   | )
|(Loss) income from discontinued operations, net of income tax (benefit) expense of $(726) and $395 for the nine months ended
September 30, 2007 and 2006, respectively |  |                           | (4,600    | ) |                    |   | (3,524    | )
|(Loss) gain on disposal of discontinued operations, net of income tax expense of $ 0 and $ 0 for the nine months ended September 30, 2007
and 2006, respectively       |  |                           | (331      | ) |                    |   | 1,013     |  
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Net loss                                                                                                                                                               |  | $                         | (17,107   | ) |                    | $ | (20,430   | )
|Preferred Dividends                                                                                                                                                    |  |                           | (3,319    | ) |                    |   |          |  
|Accretion of Preferred Stock                                                                                                                                           |  |                           | (1,130    | ) |                    |   |          |  
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Net loss available for common stockholders                                                                                                                             |  | $                         | (21,556   | ) |                    | $ | (20,430   | )
|                                                                                                                                                                       |  |                           |           |   |                    |   |           |  
|Basic (loss) per share:                                                                                                                                                |  |                           |           |   |                    |   |           |  
|Continuing operations                                                                                                                                                  |  | $                         | (1.96     | ) |                    | $ | (2.98     | )
|Discontinued operations                                                                                                                                                |  | $                         | (0.79     | ) |                    | $ | (0.42     | )
|Net loss                                                                                                                                                               |  | $                         | (2.75     | ) |                    | $ | (3.40     | )
|Net loss available for common stockholders                                                                                                                             |  | $                         | (3.47     | ) |                    | $ | (3.40     | )
|Diluted (loss) per share:                                                                                                                                              |  |                           |           |   |                    |   |           |  
|Continuing operations                                                                                                                                                  |  | $                         | (1.96     | ) |                    | $ | (2.98     | )
|Discontinued operations                                                                                                                                                |  | $                         | (0.79     | ) |                    | $ | (0.42     | )
|Net loss                                                                                                                                                               |  | $                         | (2.75     | ) |                    | $ | (3.40     | )
|Net loss available for common stockholders                                                                                                                             |  | $                         | (3.47     | ) |                    | $ | (3.40     | )
|Weighted average number of shares outstanding:                                                                                                                         |  |                           |           |   |                    |   |           |  
|Basic                                                                                                                                                                  |  |                           | 6,210,180 |   |                    |   | 6,023,075 |  
|Diluted                                                                                                                                                                |  |                           | 6,210,180 |   |                    |   | 6,023,075 |  

See accompanying notes to the unaudited condensed consolidated financial statements.



6



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity and Other Comprehensive Income (Loss)

For the Nine Months Ended September 30, 2007

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

(Unaudited)



|                                                                  |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ |  | ---------- | --- | -------------- | -------- | ------ | ----------------- | ---------------- | - | ----------------- | - |  | ------------- | ------ | - | ------------------- | - | ---- | - |  | - | ------- | -
|                                                                  |  | Common Stock |  | Additional |     |                | Retained |        |                   | AccumulatedOther |   |                   |   |  |               | Total  |  
|                                                                  |  | IssuedShares |  | Amount     |     | Paid-inCapital |          |        | Earnings(Deficit) |                  |   | ComprehensiveLoss |   |  | TreasuryStock |        |   | StockholdersEquity |  
|Balance at Dec 31, 2006 (as restated)                             |  | 6,033,882    |  | $          | 603 |                | $        | 31,845 |                   |                  | $ | 3,207             |   |  | $             | (1,232 | ) |                     | $ |     |   |  | $ | 34,423  |  
|Comprehensive (loss)                                              |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   |         |  
|Net loss                                                          |  |              |  |            |     |                |          |        |                   |                  |   | (17,107           | ) |  |               |        |   |                     |   |      |   |  |   | (17,107 | )
|Foreign currency translation adjustment                           |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               | (5     | ) |                     |   |      |   |  |   | (5      | )
|                                                                  |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   |         |  
|Comprehensive (loss)                                              |  |              |  |            |     |                |          |        |                   |                  |   | (17,107           | ) |  |               | (5     | ) |                     |   |      |   |  |   | (17,112 | )
|Issuance of common stock for payment of preferred stock dividends |  | 132,780      |  |            | 14  |                |          | 756    |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   | 770     |  
|Repurchase of 163,800 shares                                      |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               |        |   |                     |   | (575 | ) |  |   | (575    | )
|Accretion of deferred issuance and debt discount costs            |  |              |  |            |     |                |          | (1,130 | )                 |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   | (1,130  | )
|Dividends payable                                                 |  |              |  |            |     |                |          | (3,319 | )                 |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   | (3,319  | )
|Exercise of stock options                                         |  | 68,950       |  |            | 7   |                |          | 116    |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   | 123     |  
|Stock-based compensation expense                                  |  |              |  |            |     |                |          | 136    |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   | 136     |  
|                                                                  |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   |         |  
|Balance at September 30, 2007 (unaudited)                         |  | 6,235,612    |  | $          | 624 |                | $        | 28,404 |                   |                  | $ | (13,900           | ) |  | $             | (1,237 | ) |                     | $ | (575 | ) |  | $ | 13,316  |  
|                                                                  |  |              |  |            |     |                |          |        |                   |                  |   |                   |   |  |               |        |   |                     |   |      |   |  |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements



7



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

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

(Unaudited)



|                                                                              |  |                           |         |   |                   |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------------- | - | ------- | -
|                                                                              |  | For The Nine Months Ended |        
|                                                                              |  | September 30,2007         |         |   | September 30,2006 |  
|Cash flows from operating activities:                                         |  |                           |         |   |                   |   |         |  
|Net loss                                                                      |  | $                         | (17,107 | ) |                   | $ | (20,430 | )
|Adjustments to reconcile net loss to net cash (used in) operating activities: |  |                           |         |   |                   |   |         |  
|                                                                              |  |                          
|Stock-based compensation expense                                              |  |                           | 136     |   |                   |   | 175     |  
|Depreciation and amortization                                                 |  |                           | 13,172  |   |                   |   | 16,815  |  
|Loan origination cost amortization                                            |  |                           | 301     |   |                   |   | 751     |  
|Deferred income tax (benefit)                                                 |  |                           | (1,400  | ) |                   |   | (4,156  | )
|Provision for doubtful accounts and notes                                     |  |                           | 648     |   |                   |   | 327     |  
|Loss (gain) on sale of property and equipment                                 |  |                           | 88      |   |                   |   | (2,802  | )
|Minority interest in gain (loss) of consolidated subsidiaries                 |  |                           |        |   |                   |   | 35      |  
|Loss on sale of disposition of business                                       |  |                           | 262     |   |                   |   |        |  
|Change in fair value of derivative financial instrument                       |  |                           | (2,308  | ) |                   |   | (7,305  | )
|Amortization of debt discount                                                 |  |                           |        |   |                   |   | 7,696   |  
|Impairment of long lived assets                                               |  |                           | 203     |   |                   |   | 389     |  
|Changes in operating assets and liabilities:                                  |  |                           |         |   |                   |   |         |  
|Accounts receivable                                                           |  |                           | 6,104   |   |                   |   | (307    | )
|Accounts receivable  related party                                           |  |                           |        |   |                   |   | (47     | )
|Notes receivable                                                              |  |                           | 162     |   |                   |   | (357    | )
|Notes receivable  related party                                              |  |                           |        |   |                   |   | 2,160   |  
|Costs and estimated earnings in excess of billings                            |  |                           | 1,309   |   |                   |   | 1,102   |  
|Costs and estimated earnings in excess of billings, related party             |  |                           |        |   |                   |   | 20      |  
|Prepaid expenses and other current assets                                     |  |                           | (2,090  | ) |                   |   | (604    | )
|Other long-term assets                                                        |  |                           | (3,766  | ) |                   |   | (882    | )
|Accounts payable, accrued expenses and other liabilities                      |  |                           | (2,603  | ) |                   |   | (2,683  | )
|Accrued loss-related party construction contract                              |  |                           |        |   |                   |   | 341     |  
|Deferred revenue                                                              |  |                           | 404     |   |                   |   | 1,727   |  
|Billings in excess of costs and estimated earnings                            |  |                           | (945    | ) |                   |   | 1,423   |  
|Billings in excess of costs and estimated earnings, related party             |  |                           |        |   |                   |   | 387     |  
|Income tax payable                                                            |  |                           | (166    | ) |                   |   | (463    | )
|Other long-term liabilities                                                   |  |                           | 3,531   |   |                   |   | 3,616   |  
|                                                                              |  |                           |         |   |                   |   |         |  
|Net cash (used in) operating activities                                       |  | $                         | (4,065  | ) |                   | $ | (3,072  | )

See accompanying notes to the unaudited condensed consolidated financial statements.



8



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Condensed Consolidated Statement of Cash Flows

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

(Unaudited)



|                                                                                                                      |  |                           |        |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ----------------- | - | ------- | -
|                                                                                                                      |  | For The Nine Months Ended |       
|                                                                                                                      |  | September 30,2007         |        |   | September 30,2006 |  
|Cash flows from investing activities:                                                                                 |  |                           |        |   |                   |   |         |  
|Purchases of property, plant and equipment                                                                            |  | $                         | (1,182 | ) |                   | $ | (4,313  | )
|Cash used in business acquisition and purchase of customer lists, net of cash acquired                                |  |                           | (303   | ) |                   |   | (66,296 | )
|Proceeds from disposition of property, plant and equipment                                                            |  |                           | 470    |   |                   |   | 1,127   |  
|Proceeds from disposition of business                                                                                 |  |                           | 5,033  |   |                   |   | 9,733   |  
|Payments received on notes related to the sale of assets                                                              |  |                           | 1,627  |   |                   |   | 44      |  
|Investments in unconsolidated joint ventures                                                                          |  |                           | 115    |   |                   |   |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Net cash provided by (used in) investing activities                                                                   |  | $                         | 5,760  |   |                   | $ | (59,705 | )
|Cash flows from financing activities:                                                                                 |  |                           |        |   |                   |   |         |  
|Proceeds from issuance of common stock                                                                                |  |                           | 123    |   |                   |   | 138     |  
|Repurchase of treasury shares                                                                                         |  |                           | (575   | ) |                   |   |        |  
|Proceeds from issuance of notes                                                                                       |  |                           |       |   |                   |   | 45,000  |  
|Net borrowing from revolving credit facility                                                                          |  |                           | 5,800  |   |                   |   | 23,786  |  
|Buyback of warrants                                                                                                   |  |                           | (167   | ) |                   |   |        |  
|Payment of debt issuance costs                                                                                        |  |                           | (555   | ) |                   |   | (4,240  | )
|Redemption of Series A Convertible Preferred Stock                                                                    |  |                           | (7,422 | ) |                   |   |        |  
|Principal payments on debt                                                                                            |  |                           | (22    | ) |                   |   | (1,725  | )
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Net cash (used in) provided by financing activities                                                                   |  | $                         | (2,818 | ) |                   | $ | 62,959  |  
|Effect of exchange rate changes on cash                                                                               |  |                           | (43    | ) |                   |   | (108    | )
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                                  |  | $                         | (1,166 | ) |                   | $ | 74      |  
|Cash and cash equivalents, beginning of year                                                                          |  |                           | 5,015  |   |                   |   | 4,634   |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Cash and cash equivalents, end of period                                                                              |  | $                         | 3,849  |   |                   | $ | 4,708   |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Supplemental disclosures of cash flow information:                                                                    |  |                           |        |   |                   |   |         |  
|Cash paid for interest                                                                                                |  | $                         | 8,643  |   |                   | $ | 6,302   |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Cash paid for income taxes                                                                                            |  | $                         | 286    |   |                   | $ | 537     |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Supplemental non-cash disclosures:                                                                                    |  |                           |        |   |                   |   |         |  
|Offset of note receivable against accounts payable                                                                    |  | $                         | 1,359  |   |                   | $ | 130     |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Issuance of Warrants                                                                                                  |  | $                         |       |   |                   | $ | 1,256   |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Issuance of common stock in lieu of cash payment of dividends payable related to Series A Convertible Preferred Stock |  | $                         | 770    |   |                   | $ |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Reclassification of dividends payable in-kind to Series A Convertible Preferred Stock                                 |  | $                         | 2,897  |   |                   | $ |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Reclassification of property, plant and equipment to assets held for sale                                             |  | $                         | 2,364  |   |                   | $ | 844     |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Reclassification from assets held for sale to notes receivable                                                        |  | $                         | 233    |   |                   | $ |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Reclassification of notes receivable to other assets                                                                  |  | $                         | 525    |   |                   | $ |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Accretion of deferred financing costs and debt discount charged to additional paid-in capital                         |  | $                         | 1,130  |   |                   | $ |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  
|Accrued dividends charged to additional paid-in capital                                                               |  | $                         | 3,319  |   |                   | $ |        |  
|                                                                                                                      |  |                           |        |   |                   |   |         |  

See accompanying notes to the unaudited condensed consolidated financial statements



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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 nine months ended September 30, 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 September 30, 2007, and the results of its operations and cash flows for the three months ended September 30, 2007 and 2006, and the nine
months ended September 30, 2007 and 2006.

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

Background of Restatement

During the fourth quarter of 2007, the Company will be filing an amendment to its Form 10-K/A for the year ended December 31, 2006 and its Form 10Q for the three months ended March 31, 2007 and the six months ended June 30,
2007. The Company is 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, par value $.10 (Preferred
Stock). The substantive changes to be reflected in such amendments will be (1) the re-valuation of the derivative liability 2) adjustment to the carrying value of the Preferred Stock and 3) reclassification of Preferred Stock dividends
payable and accretion charges to net loss available for common shareholders.

Valuation of Derivative Liability

On October 20, 2006, pursuant to the terms of the Securities Purchase Agreement, as amended (SPA), the private placement investors
received, in exchange for the Notes, an aggregate of 45,000 shares of 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 Preferred Stock, the following embedded derivatives were identified within the 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
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 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 Preferred Stock 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 Preferred Stock that were bifurcated should have been valued at $0.5 million. At December 31, 2006, this adjustment impacted the carrying value of the Preferred Stock, as well as interest expense.



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##### Table of Contents

Reclassification of Dividends Payable and Accretion Charges

The Preferred Stock accrues dividends in accordance with the SPA. The dividends accrued for the three and six months ended March 31, 2007 and
June 30, 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 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 Preferred Stock was reclassified from interest expense and deducted from net loss
available for common stockholders. These amounts have been properly presented for the three and nine months ended September 30, 2007.

The effect of the foregoing on the Companys consolidated balance sheet at December 31, 2006 is expected to be as follows (000s):

Consolidated Balance Sheet:



|                                                                           |  |                     |        |   |                                |   |                                    |  |                  |        |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------- | ------ | - | ------------------------------ | - | ---------------------------------- |  | ---------------- | ------ |  | - | ------ | -
|                                                                           |  | DerivativeLiability |        |   | Long-termDeferred TaxLiability |   | Series AConvertiblePreferred Stock |  | RetainedEarnings |       
|As originally reported                                                     |  | $                   | 8,390  |   |                                | $ | 4,682                              |  | $                | 35,873 |  | $ | 4,910  |  
|Adjust the estimated fair market value of the derivative                   |  |                     | (3,928 | ) |                                |   |                                   |  |                  | 5,267  |  |   | (1,339 | )
|Adjustment to true up the Discount on Series A Convertible Preferred Stock |  |                     |       |   |                                |   |                                   |  |                  | 28     |  |   | (28    | )
|                                                                           |  |                     |        |  
|Tax effect of restatement adjustments                                      |  |                     |       |   |                                |   | 336                                |  |                  |       |  |   | (336   | )
|                                                                           |  |                     |        |   |                                |   |                                    |  |                  |        |  |   |        |  
|As restated                                                                |  | $                   | 4,462  |   |                                | $ | 5,018                              |  | $                | 41,168 |  | $ | 3,207  |  
|                                                                           |  |                     |        |   |                                |   |                                    |  |                  |        |  |   |        |  

Certain balance sheet amounts at December 31, 2006 have been restated to reflect the effect of the foregoing.

(2) SIGNIFICANT ACCOUNTING POLICIES

Income Taxes

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes and FSP FIN 48-1, which amended certain provisions of FIN 48. 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. In connection with our adoption of FIN No. 48, we analyzed the filing positions in all of the federal and state jurisdictions
where we are required to file income tax returns, as well as all open tax years in these jurisdictions. There was no impact on our condensed consolidated financial statements upon adoption of FIN No. 48 on January 1, 2007. The Company did
not have any unrecognized tax benefits and there was no effect on the financial condition or results of operations for the three and nine months ended September 30, 2007 as a result of implementing FIN 48, or FSP FIN 48-1. In accordance with
FIN 48, the Company adopted the policy of recognizing penalties in selling, general and administrative expenses and interest, if any, related to unrecognized tax positions as income tax expense.



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##### Table of Contents

Capitalized Software

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 and the nine months ended September 30, 2007 and 2006, the amounts capitalized were insignificant.

(3) 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.

(4) LIQUIDITY

On April 2, 2007, effective as of
March 30, 2007, Devcon International Corp., entered into certain Forbearance and Amendment Agreements (the Forbearance Agreements) with each of certain institutional investors (the Required Holders) holding, in the
aggregate, a majority of the Companys previously-issued Preferred Stock. The intent of the Forbearance Agreements was to amend certain terms of the Preferred Stock. 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 and an amended and restated Registration Stock Rights Agreement with the Secretary of State of Florida on
July 13, 2007, effective as of such date (Closing Date). 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 prior to the Closing Date 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 dividends accrued were paid-in-kind and reclassified to the carrying value of the Preferred Stock. In addition, each of the parties to the Amended SPA waived certain Triggering Events (as
defined in the Certificate of Designations) that may have occurred prior to the Closing Date, certain rights to receive Registration Delay Payments and certain other provisions set forth in the governing documents.

On April 3, 2007, an institutional investor who held shares of the Companys 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 Preferred Stock held by such investor. The Company disagreed with this investor. The investor held shares of the Companys Preferred Stock with a face value equal to $7.0 million. On April 25, 2007, this investor filed a lawsuit
in the United States District Court for the Southern District of New York. The Company did not believe that a liability for any registration delay payments in accordance with the Registration Rights Agreement was warranted.

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.



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##### Table of Contents

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) previously disclosed under the caption Preferred
Stockholder in Item 3Legal Proceedings of the Companys Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30, 2007. On September 28, 2007, the total amount paid by the
Company upon redemption of the shares was $7.4 million, which included accrued dividends since January 1, 2007. (See Note 7-Debt).

(5)
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
September 2007, the income tax matters were resolved and the remaining balance in escrow of $0.3 million was distributed to the Guardian common shareholders.

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 the SPA dated as of
February 10, 2006, an aggregate principal amount of $45 million of notes. On October 20, 2006, the notes were exchanged for Preferred Stock (See Note 9-Preferred Stock).

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
September 30, 2007, the net effect of those adjustments was $2.9 million of 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 September 30, 2006, as compared to results of operations for the nine months ended September 30, 2007.



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##### Table of Contents

The purchase price allocation was 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 the 2006 fiscal year:

Proforma Statement of Acquisition



|                                     |  |                                             |           |  
|------------------------------------ |  | ------------------------------------------- | --------- | -
|Proforma Statement of Acquisition    |  |                                             |           |  
|                                     | 
|                                     |  | For the NineMonths Ended September 30, 2006 |          
|                                     |  |                                             |          
|Revenue                              |  | $                                           | 44,497    |  
|Net loss                             |  | $                                           | (17,234   | )
|Loss per common share  basic        |  | $                                           | (2.86     | )
|Loss per common share  diluted      |  | $                                           | (2.86     | )
|Weighted average shares outstanding: |  |                                             |           |  
|Basic                                |  |                                             | 6,023,075 |  
|Diluted                              |  |                                             | 6,023,075 |  



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##### Table of Contents

(6) DISCONTINUED OPERATIONS

On March 30, 2007, the Companys Board of Directors passed a resolution which authorized management to sell the remaining assets of the Construction, Materials and Utilities Divisions upon such terms and
conditions, including price, as management determined to be appropriate. The Board resolution provided the Companys management with the authority and commitment to establish a plan to sell these assets, some of which have been sold with the
remaining assets being immediately available for sale. The Company is seeking 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), as of September 30, 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 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. As of September 30, 2007, the promissory note was applied to reduce
amounts the Company owed to the Purchaser. 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. As of June 27, 2007, the Company has entered into an extended sublease agreement beyond the original 90 day period with the Purchaser. 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 under the terms of which, Seller 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 of September 30, 2007, the Transition Services Agreement has been informally extended
between the parties.

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 $261,828 was recorded during the nine months ended September 30, 2007 upon final transfer of assets to the Purchaser. The Company established
an accrued liability of $201,659 for the Deerfield lease in accordance with FASB No. 146 Accounting for Costs Associated with Exit or Disposal Activities (FASB No. 146). At September 30, 2007, the related
unpaid balance was $177,678. 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 was included in accrued expense, retirement and severance and the payroll related benefits were included in accrued expenses and other liabilities. All
of these amounts were charged to discontinued operations. 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. For the nine months ended September 30, 2007, the Company made payments of $1,106,003 related to these charges. At September 30, 2007, the related unpaid
severance balance amounted to $50,305.

As of February 28, 2007 the Purchaser 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 Purchaser). The Company will continue to recognize revenue of these contracts during this interim
period. In these cases the Purchaser will be performing as a subcontractor, for which the Purchaser has indemnified the Company from any new contract 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.



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##### Table of Contents

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 AMP Preferred Shares) were outstanding and owned beneficially and of record by certain third parties and that such AMP 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 AMP Preferred Shares and that the purchasers have sole responsibility of satisfying and discharging all obligations represented by
such AMP 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.

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 months Ended
September 30, |        |   | (dollars in thousands) For the nine months Ended
September 30, |  
|                                                           |  | 2007                                                            |        |   | 2006                                                           |   |        | 2007 |  |   | 2006   |  
|Total Revenue                                              |  | $                                                               | 3,335  |   |                                                                | $ | 12,279 |      |  | $ | 17,901 |   |  | $ | 42,618 |  
|Pre-tax (loss) from discontinued operations                |  |                                                                 | (1,921 | ) |                                                                |   | (2,767 | )    |  |   | (5,326 | ) |  |   | (3,129 | )
|Pre-tax (loss) gain on disposal of discontinued operations |  |                                                                 |       |   |                                                                |   |       |      |  |   | (331   | ) |  |   | 1,013  |  
|                                                           |  |                                                                 |        |   |                                                                |   |        |      |  |   |        |   |  |   |        |  
|(Loss) before income taxes                                 |  |                                                                 | (1,921 | ) |                                                                |   | (2,767 | )    |  |   | (5,657 | ) |  |   | (2,116 | )
|Income tax (benefit) provision                             |  |                                                                 | (678   | ) |                                                                |   | 375    |      |  |   | (726   | ) |  |   | 395    |  
|                                                           |  |                                                                 |        |   |                                                                |   |        |      |  |   |        |   |  |   |        |  
|(Loss) from discontinued operations, net of tax            |  | $                                                               | (1,243 | ) |                                                                | $ | (3,142 | )    |  | $ | (4,931 | ) |  | $ | (2,511 | )
|                                                           |  |                                                                 |        |   |                                                                |   |        |      |  |   |        |   |  |   |        |  

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



|                                      |  |                        |        |                   |   |       
|------------------------------------- |  | ---------------------- | ------ | ----------------- | - | ------
|                                      |  | (dollars in thousands)
|                                      |  | September 30, 2007     |        | December 31, 2006
|                                      | 
|                                      |  |                        |        | (as restated)    
|Cash                                  |  | $                      | 1,531  |                   | $ | 1,953 
|Accounts receivable, net of allowance |  |                        | 3,577  |                   |   | 8,416 
|Notes receivable, net                 |  |                        | 901    |                   |   | 2,162 
|Inventory                             |  |                        | 1,795  |                   |   | 1,730 
|Other assets                          |  |                        | 3,507  |                   |   | 5,761 
|Assets held for sale                  |  |                        | 2,314  |                   |   | 757   
|Property and equipment, net           |  |                        |       |                   |   | 8,333 
|                                      |  |                        |        |                   |   |       
|Total assets                          |  | $                      | 13,625 |                   | $ | 29,112
|                                      |  |                        |        |                   |   |       



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(7) DEBT



|                                                                                                                                                                                             |  |                   |        |                  |   |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                                                                                                                                                             |  | (in thousands)   
|                                                                                                                                                                                             |  | September 30,2007 |        | 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 |  | $                 | 81     |                  | $ | 158   
|Secured note payable due September 25, 2010, bearing interest at the LIBOR rate plus a margin ranging from 3.75% to 5.75%                                                                    |  |                   | 94,420 |                  |   | 89,120
|                                                                                                                                                                                             |  |                   |        |                  |   |       
|Total debt outstanding                                                                                                                                                                       |  | $                 | 94,501 |                  | $ | 89,278
|Total current maturities on long-term debt                                                                                                                                                   |  | $                 | 52     |                  | $ | 76    
|                                                                                                                                                                                             |  |                   |        |                  |   |       
|Total long-term debt excluding current maturities                                                                                                                                            |  | $                 | 94,449 |                  | $ | 89,202
|                                                                                                                                                                                             |  |                   |        |                  |   |       

On February 10, 2006, the Company issued to certain investors, under the terms of the 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.

In October and November 2006, the Company was not in compliance with certain financial covenants and on December 29, 2006, obtained a waiver and
third amendment to the Credit Agreement that waived these breaches and amended the following provisions of the Credit Agreement; (i) increased the maximum leverage ratio from 26.0x to 1.0 to 26.6x to 1.0 (ii) reduced the minimum fixed
charge coverage ratio from 1.25 to 1.0 to 1.15 to 1.0 and (iii) increased the maximum capital expenditures from $1.5 million to $1.75 million. As a result of this waiver and third amendment, at December 31, 2006, the Company was in
compliance with the covenants of the Credit Agreement. On May 10, 2007, the Company received a fourth amendment to the Credit Agreement which amended the fixed charge coverage ratio calculation from using interest paid in cash to accrued
interest.

On September 25, 2007, certain subsidiaries (the Borrowers) of the Company entered into a Consent and Fifth
Amendment (the Fifth Amendment) to the Credit Agreement with CapitalSource Finance LLC (CapitalSource). The Fifth Amendment to the

Credit Agreement dated September 25, 2007, 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, increased the Maximum Leverage Ratio to 28.0x, amended Minimum Fixed Charge Coverage Ratio to be 1.25 to 1.0 after June 30, 2008, and certain financial and other covenants provided therein. The Company
incurred debt issuance costs amounting to $0.7 million, consisting primarily of commitment fees. These debt issuance costs are being amortized over the term of the loan using the effective interest rate method. The Companys effective interest
rate at September 30, 2007 and 2006 was 11.5% and 11.2%, respectively. At September 30, 2007, the Company was in compliance with the debt covenant requirements.

At September 30, 2007, the Company had $10.6 million of unused facility under the Credit Agreement and $2.5 million of borrowing capacity. The effective interest rate on all debt outstanding was 11.5% and 11.2%
for the nine months ended September 30, 2007 and 2006, respectively.



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(8) PREFERRED STOCK

On February 10, 2006, the Company issued to certain investors, under the terms of the SPA 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 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
Preferred Stock.

The 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 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 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 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 Preferred Stock using the effective interest rate method. The Preferred Stock is classified outside stockholders 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 for common stockholders. The Preferred Stock is accreted to its liquidation
value based on the effective interest rate method over the period to the earliest redemption date. The accretion of the discount is charged to retained earnings (if a deficit balance, then the charge is to additional paid-in capital). For the three
and nine months ended September 30, 2007, the amortization of the discount on the Preferred Stock amounted to less than $0.1 million and $0.1 million, respectively, and was charged to net loss available for common stockholders. At
September 30, 2007 and December 31, 2006, the unamortized portion of the Preferred Stock discount amounted to $0.3 million and $0.5 million, respectively. In addition, 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 issuance costs and are amortized on a straight line basis over 4.0 years. Amortization expense related to these deferred financing costs
amounted to $0.2 million for the three months ended September 30, 2007 and 2006, and $0.5 million and $0.4 million for the nine months ended September 30, 2007 and 2006, respectively. Subsequent to the conversion of the Notes, these
amounts were charged to additional paid-in capital and deducted from net loss available for common stockholders. The unamortized balance of deferred issuance costs at September 30, 2007 and December 31, 2006, amounted to $2.4 million and
$3.3 million, respectively, and are recorded as a reduction of the carrying value of the Preferred Stock in the accompanying consolidated balance sheet. In addition, the Company determined that the Preferred Stock has several embedded derivatives
that met the requirements for bifurcation at the date of issuance. (See Note 9-Derivative Instruments.)

The issuance of the 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 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 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 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 would 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 Preferred Stock 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 Preferred Stock



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(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.

The Forbearance Agreements also contain agreements to amend the governing Certificate of Designations to
revise certain terms of the Preferred Stock, including, without limitation, a reduction in the conversion price of the Preferred Stock to $6.75, allowance for the accrual of dividends on the 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. 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. At December 31, 2006, the Company accrued $0.9 million of dividends payable which is included in accrued expenses and other liabilities in the accompanying consolidated
balance sheets. For the three and nine months ended September 30, 2007, $1.1 million and $3.3 million, respectively, of dividends payable were declared from and charged to additional paid-in capital and deducted from net loss available for
common shareholders.

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 Preferred Stock as described in the
Forbearance Agreements, as previously announced by the Company.

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 prior to 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 carrying value of the Preferred Stock at September 30, 2007, and December 31, 2006, was $38.2 million and $41.2 million, respectively.

On September 28, 2007, the Company redeemed 7,000 shares of the Companys Preferred Stock at $1,000 stated value per share, in connection with
previously disclosed settlement arrangements the Company had entered into to settle all claims set forth in the lawsuit (the Lawsuit) previously disclosed under the Caption Series A Convertible Preferred Stockholder in
Item 3Legal Proceedings of the Companys Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30, 2007, the total amount paid by the Company upon redemption of the shares was $7.4
million, which included accrued dividends since January 1, 2007.

In connection with the redemption of the Preferred Stock, for the
three months ended September 30, 2007, the Company charged to additional paid-in-capital $0.4 million of unamortized deferred issuance costs and $0.1 million of unamortized discount related to the pro-rata portion of the Preferred Stock that
was redeemed.

(9) 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 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 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



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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 interest rate method, over the life of the Notes and recorded a non-cash charge amounting to $8.6 million to interest expense from the date of issuance through October 20, 2006, the date of exchange of the Notes into Preferred Stock.

Additionally, the derivative liability amounts 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. From the date of issuance through October 20, 2006, an aggregate benefit of $7.3 million has been recorded with respect to the re-valuation of these derivatives liabilities and the fair
value of the Right to Purchase derivative liability was adjusted to zero at October 20, 2006 as the Right to Purchase was executed by the Note Holders. The remaining derivative liability at October 20, 2006 of $1.3 million related to the
Warrants.

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 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 Preferred Stock, the
following embedded derivatives were identified within the 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 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 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 Forbearance Agreements with respect to the Preferred Stock with some of the institutional investors, which among other amended terms eliminated the legacy rate adjustment and provided
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 during the quarter ended
December 31, 2006, related to the write off of this net derivative asset.

As indicated in Note 8-Preferred Stock, effective
July 13, 2007, the Company entered into an Amended SPA which 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. The Company purchased back the warrants at fair value which was determined to be $0.2 million. At September 30, 2007, the derivative liability was adjusted accordingly.

A binomial model is being used on a quarterly basis to re-value the derivative instruments to market value. The model assumptions for revaluation of the
Warrants and the embedded derivatives at September 30, 2007, were a risk free rate of 4.92%, and volatility for the Companys common stock of 45.0%. For the three and nine months ended September 30, 2007, an aggregate benefit of $0.4
million and $2.3 million, respectively, has been recorded with respect to the re-valuation of these derivatives liabilities. At September 30, 2007, the derivative liability amounted to $2.0 million and it was primarily related to the conversion
feature in the preferred stock. At September 30, 2007, the fair value of the remaining Warrants was insignificant. At December 31, 2006, the derivative liability amounted to $4.5 million, of which $3.7 million related to the conversion
feature in the preferred stock and $0.8 million related to the Warrants.



20



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(10) CAPITAL STOCK

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.

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



|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|------------------------------------------------------- |  | -------------------------- | - | ------------------------- | ----------------- |  | ----------------- | - |  | -----------------
|                                                        |  | For The Three Months Ended |   | For The Nine Months Ended
|                                                        |  | September 30,2007          |   |                           | September 30,2006 |  | September 30,2007 |   |  | September 30,2006
|Common stock:                                           |  |                            |   |                           |                   |  |                   |   |  |                  
|Weighted average number of shares outstanding  basic   |  | 6,202,769                  |   |                           | 6,033,879         |  | 6,210,180         |   |  | 6,023,075        
|Effect of dilutive securities:                          |  |                            |   |                           |                   |  |                   |   |  |                  
|Options and Warrants                                    |  |                           |   |                           |                  |  |                  |   |  |                 
|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|Weighted average number of shares outstanding  diluted |  | 6,202,769                  |   |                           | 6,033,879         |  | 6,210,180         |   |  | 6,023,075        
|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|Options and Warrants not included above (anti-dilutive) |  | 8,632,124                  |   |                           | 6,017,653         |  | 9,915,072         |   |  | 6,055,151        
|Shares outstanding:                                     |  |                            |   |                           |                   |  |                   |   |  |                  
|Beginning outstanding shares                            |  | 6,235,578                  |   |                           | 6,033,848         |  | 6,033,848         |   |  | 6,001,888        
|Issuance of shares                                      |  |                           |   |                           |                  |  | 201,730           |   |  | 31,960           
|Repurchase of shares                                    |  | (163,800                   | ) |                           |                  |  | (163,800          | ) |  |                 
|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|Ending outstanding shares                               |  | 6,071,778                  |   |                           | 6,033,848         |  | 6,071,778         |   |  | 6,033,848        
|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|                                                        |  |                           
|                                                        |  | For The Three Months Ended |   | For The Nine Months Ended
|                                                        |  | September 30,2007          |   |                           | September 30,2006 |  | September 30,2007 |   |  | September 30,2006
|Preferred stock:                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|Beginning outstanding shares                            |  | 45,000                     |   |                           |                  |  | 45,000            |   |  |                 
|Issuance of shares                                      |  |                           |   |                           |                  |  |                  |   |  |                 
|Redemption of shares                                    |  | (7,000                     | ) |                           |                  |  | (7,000            | ) |  |                 
|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  
|Ending outstanding shares                               |  | 38,000                     |   |                           |                  |  | 38,000            |   |  |                 
|                                                        |  |                            |   |                           |                   |  |                   |   |  |                  

(11) 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. For the three months ended, September 30, 2007 and 2006, the Company did
not issue any new option grants. The Company granted 65,000 stock options during the nine months ended September 30, 2007 and zero during the nine months ended September 30, 2006. The per share weighted-average fair value of stock options
granted during 2007 was $3.47, on the grant date, using the Black-Scholes option-pricing model with the following assumptions:



|                          |  |                    |   |  |                    |  
|------------------------- |  | ------------------ | - |  | ------------------ | -
|                          |  | September 30, 2007 |   |  | September 30, 2006 |  
|Expected dividend yield   |  |                   |   |  |                   |  
|Expected price volatility |  | 41.80-49.40        | % |  | 25.00-33.82        | %
|Risk-free interest rate   |  | 4.96-5.07          | % |  | 2.00-3.60          | %
|Expected life of options  |  | 6 years            |   |  | 4-6 years          |  

The Company determined stock-based compensation cost based on the fair value at the date of grant
for stock options under SFAS 123R. Stock-based compensation cost in the amount of $13,398 and $29,136 for the three months ended September 30, 2007 and September 30, 2006, and $136,300 and $175,442 for the nine months ended
September 30, 2007 and 2006, respectively. These amounts are included in the results of operations in the condensed consolidated financial statements for the three and nine months ended September 30, 2007 and 2006, respectively.



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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. No further grants can be made from these plans as they have expired. However, there are outstanding options
related to these plans that were issued prior to their expiration.

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 2006 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 offer 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 2006 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 there under that terminate without being exercised, plus the number of shares that are surrendered in payment of any awards or any tax withholding requirements. As of September 30, 2007, 65,000 options have been 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 (i) 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, (ii) on the date of permanent disability of the
optionee and for the six-month period thereafter, (iii) on the date of a change of control and for the six-month period thereafter and (iv) 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.



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A summary of stock option activity is as follows for the nine months ended September 30, 2007 and 2006,
respectively:



|                                          |  |                                              |   |                 |                              |      |        |       |                              |   |     
|----------------------------------------- |  | -------------------------------------------- | - | --------------- | ---------------------------- | ---- | ------ | ----- | ---------------------------- | - | ----
|                                          |  | For The Nine Months Ended September 30, 2007
|                                          |  | Employee Plans                               |   | Directors Plan
|                                          |  | Shares                                       |   |                 | Weighted Avg. Exercise Price |      | Shares |       | Weighted Avg. Exercise Price
|Balance at December 31, 2006              |  | 657,150                                      |   |                 | $                            | 6.10 |        |      |                              | $ |    
|Granted                                   |  | 65,000                                       |   |                 | $                            | 3.47 |        |      |                              | $ |    
|Exercised                                 |  | (68,950                                      | ) |                 | $                            | 1.78 |        |      |                              | $ |    
|Expired/Forfeited                         |  | (349,000                                     | ) |                 | $                            | 7.12 |        |      |                              | $ |    
|                                          |  |                                              |   |                 |                              |      |        |       |                              |   |     
|Options outstanding at September 30, 2007 |  | 304,200                                      |   |                 | $                            | 5.42 |        |      |                              |   |     
|Options exercisable at September 30, 2007 |  | 184,200                                      |   |                 | $                            | 5.60 |        |      |                              |   |     
|Options available for future grants       |  | 571,000                                      |   |                 |                              |      |        |      |                              |   |     
|                                          | 
|                                          |  | For The Nine Months Ended September 30, 2006
|                                          |  | Employee Plans                               |   | Directors Plan
|                                          |  | Shares                                       |   |                 | Weighted Avg. Exercise Price |      | Shares |       | Weighted Avg. Exercise Price
|Balance at December 31, 2005              |  | 436,810                                      |   |                 | $                            | 5.68 |        | 8,000 |                              | $ | 9.38
|Granted                                   |  |                                             |   |                 | $                            |     |        |      |                              | $ |    
|Exercised                                 |  | (31,960                                      | ) |                 | $                            | 4.34 |        |      |                              | $ |    
|Expired/Forfeited                         |  | (38,140                                      | ) |                 | $                            | 5.85 |        | 8,000 |                              | $ | 9.38
|                                          |  |                                              |   |                 |                              |      |        |       |                              |   |     
|Options outstanding at September 30, 2006 |  | 366,710                                      |   |                 | $                            | 6.44 |        |      |                              |   |     
|Options exercisable at September 30, 2006 |  | 333,403                                      |   |                 | $                            | 5.22 |        |      |                              |   |     
|Options available for future grants       |  | 5,000                                        |   |                 |                              |      |        |      |                              |   |     

At September 30, 2007, there was approximately $185,190 of total unrecognized compensation
cost related to unvested stock options granted under our stock option plan. This unrecognized stock based compensation cost is expected to be recognized over a weighted average period of 2.20 years.

(12) 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 a 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.



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##### Table of Contents

For the three and nine months ended September 30, 2007 the Company realized a tax benefit of $0.9
million and $1.9 million, respectively, from continuing operations. The tax benefit was related to certain deferred tax liabilities expected to reverse during fiscal 2007. For the three and nine months ended September 30, 2006, the Company
realized a tax benefit of $1.7 million and $3.2 million, respectively, from continuing operations. The Company realized a tax benefit of $0.7 million from discontinued operations for the three and nine months ended September 30, 2007,
respectively. The $0.7 million income tax benefit related to the filing of an NOL carryback claim for one of the Companys subsidiaries located in the Virgin Islands. Tax expense for discontinued operations was $0.4 million for both the three
and nine months ended September 30, 2006.

(13) 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.

(14) RELATED PERSON TRANSACTIONS

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 Officer 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 6-Discontinued Operations). As of September 30, 2007, there was an outstanding net payable balance of approximately $0.5 million, with components included
in other receivables and other payables of the accompanying condensed consolidated balance sheet.

In June 2000, the Company entered into
an amended Life Insurance and Salary Continuation Agreement with Donald L. Smith, Jr., our former Chairman, Chief Executive Officer and President. Mr. Smith has received a retirement benefit since his retirement from his position in 2005.
Benefits equal 75 percent of his base salary and will continue for the remainder of his life. In the event that a spouse survives him, then the surviving spouse will receive a benefit equal to 100 percent of his base salary for the shorter of five
years or the remainder of the surviving spouses life. During 2006, Mr. Smith received $253,800 in retirement payments under this agreement. The net present value of the future obligation was estimated at $1.5 million and $1.6 million at
September 30, 2007 and December 31, 2006, respectively. These amounts are included in Retirement and Severance in the accompanying condensed consolidated balance sheet.

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. In 2006, he started to receive annual payments of $32,000 for life. The net present value of the future obligation was estimated at $0.2 million and $0.3 million at September 30, 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), which 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
Stephen J. 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 the Chief Financial Officer from
February 16, 2007 through May 1, 2007, as a result of the resignation of George Hare. Since May 1, 2007 Mr. Farenhem has been the Companys President. In addition, the Company leases certain office space to Royal Palm. The
following table represents fees and charges to Royal Palm:



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|                                          |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------- |  | ---------------------------------------- | ------- | - | --------------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                          |  | (dollars in thousands)                   |         |   | (dollars in thousands)                  |  
|                                          |  | For the three months ended September 30, |         |   | For the nine months ended September 30, |  
|                                          |  | 2007                                     |         |   | 2006                                    |   |         | 2007 |  |   | 2006    |  
|Management service fee paid to Royal Palm |  | $                                        | 90,000  |   |                                         | $ | 90,000  |      |  | $ | 270,000 |   |  | $ | 270,000 |  
|Rental income charged to Royal Palm       |  |                                          | (22,500 | ) |                                         |   | (22,500 | )    |  |   | (67,500 | ) |  |   | (67,500 | )
|                                          |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  
|                                          |  | $                                        | 67,500  |   |                                         | $ | 67,500  |      |  | $ | 202,500 |   |  | $ | 202,500 |  
|                                          |  |                                          |         |   |                                         |   |         |      |  |   |         |   |  |   |         |  

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 was assumed by the purchaser of the construction division assets of which Mr. Donald Smith is a part. Rent expense amounted to $ 0 and $23,750 for the three months ended September 30, 2007 and 2006,
respectively, and $20,773 and $71,250 for the nine months ended September 30, 2007 and 2006, respectively.

(15) 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. During the second quarter 2007, the Company recorded a charge of $104,000 for severance related to other executives. At September 30, 2007, the remaining balance related to these total liabilities is $91,667.

Legal Matters

Preferred Stock Holder

On January 31, 2007, an investor who holds 7,000 of the 45,000 outstanding shares of our Preferred Stock, but was not a party to certain Forbearance
Agreements entered into by the other two holders of the 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 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 Preferred Stock held by this investor.



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##### Table of Contents

On April 25, 2007, this investor filed a 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 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 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.

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) previously
disclosed under the Caption Series A Convertible Preferred Stockholder in Item 3Legal Proceedings of the Companys Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30,
2007. 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.

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 has 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 operated 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 exercised this option, Petit agreed to withdraw all legal actions against us and our subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC did 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | 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 August 10, 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
and second quarters 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.

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.

As of August 10, 2007, Petit had not complied with the court decision, and the Company
had not been able to restart operations. SCGC applied for and received approval of partial payroll subsidies from the relevant Saint Martin governmental agencies. The partial payroll subsidies will expire in December 2007 and January 2008, at which
point SCGC would be obligated to pay severance benefits.



27



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##### Table of Contents

In November 2007, the Company entered into an agreement to sell the shares of SCGC to Petit. (See Note
16-Subsequent Event).

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.

(16) SUBSEQUENT EVENT

On November 2, 2007, the
Company entered into an agreement to sell the shares of SCGC located on Sint Martin to Mr. Francois Petit and Mr. Michel Petit, subject to a condition precedent. As a result of this agreement both parties have agreed to terminate and
settle all claims and outstanding matters. As part of the agreement the Company will retain certain assets of SCGC. The transfer of ownership of the shares is anticipated to occur within the next 45 days.



|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.



28



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##### Table of Contents

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:



| |  |  | In May 2005, we sold part of the customer lists associated with our Buffalo security 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.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

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 nine months ended September 30, 2006, only includes four months of Guardian operations.



29



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##### Table of Contents

Comparison of the three months ended September 30, 2007 with the three months ended September 30, 2006

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 September 30, |       
|                                                        |  | 2007                                     |        | % ofRevenue |       |   | 2006 |   | % ofRevenue | 
|Revenue                                                 |  | $                                        | 14,263 |             | 100.0 | % |      | $ | 13,845      |  | 100.0 | %
|Cost of Sales (excluding depreciation and amortization) |  |                                          | 6,143  |             | 43.1  | % |      |   | 6,236       |  | 45.0  | %
|                                                        |  |                                          |        |             |       |   |      |   |             |  |       |  
|Gross Profit.                                           |  | $                                        | 8,120  |             | 56.9  | % |      | $ | 7,609       |  | 55.0  | %
|                                                        |  |                                          |        |             |       |   |      |   |             |  |       |  

Revenue increased in 2007 as compared to 2006 as a result of increased service revenue of $0.2
million and increased installations revenue of $0.2 million, primarily relating to commercial installations.



| |  |  | The $0.1 million decrease in cost of sales resulted primarily from cost reductions from consolidation of acquired operations, partially offset by additional costs
associated with increased revenues.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The increase in gross profit of $0.5 million is primarily the result of the increased revenues in 2007.
| | - |  | -------------------------------------------------------------------------------------------------------

Operating expenses:



|                              |  |                                          |        |             |      |   |      |   |             |  |      |  
|----------------------------- |  | ---------------------------------------- | ------ | ----------- | ---- | - | ---- | - | ----------- |  | ---- | -
|                              |  | (dollars in thousands)                   |       
|                              |  | For The Three Months Ended September 30, |       
|                              |  | 2007                                     |        | % ofRevenue |      |   | 2006 |   | % ofRevenue | 
|Selling                       |  | $                                        | 1,086  |             | 7.6  | % |      | $ | 1,261       |  | 9.1  | %
|General and Administrative    |  |                                          | 4,914  |             | 34.5 | % |      |   | 5,711       |  | 41.2 | %
|Depreciation and Amortization |  |                                          | 4,252  |             | 29.8 | % |      |   | 5,010       |  | 36.2 | %
|                              |  |                                          |        |             |      |   |      |   |             |  |      |  
|Total Operating Expenses      |  | $                                        | 10,252 |             | 71.9 | % |      | $ | 11,982      |  | 86.5 | %
|                              |  |                                          |        |             |      |   |      |   |             |  |      |  



| |  |  | The decrease of $0.2 million in selling expense is primarily related to the reduction of headcount resulting from consolidation of acquired sales forces, and lower
advertising costs due to consolidation of companies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses decreased by $0.8 million for the three months ended September 30, 2007 as compared to 2006. The reduction primarily
resulted from a $0.4 million reduction in headcount costs resulting from consolidation of acquired staffs, a $0.1 million expenditure for a branding study conducted in 2006 and not repeated in 2007, and a reduction of facility expenses of $0.2
million due to consolidation of acquired offices.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The decrease of $0.8 million in depreciation and amortization between periods relates primarily to the $0.5 million decrease associated with impairment of customer
lists resulting from a reduction of accounts that were part of the customer lists previously purchased, and a $0.3 million decrease in amortization associated with the reduction of customer list base.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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##### Table of Contents

Other Income (Expense):



|                       |  |                                          |        |   |      |   |        |  
|---------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | -
|                       |  | (dollars in thousands)                   |       
|                       |  | For The Three Months Ended September 30, |       
|                       |  | 2007                                     |        |   | 2006 |  
|Other income (expense) |  | $                                        | (2,210 | ) |      | $ | (5,438 | )
|                       |  |                                          |        |   |      |   |        |  

Other expense decreased for the three months ended September 30, 2007 as compared to the same
period in 2006 by approximately $3.2 million, primarily related to the decrease in interest expense related to the amortization of the discount on the Notes, which was converted to Preferred Stock in October 2006. For the three months ended
September 30, 2007, dividends accrued on the Preferred Stock were charged to additional paid-in capital.

Income tax (benefit) expense from
continuing operations:



|                     |  |                                          |      |   |      |   |        |  
|-------------------- |  | ---------------------------------------- | ---- | - | ---- | - | ------ | -
|                     |  | (dollars in thousands)                   |     
|                     |  | For The Three Months Ended September 30, |     
|                     |  | 2007                                     |      |   | 2006 |  
|Income tax (benefit) |  | $                                        | (901 | ) |      | $ | (1,711 | )
|                     |  |                                          |      |   |      |   |        |  

For the three months ended September 30, 2007, the Company realized a tax benefit of $0.9
million from continuing operations. The income tax benefit arises from certain deferred tax liabilities expected to reverse during fiscal 2007.

Discontinued Operations:



|                                                         |  |                                         |        |   |      |   |        |  
|-------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                         |  | (dollars in thousands)                  |       
|                                                         |  | For The Three MonthsEnded September 30, |       
|                                                         |  | 2007                                    |        |   | 2006 |  
|(Loss) from discontinued operations, net of income taxes |  | $                                       | (1,243 | ) |      | $ | (3,142 | )
|                                                         |  |                                         |        |   |      |   |        |  
|Net Loss                                                 |  | $                                       | (1,243 | ) |      | $ | (3,142 | )
|                                                         |  |                                         |        |   |      |   |        |  

The $1.2 million decrease in loss from discontinued operations resulted primarily from a decreased
loss in the construction operations due to the winding down of costs associated with completion of projects not sold, partially offset by an increased bad debt reserve from reassessment of the collectability of customer accounts and notes, and costs
to transition construction projects to the Purchaser.



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Comparison of the nine months ended September 30, 2007 with the nine months ended September 30, 2006



|                                                        |  |                                         |        |             |       |   |      |   |             |  |       |  
|------------------------------------------------------- |  | --------------------------------------- | ------ | ----------- | ----- | - | ---- | - | ----------- |  | ----- | -
|                                                        |  | (dollars in thousands)                  |       
|                                                        |  | For the Nine Months Ended September 30, |       
|                                                        |  | 2007                                    |        | % ofRevenue |       |   | 2006 |   | % ofRevenue | 
|Revenue                                                 |  | $                                       | 42,245 |             | 100.0 | % |      | $ | 39,451      |  | 100.0 | %
|Cost of Sales (excluding depreciation and amortization) |  |                                         | 18,237 |             | 43.2  | % |      |   | 17,490      |  | 44.3  | %
|                                                        |  |                                         |        |             |       |   |      |   |             |  |       |  
|Gross Profit.                                           |  | $                                       | 24,008 |             | 56.8  | % |      | $ | 21,961      |  | 55.7  | %
|                                                        |  |                                         |        |             |       |   |      |   |             |  |       |  



| |  | Included in the 2007 revenues is approximately two additional months of Guardian revenues in 2007 ($4.1 million) as Guardian was purchased in March 2006. In addition, the company
realized $0.4 million in additional services revenues from prices increases and higher chargeability, and $0.3 million of increased installation revenue, primarily relating to commercial installations. These increases were partially offset by an
approximate $2.0 million decrease in revenue in 2007 as a result of the June 2006 sale of the Coastal wholesale business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Included in the 2007 cost of sales is approximately two additional months of Guardian costs ($1.8 million) versus approximately one months worth of cost in 2006 ($0.6
million). This increase was partially offset by approximately $1.0 million in cost reductions from consolidation of acquired operations, such as integrating multiple monitoring stations into one facility.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The increase in gross profit of $2.0 million, or 1.1%, is primarily the result of the two additional months of Guardian activity in 2007 versus one months of Guardian activity
in 2006, and cost reduction from acquired operations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating expenses:



|                              |  |                                         |        |             |      |   |      |   |             |  |      |  
|----------------------------- |  | --------------------------------------- | ------ | ----------- | ---- | - | ---- | - | ----------- |  | ---- | -
|                              |  | (dollars in thousands)                  |       
|                              |  | For The Nine Months Ended September 30, |       
|                              |  | 2007                                    |        | % ofRevenue |      |   | 2006 |   | % ofRevenue | 
|Selling                       |  | $                                       | 3,568  |             | 8.4  | % |      | $ | 3,575       |  | 9.1  | %
|General and Administrative    |  |                                         | 15,855 |             | 37.5 | % |      |   | 15,415      |  | 39.1 | %
|Depreciation and Amortization |  |                                         | 13,137 |             | 31.1 | % |      |   | 14,061      |  | 35.6 | %
|                              |  |                                         |        |             |      |   |      |   |             |  |      |  
|Total Operating Expenses      |  | $                                       | 32,560 |             | 77.0 | % |      | $ | 33,051      |  | 83.8 | %
|                              |  |                                         |        |             |      |   |      |   |             |  |      |  



| |  | Selling expense basically remained constant for the nine months ended September 30, 2007 versus the nine months ended September 30, 2006. The increase is associated with
approximately two additional months of Guardian operations in 2007 versus approximately one month of activity in 2006. This increase was completely offset by the reduction of headcount resulting from consolidation of acquired sales forces, a lower
commission structure, as all sales employees were migrated to a universal plan, and a branding study that was conducted in 2006 and not repeated in 2007.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | General and administrative expenses increased by $0.4 million for the nine months ended September 30, 2007 as compared to the comparable period in 2006. The increase primarily
relates to two additional months of Guardian in 2007 compared to one month operating activity in 2006, and the net gain of $0.8 million from disposal of Coastal wholesale business and Buffalo operations in 2006, partially offset by a reduction in
headcount and facility costs in 2007.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | The decrease in amortization and depreciation between periods relates primarily to the $0.9 million decrease associated with impairment of customer lists resulting from a reduction
of accounts that were part of the customer lists previously purchased, and a $0.3 million decrease in amortization associated with the reduction of customer list base, partially offset by the $0.2 million for the two additional months of
depreciation expense related to Guardian in 2007 as compared to 2006.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Income (Expense):



|                       |  |                                        |        |   |      |   |         |  
|---------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------- | -
|                       |  | (dollars in thousands)                 |       
|                       |  | For The Nine MonthsEnded September 30, |       
|                       |  | 2007                                   |        |   | 2006 |  
|Other income (expense) |  | $                                      | (5,479 | ) |      | $ | (10,057 | )
|                       |  |                                        |        |   |      |   |         |  



| |  | Other expense decreased for the nine months ended September 30, 2007 as compared to the same period in 2006 by approximately $4.6 million, primarily related to a decrease of
$9.6 million in interest expense related to the amortization of the discount on the Notes, which were converted to Preferred Stock in October 2006. Partially offsetting this decrease in interest expense was a decrease in the change in the fair value
of the derivative. For the nine months ended September 30, 2006, the Company recorded $7.3 million of income related to the change in the fair value of the derivative and for the nine months ended September 30, 2007 that amount was $2.3
million, a reduction in derivative income of $5.0 million. The significant decrease in derivative income was primarily related to the Right to Purchase derivative liability that was recorded in connection with the issuance of the Notes. This
derivative liability was being amortized over the expected period to convert the Notes to Preferred Stock and resulted in derivative income of $4.8 million for the nine months ended September 30, 2006.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income tax (benefit) expense from continuing operations:



|                     |  |                                        |        |   |      |   |        |  
|-------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                     |  | (dollars in thousands)                 |       
|                     |  | For The Nine MonthsEnded September 30, |       
|                     |  | 2007                                   |        |   | 2006 |  
|Income tax (benefit) |  | $                                      | (1,855 | ) |      | $ | (3,228 | )
|                     |  |                                        |        |   |      |   |        |  

For the nine months ended September 30, 2007, the Company realized a tax benefit of $1.9
million from continuing operations. The income tax benefit arises from certain deferred tax liabilities expected to reverse during fiscal 2007.

Discontinued Operations:



|                                                                      |  |                                        |        |   |      |   |        |  
|--------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                      |  | (dollars in thousands)                 |       
|                                                                      |  | For The Nine MonthsEnded September 30, |       
|                                                                      |  | 2007                                   |        |   | 2006 |  
|(Loss) from discontinued operations, net of income taxes              |  | $                                      | (4,600 | ) |      | $ | (3,524 | )
|(Loss) gain on sale from discontinued operations, net of income taxes |  |                                        | (331   | ) |      |   | 1,013  |  
|                                                                      |  |                                        |        |   |      |   |        |  
|Net Loss                                                              |  | $                                      | (4,931 | ) |      | $ | (2,511 | )
|                                                                      |  |                                        |        |   |      |   |        |  

The $2.4 million increase in loss from discontinued operations resulted from:



| |  | A $1.8 million reduction in loss related to the Construction operations, which improved due to the completion of a problematic project. This reduction was partially offset by the
second and third quarter costs associated with the completion of projects not sold, an increased bad debt reserve related to the collectability of customer account receivables and notes, and costs to transition projects to the Purchaser.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  | A $3.5 million reduction to income resulting from the cessation of the SCGC ready-mix operations due to legal issues, a negative inventory adjustment in the Dutch operations, and
the sale of PRCC (May 2006) and AMP (March 2006) operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company realized a $0.7 million tax benefit related to a prior year tax refund.
| | - | -----------------------------------------------------------------------------------

The $1.4 million decrease in gain (loss) on sale from discontinued operations resulted from:



| |  | On March 21, 2007, we sold the majority of the assets, inventory and customer lists of the construction division. This sale resulted in a loss from discontinued operations, net
of income taxes of $0.3 million.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 $1.1
million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

We expect to generate cash flow in excess of that required for operations and for interest payments. On March 12, 2007 we entered into an agreement to sell substantially all of the assets of our construction
division and on March 30, 2007 our Board of Directors decided to sell all our remaining non-core security assets.

As of
September 30, 2007, our liquidity and capital resources included cash and cash equivalents of $ 3.8 million, working capital of $5.5 million and available lines of credit of $2.5 million.

Cash flow used in operating activities for the nine months ended September 30, 2007 was $4.0 million compared with $3.0 million used in operating
activities for the nine months ended September 30, 2006.

Net cash provided by investing activities was $5.8 million for the nine
months ended September 30, 2007, which includes $5.0 million of proceeds from the sale of construction assets and $1.6 million of cash received on notes related to the sale of the construction assets. Net cash used by investing activities was
$59.7 million for the nine months ended September 30, 2006, including $66.3 million for the Guardian acquisition, and the purchase of approximately $4.3 million of property, plant and equipment. Net cash used by investing activities was offset
slightly in 2006 by $9.7 million of proceeds received for the disposition of AMP and PRCC.

Net cash used in financing activities for the
nine months ended September 30, 2007, was $2.8 million, primarily related to the $7.4 million paid to redeem 7,000 shares of our Preferred Stock. This was offset by $5.8 million of net borrowings from our revolving credit facility. In September
2007, we entered into a Fifth Amendment to our revolving credit facility which increased the total commitment to $105.0 million from $100.0 million. Net cash provided by financing activities for the nine months ended September 30, 2006, was
$63.0 million, primarily from the proceeds resulting from the issuance of the Notes in the amount of $45.0 million and additional borrowing from the Companys credit facility in the amount of $23.8 million. The net cash expenditure of $1.7
million related to the pay down of debt and other related debt costs. We estimate the capital expenditures for the remainder of the year to be approximately $1.0 million, which will be primarily related to the integration of the back office systems
and the refurbishment of our monitoring center in New York.

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 cash interest payments of $11.3 million on our outstanding senior debt.

Cash flows from discontinued operations are included in the consolidated statement of cash flows within operating, investing and financing activities. Cash flow from discontinued operations is expected to have a
favorable impact on future liquidity as the Company converts $2.2 million of working capital into cash. The absence of future 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. Our plan is to continue to
sell the assets related to our discontinued operations to generate cash flows coupled with the ongoing collections of our accounts receivable. We anticipate that the continued integration of the back office processes related to our acquisitions will
result in an increase in operating cash flow in our electronic security business.

On April 2, 2007, effective as of March 30,
2007, Devcon International Corp., a Florida corporation, entered into certain Forbearance and Amendment Agreements (the Forbearance Agreements) with each of certain institutional investors (the Required Holders) holding, in
the aggregate, a majority of the Companys previously-issued Preferred Stock. The intent of the Forbearance



34



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##### Table of Contents

Agreement was to amend certain terms of the Preferred Stock. 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 and an amended and restated Registration Rights Agreement with the Secretary of State of Florida on July 13, 2007,
effective as of such date. 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, par value $.10 (the Common Stock), and the parties thereto acknowledged and agreed that the Companys dividend payment obligations with respect to the Preferred Stock accruing prior to the Closing Date
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.
In addition, each of the parties to the Amended SPA waived certain Triggering Events (as defined in the Certificate of Designations) that may have occurred prior to the Closing Date, certain rights to receive Registration Delay Payments and certain
other provisions set forth in the governing documents.

On April 3, 2007, an institutional investor who holds shares of the
Companys 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 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 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. On April 25, 2007, this investor filed a lawsuit in the United States District Court for the Southern District of New York and on August 16, 2007, the Company entered into the Settlement Agreement.
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 and the plaintiffs returned all of the shares
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.

Our 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 September 30, 2007, the Company was in compliance with the debt covenant requirements.

At
September 30, 2007, the Company had $10.6 million of unused facility under the Credit Agreement and $2.5 million of borrowing capacity. The effective interest rate on all debt outstanding was 11.5% and 11.2% for the nine months ended
September 30, 2007 and 2006, respectively.

Our credit facility includes two debt covenants which are tied to Recurring Monthly
Revenue that could affect liquidity. At various times during each year, we measure all of the monthly revenue we are entitled to receive under contracts with customers in effect at the end of the period. Our computation of recurring monthly revenue,
or RMR, may not be comparable to other similarly titled measures of other companies, and RMR should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles. We
believe that we will remain in compliance with both covenants in 2007:



| |  | Debt / Performing RMR (Revolving Credit Facility & Preferred Stock)  As of September 30, 2007, we had eligible Performing RMR of $3.5 million and outstanding
senior debt of $94.4 million (including accrued interest) or a ratio of 27.26x. Our proforma leverage ratio test for the Preferred Stock, which will be calculated on a net debt basis, including proforma cash from the construction sale and the $38
million face value of the Preferred Stock to Performing RMR is 37.02x. 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 September 2007 was 10.1% compared to a maximum permitted ratio of 11.0%. See tables
below for our attrition rate trend over the last six months.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

|          |  |                         |  |                 |        |            |                           |        |  |      |   |  |      |  
|--------- |  | ----------------------- |  | --------------- | ------ | ---------- | ------------------------- | ------ |  | ---- | - |  | ---- | -
|          |  | Actual Period Attrition |  | Monthly Ratio % |        |            | AnnualizedMonthly Ratio % |       
|          |  | Number of               |  |                 |        | Net RMR    |                           |       
|          |  | Accounts                |  | Cancelled RMR   |        | Attrition* |                           |       
|April     |  | 766                     |  | $               | 26,617 |            | $                         | 29,072 |  | 10.0 | % |  | 8.8  | %
|May       |  | 760                     |  | $               | 20,480 |            | $                         | 36,519 |  | 12.5 | % |  | 9.4  | %
|June      |  | 1,214                   |  | $               | 24,218 |            | $                         | 3,363  |  | 1.2  | % |  | 8.2  | %
|July      |  | 923                     |  | $               | 38,541 |            | $                         | 51,111 |  | 17.3 | % |  | 9.4  | %
|August    |  | 470                     |  | $               | 24,056 |            | $                         | 22,399 |  | 7.6  | % |  | 9.4  | %
|September |  | 612                     |  | $               | 26,081 |            | $                         | 35,402 |  | 12.1 | % |  | 10.1 | %

---

|* | Net of change in RMR over 90 days and net of re-signs.
|- | ------------------------------------------------------

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 the gross number of lost customer accounts for a given period, net of adjustments described below, and the denominator of which is the average number of 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 net third party gains. Below is a rollforward of our RMR for the three months ended September 30, 2007 and 2006, respectively, and
nine months ended September 30, 2007 and 2006, respectively.



|                                      |  |                            |           |   |                           |   |           |                   |  |   |                   |   |  |   |           |  
|------------------------------------- |  | -------------------------- | --------- | - | ------------------------- | - | --------- | ----------------- |  | - | ----------------- | - |  | - | --------- | -
|                                      |  | For the Three Months Ended |           |   | For the Nine Months Ended |  
|                                      |  | September 30,2007          |           |   | September 30,2006         |   |           | September 30,2007 |  |   | September 30,2006 |  
|Beginning RMR Balance                 |  | $                          | 3,595,552 |   |                           | $ | 3,541,506 |                   |  | $ | 3,519,270         |   |  | $ | 2,471,491 |  
|                                      |  |                            |           |  
|RMR Added                             |  |                            | 59,657    |   |                           |   | 63,075    |                   |  |   | 182,619           |   |  |   | 224,702   |  
|Price Increase                        |  |                            | 8,834     |   |                           |   | 625       |                   |  |   | 104,183           |   |  |   | 8,616     |  
|RMR Loss (less Change of Ownership)   |  |                            | (82,953   | ) |                           |   | (76,670   | )                 |  |   | (233,534          | ) |  |   | (269,276  | )
|                                      |  |                            |           |   |                           |   |           |                   |  |   |                   |   |  |   |           |  
|Net Gain/(Loss)                       |  |                            | (14,462   | ) |                           |   | (12,970   | )                 |  |   | 53,268            |   |  |   | (35,958   | )
|                                      |  |                            |           |  
|Acquired RMR                          |  |                            | 1,607     |   |                           |   | 1,644     |                   |  |   | 10,558            |   |  |   | 16,424    |  
|Accounts Lost/Charged Back            |  |                            |          |   |                           |   | (876      | )                 |  |   | (399              | ) |  |   | (3,280    | )
|Special Events:                       |  |                            |           |   |                           |   |           |                   |  |   |                   |   |  |   |           |  
|Guardian/Mutual/Stat-Land Acquisition |  |                            |          |   |                           |   |          |                   |  |   |                  |   |  |   | 1,482,931 |  
|Sale of Wholesale Accounts            |  |                            |          |   |                           |   |          |                   |  |   |                  |   |  |   | (333,724  | )
|Loss of Boca Pointe                   |  |                            |          |   |                           |   |          |                   |  |   |                  |   |  |   | (68,580   | )
|                                      |  |                            |           |   |                           |   |           |                   |  |   |                   |   |  |   |           |  
|Ending RMR Balance                    |  | $                          | 3,582,697 |   |                           | $ | 3,529,304 |                   |  | $ | 3,582,697         |   |  | $ | 3,529,304 |  
|                                      |  |                            |           |   |                           |   |           |                   |  |   |                   |   |  |   |           |  

Critical Accounting Policies and 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. In accordance with FIN 48, the Company adopted the policy
of recognizing penalties in selling, general and administrative expenses and interest, if any, related to unrecognized tax positions as income tax expense.



36



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##### Table of Contents

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.



|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 September 30, 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 September 30, 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.

Changes in Internal Controls

During the nine months ended September 30, 2007, there were no changes in the Companys internal control over financial
reporting that have materially affected or are reasonably likely to materially affect such internal control over financial reporting.

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.



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##### Table of Contents

In order to remediate the significant deficiencies and material weaknesses described above, the
Companys management and its Audit Committee continue to take 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 hired additional qualified accounting staff with GAAP experience to provide development of additional review procedures and improved financial
controls
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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, 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.

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

Preferred Stock Holder

On
January 31, 2007, an investor who holds 7,000 of the 45,000 outstanding shares of our Preferred Stock, but was not a party to certain Forbearance Agreements entered into by the other two holders of the 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
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 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 Preferred Stock that are held by this investor.

On April 25, 2007, this investor filed a 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 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 Preferred Stock with a face value equal to $7,000,000. The Company did believe that a liability for any registration delay payments in accordance with the Registration Rights Agreement was warranted.

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) previously disclosed under the Caption Series A Convertible Preferred
Stockholder in Item 3Legal Proceedings of the Companys Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 30, 2007. 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 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.



38



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##### Table of Contents

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 its 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 has 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, on which SCGC operated 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 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 exercised this option, Petit agreed to withdraw all legal actions against us and our subsidiaries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC did 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 August 10, 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.



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##### Table of Contents

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 and second quarters 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.

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.

As of August 10, 2007, Petit has not complied with the court decision, and the Company
has not been able to restart operations. SCGC has applied for and received approval of partial payroll subsidies from the relevant Saint Martin governmental agencies. The partial payroll subsidies will expire in January 2008, at which point SCGC may
be obligated to pay severance benefits.

In November 2007, the Company entered into an agreement to sell the shares of SCGC to Petit. (See
Note 16-Susequent Event).

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 nine months ended September 30, 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.



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##### Table of Contents

The Company may have continued exposure related to the wind-down of its construction and materials divisions:

The Company may incur additional costs related to the transition and wind-down of its construction and materials operations. These costs
may include costs to complete existing construction contracts, employee severance, employee related expenses and various remediation costs.



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

(a)
None

(b) None

(c) Issuer Purchases of Equity Securities (in
thousands, except per-share amounts):



|                                         |  |                                |  |                            |      |                                                                                   |     |                                                                                             |   |      
|---------------------------------------- |  | ------------------------------ |  | -------------------------- | ---- | --------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------------------------- | - | -----
|Period                                   |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |      | Total Number ofShares Purchased as Part ofPublicly AnnouncedPlans or Programs (1) |     | Approximate Dollar Value of Shares that May Yet Be PurchasedUnder the Plans or Programs (1)
|July 24, 2007 to July 31, 2007           |  |                               |  | $                          |     |                                                                                   |    |                                                                                             | $ | 5,000
|August 1, 2007 to August 31, 2007        |  | 11                             |  | $                          | 3.49 |                                                                                   | 11  |                                                                                             | $ | 4,962
|September 1, 2007 and September 30, 2007 |  | 153                            |  | $                          | 3.52 |                                                                                   | 153 |                                                                                             | $ | 4,424
|                                         |  |                                |  |                            |      |                                                                                   |     |                                                                                             |   |      
|Total                                    |  | 164                            |  | $                          | 3.52 |                                                                                   | 164 |                                                                                             |   |      
|                                         |  |                                |  |                            |      |                                                                                   |     |                                                                                             |   |      

---

|(1) | 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 163,800 of our common stock at an average price of $3.52 per share for an aggregate purchase price of $0.6 million. At September 30, 2007, the remaining authorized amount for stock
repurchase under this plan was $4.4 million, which will terminate on December 31, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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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##### Table of Contents

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: November 13, 2007



By:

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

/s/ Robert W. SchillerRobert W. Schiller, Chief Financial Officer,(on behalf of the Registrant and as Principal Financial and Accounting Officer)




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##### Table of Contents

Exhibit Index



|             |  |                                                                                                                            
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibits No. |  | Description                                                                                                                
|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.    



43