##### 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, 2005



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                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1350 East Newport
Center Drive

Suite 201

Deerfield Beach, FL 33442

(Address of Principal Executive Offices)



(954) 429-1500

(Registrants telephone number, including area code)



---



Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:    YES  x    NO ̈



Indicate by check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):    YES ̈NO  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 15, 2005 the number of shares outstanding of the registrants Common Stock was 5,826,660.



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES



INDEX



|        |  |                       |  |                                                                                                                     |  |      
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -----
|        |  |                       |  | PageNumber                                                                                                         
|Part I  |  | Financial Information |  |                                                                                                                    
|        |  |                       | 
|        |  | Item 1                |  | Financial Statements                                                                                                |  |      
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Balance Sheets September 30, 2005 and December 31, 2004 (unaudited)                          |  | 3-4  
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 2005 and 2004 (unaudited) |  | 5    
|        |  |                       | 
|        |  |                       |  | Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2005 and 2004 (unaudited)           |  | 6-7  
|        |  |                       | 
|        |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                      |  | 8-19 
|        |  |                       | 
|        |  | Item 2                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 20-33
|        |  |                       | 
|        |  | Item 3                |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 34   
|        |  |                       | 
|        |  | Item 4                |  | Controls and Procedures                                                                                             |  | 34-35
|        |  |                      
|Part II |  | Other Information     |  |                                                                                                                    
|        |  |                       | 
|        |  | Item 1                |  | Legal Proceedings                                                                                                   |  | 36   
|        |  |                       | 
|        |  | Item 2                |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 36   
|        |  |                       | 
|        |  | Item 3                |  | Default Upon Senior Securities                                                                                      |  | 36   
|        |  |                       | 
|        |  | Item 4                |  | Submission of Matter to a Vote of Security Holders                                                                  |  | 36   
|        |  |                       | 
|        |  | Item 5                |  | Other Information                                                                                                   |  | 36   
|        |  |                       | 
|        |  | Item 6                |  | Exhibits                                                                                                            |  | 37   



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



September 30, 2005 and December 31, 2004

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

(Unaudited)



|                                                                                                |  |                    |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                |  | September 30, 2005 |         |   | December 31, 2004 |  
|ASSETS                                                                                          |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                 |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                       |  | $                  | 7,856   |   |                   | $ | 34,928  |  
|Accounts receivable, net of allowance for doubtful accounts of $ 2,150 and $2,785, respectively |  |                    | 21,101  |   |                   |   | 8,129   |  
|Accounts receivable, related party                                                              |  |                    | 630     |   |                   |   | 1,046   |  
|Notes receivable                                                                                |  |                    | 1,302   |   |                   |   | 2,612   |  
|Notes receivable, related party                                                                 |  |                    | 2,939   |   |                   |   | 775     |  
|Costs and estimated earnings in excess of billings                                              |  |                    | 3,724   |   |                   |   | 1,130   |  
|Costs and estimated earnings in excess of billings, related party                               |  |                    | 47      |   |                   |   |        |  
|Inventories                                                                                     |  |                    | 2,363   |   |                   |   | 3,324   |  
|Prepaid expenses                                                                                |  |                    | 758     |   |                   |   | 747     |  
|Prepaid taxes                                                                                   |  |                    | 284     |   |                   |   | 4,402   |  
|Other current assets                                                                            |  |                    | 5,815   |   |                   |   | 4,427   |  
|                                                                                                |  |                    |         |   |                   |   |         |  
|Total current assets                                                                            |  | $                  | 46,819  |   |                   | $ | 61,520  |  
|                                                                                                |  |                   
|Property, plant and equipment, net                                                              |  |                    |         |   |                   |   |         |  
|Land                                                                                            |  | $                  | 1,096   |   |                   | $ | 1,485   |  
|Buildings                                                                                       |  |                    | 472     |   |                   |   | 847     |  
|Leasehold improvements                                                                          |  |                    | 2,301   |   |                   |   | 2,515   |  
|Equipment                                                                                       |  |                    | 41,959  |   |                   |   | 49,357  |  
|Furniture and fixtures                                                                          |  |                    | 1,247   |   |                   |   | 948     |  
|Construction in process                                                                         |  |                    | 1,021   |   |                   |   | 2,019   |  
|                                                                                                |  |                    |         |   |                   |   |         |  
|Total property, plant and equipment                                                             |  | $                  | 48,096  |   |                   | $ | 57,171  |  
|Less accumulated depreciation                                                                   |  |                    | (23,383 | ) |                   |   | (29,426 | )
|                                                                                                |  |                    |         |   |                   |   |         |  
|Total property, plant and equipment, net                                                        |  | $                  | 24,713  |   |                   | $ | 27,745  |  
|                                                                                                |  |                   
|Investments in unconsolidated joint ventures and affiliates, net                                |  | $                  | 340     |   |                   | $ | 362     |  
|Notes receivable, net of current portion                                                        |  |                    | 3,874   |   |                   |   | 1,318   |  
|Notes receivable, related party, net of current portion                                         |  |                    |        |   |                   |   | 2,000   |  
|Intangible assets, net of amortization $2,497 and $230, respectively                            |  |                    | 21,627  |   |                   |   | 4,321   |  
|Goodwill                                                                                        |  |                    | 19,965  |   |                   |   | 1,115   |  
|Other long-term assets                                                                          |  |                    | 5,417   |   |                   |   | 3,284   |  
|                                                                                                |  |                    |         |   |                   |   |         |  
|Total assets                                                                                    |  | $                  | 122,755 |   |                   | $ | 101,665 |  
|                                                                                                |  |                    |         |   |                   |   |         |  



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)



September 30, 2005 and December 31, 2004

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

(Unaudited)



|                                                                                                                                                                        |  |                    |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                        |  | September 30, 2005 |         |   | December 31, 2004 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                    |  |                    |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                    |  |                    |         |   |                   |   |         |  
|Accounts payable, trade and other                                                                                                                                       |  | $                  | 4,736   |   |                   | $ | 4,929   |  
|Accrued expenses and other liabilities                                                                                                                                  |  |                    | 8,417   |   |                   |   | 5,068   |  
|Deferred revenue                                                                                                                                                        |  |                    | 2,405   |   |                   |   | 761     |  
|Accrued expense, retirement and severance                                                                                                                               |  |                    | 1,030   |   |                   |   | 948     |  
|Current installments of long-term debt                                                                                                                                  |  |                    | 852     |   |                   |   | 80      |  
|Current installments of long term debt, related party                                                                                                                   |  |                    |        |   |                   |   | 1,725   |  
|Billings in excess of costs and estimated earnings                                                                                                                      |  |                    | 291     |   |                   |   | 206     |  
|Billings in excess of costs and estimated earnings, related party                                                                                                       |  |                    | 37      |   |                   |   | 538     |  
|Deferred tax liability                                                                                                                                                  |  |                    |        |   |                   |   | 4,080   |  
|Income tax payable                                                                                                                                                      |  |                    | 361     |   |                   |   | 1,125   |  
|                                                                                                                                                                        |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                               |  | $                  | 18,129  |   |                   | $ | 19,460  |  
|                                                                                                                                                                        |  |                   
|Long-term debt, excluding current installments                                                                                                                          |  | $                  | 23,873  |   |                   | $ | 564     |  
|Long-term debt, excluding current installments, related party                                                                                                           |  |                    | 1,725   |   |                   |   |        |  
|Retirement and severance, excluding current portion                                                                                                                     |  |                    | 3,839   |   |                   |   | 4,013   |  
|Other long-term liabilities, excluding current portion                                                                                                                  |  |                    | 1,194   |   |                   |   | 645     |  
|                                                                                                                                                                        |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                                                       |  | $                  | 48,760  |   |                   | $ | 24,682  |  
|                                                                                                                                                                        |  |                   
|Stockholders equity:                                                                                                                                                   |  |                    |         |   |                   |   |         |  
|Common stock, $0.10 par value. Authorized 15,000,000 shares, issued 5,988,204 in 2005 and 5,753,057 in 2004, outstanding 5,982,360 in 2005 and
5,738,713 shares in 2004 |  | $                  | 599     |   |                   | $ | 575     |  
|Additional paid-in capital                                                                                                                                              |  |                    | 31,166  |   |                   |   | 29,790  |  
|Retained earnings                                                                                                                                                       |  |                    | 44,219  |   |                   |   | 48,106  |  
|Accumulated other comprehensive loss  cumulative translation adjustment                                                                                                |  |                    | (1,910  | ) |                   |   | (1,390  | )
|Treasury stock, at cost, 5,844 and 14,344 shares in 2005 and 2004, respectively                                                                                         |  |                    | (79     | ) |                   |   | (98     | )
|                                                                                                                                                                        |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                              |  | $                  | 73,995  |   |                   | $ | 76,983  |  
|                                                                                                                                                                        |  |                    |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                                              |  | $                  | 122,755 |   |                   | $ | 101,665 |  
|                                                                                                                                                                        |  |                    |         |   |                   |   |         |  



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



Three and Nine Months Ended September 30, 2005 and 2004

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

(Unaudited)



|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|------------------------------------------------------------ |  | ------------------ | --------- | - | ------------------ | - | --------- | ------------------ |  | - | ------------------ | - |  | - | --------- | -
|                                                             |  | Three Months Ended |           |   | Nine Months Ended  |  
|                                                             |  | September 30, 2005 |           |   | September 30, 2004 |   |           | September 30, 2005 |  |   | September 30, 2004 |  
|Revenue                                                      |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Materials revenue                                            |  | $                  | 6,213     |   |                    | $ | 7,518     |                    |  | $ | 20,104             |   |  | $ | 19,971    |  
|Materials revenue, related party                             |  |                    |          |   |                    |   |          |                    |  |   |                   |   |  |   | 1,308     |  
|Construction revenue                                         |  |                    | 8,372     |   |                    |   | 3,317     |                    |  |   | 22,437             |   |  |   | 10,013    |  
|Construction revenue, related party                          |  |                    | 829       |   |                    |   | 4,386     |                    |  |   | 6,529              |   |  |   | 6,427     |  
|Security revenue                                             |  |                    | 4,591     |   |                    |   | 369       |                    |  |   | 11,146             |   |  |   | 369       |  
|Other revenue                                                |  |                    | 65        |   |                    |   | 73        |                    |  |   | 542                |   |  |   | 73        |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Total revenue                                                |  | $                  | 20,070    |   |                    | $ | 15,663    |                    |  | $ | 60,758             |   |  | $ | 38,161    |  
|Cost of Sales                                                |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Cost of Materials                                            |  |                    | (5,333    | ) |                    |   | (6,270    | )                  |  |   | (18,516            | ) |  |   | (17,221   | )
|Cost of Construction                                         |  |                    | (11,504   | ) |                    |   | (5,201    | )                  |  |   | (27,228            | ) |  |   | (10,859   | )
|Cost of Security                                             |  |                    | (1,983    | ) |                    |   | (254      | )                  |  |   | (4,725             | ) |  |   | (254      | )
|Cost of Other                                                |  |                    | (43       | ) |                    |   | (53       | )                  |  |   | (336               | ) |  |   | (54       | )
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Gross profit                                                 |  |                    | 1,207     |   |                    |   | 3,885     |                    |  |   | 9,953              |   |  |   | 9,773     |  
|Operating expenses                                           |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Selling, general and administrative                          |  |                    | (5,943    | ) |                    |   | (3,881    | )                  |  |   | (16,617            | ) |  |   | (9,431    | )
|Severance and retirement                                     |  |                    | (39       | ) |                    |   | (790      | )                  |  |   | (629               | ) |  |   | (1,191    | )
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Operating loss                                               |  |                    | (4,775    | ) |                    |   | (786      | )                  |  |   | (7,293             | ) |  |   | (849      | )
|                                                             |  |                    |           |  
|Other income (expense)                                       |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Interest expense                                             |  |                    | (520      | ) |                    |   | (44       | )                  |  |   | (1,218             | ) |  |   | (126      | )
|Interest income, receivables                                 |  |                    | 187       |   |                    |   | 557       |                    |  |   | 438                |   |  |   | 1,330     |  
|Interest income, banks                                       |  |                    | 53        |   |                    |   | 84        |                    |  |   | 225                |   |  |   | 140       |  
|Other income (expense)                                       |  |                    | 528       |   |                    |   | (74       | )                  |  |   | 598                |   |  |   | (78       | )
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|(Loss) income from continuing operations before income taxes |  |                    | (4,527    | ) |                    |   | (263      | )                  |  |   | (7,250             | ) |  |   | 417       |  
|Benefit for income taxes                                     |  |                    | 1,288     |   |                    |   | 1,568     |                    |  |   | 1,316              |   |  |   | 924       |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Net (loss) income from continuing operations                 |  |                    | (3,239    | ) |                    |   | 1,305     |                    |  |   | (5,934             | ) |  |   | 1,341     |  
|                                                             |  |                    |           |  
|Income from discontinued operations, net of income taxes     |  |                    | 1,455     |   |                    |   | 2,292     |                    |  |   | 2,165              |   |  |   | 3,012     |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Net (loss) income                                            |  | $                  | (1,784    | ) |                    | $ | 3,597     |                    |  | $ | (3,769             | ) |  | $ | 4,353     |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Basic (loss) income per share:                               |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Continuing operations                                        |  | $                  | (.54      | ) |                    | $ | .26       |                    |  | $ | (1.01              | ) |  | $ | .34       |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Discontinued operations                                      |  | $                  | .24       |   |                    | $ | .46       |                    |  | $ | .37                |   |  | $ | .77       |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Net income                                                   |  | $                  | (.30      | ) |                    | $ | .72       |                    |  | $ | (.64               | ) |  | $ | 1.11      |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Diluted (loss) income per share:                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Continuing operations                                        |  | $                  | (.54      | ) |                    | $ | .22       |                    |  | $ | (1.01              | ) |  | $ | .30       |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Discontinued operations                                      |  | $                  | .24       |   |                    | $ | .38       |                    |  | $ | .37                |   |  | $ | .68       |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Net income                                                   |  | $                  | (.30      | ) |                    | $ | .60       |                    |  | $ | (.64               | ) |  | $ | .98       |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Weighted average number of shares outstanding:               |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Basic                                                        |  |                    | 5,959,358 |   |                    |   | 4,977,252 |                    |  |   | 5,872,736          |   |  |   | 3,914,482 |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  
|Diluted                                                      |  |                    | 5,959,358 |   |                    |   | 5,968,580 |                    |  |   | 5,872,736          |   |  |   | 4,463,107 |  
|                                                             |  |                    |           |   |                    |   |           |                    |  |   |                    |   |  |   |           |  



See accompanying notes
to the unaudited condensed consolidated financial statements.



5



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES



Condensed Consolidated Statements of Cash Flows



Nine Months Ended September 30, 2005 and 2004

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

(Unaudited)



|                                                                                                   |  |                    |        |   |                    |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------------------ | - | ------ | -
|                                                                                                   |  | Nine months ended  |       
|                                                                                                   |  | September 30, 2005 |        |   | September 30, 2004 |  
|Cash flows from operating activities:                                                              |  |                    |        |   |                    |   |        |  
|Net (loss) income                                                                                  |  | $                  | (3,769 | ) |                    | $ | 4,353  |  
|                                                                                                   |  |                   
|Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |  |                    |        |   |                    |   |        |  
|Non-cash stock compensation                                                                        |  |                    | 56     |   |                    |   | 231    |  
|Non-cash compensation expense for warrants                                                         |  |                    |       |   |                    |   | 390    |  
|Depreciation and amortization                                                                      |  |                    | 6,509  |   |                    |   | 3,642  |  
|Deferred income taxes                                                                              |  |                    | (1,734 | ) |                    |   | (805   | )
|Provision for doubtful accounts and notes                                                          |  |                    | 69     |   |                    |   | 301    |  
|Impairment on long-lived assets                                                                    |  |                    | 502    |   |                    |   | 46     |  
|Gain on sale of property and equipment                                                             |  |                    | (2,639 | ) |                    |   | (113   | )
|Minority interest                                                                                  |  |                    |       |   |                    |   | 1      |  
|Joint venture equity gain                                                                          |  |                    | 18     |   |                    |   | 77     |  
|                                                                                                   |  |                   
|Changes in operating assets and liabilities:                                                       |  |                    |        |   |                    |   |        |  
|Accounts receivable                                                                                |  |                    | 776    |   |                    |   | (636   | )
|Accounts receivable - related party                                                                |  |                    | 416    |   |                    |   | (2,135 | )
|Notes receivable                                                                                   |  |                    | (1,704 | ) |                    |   | (57    | )
|Notes receivable - related party                                                                   |  |                    | (165   | ) |                    |   | (114   | )
|Costs and estimated earnings in excess of billings                                                 |  |                    | (2,594 | ) |                    |   | 93     |  
|Costs and estimated earnings in excess of billings, related party                                  |  |                    | (47    | ) |                    |   |       |  
|Inventories                                                                                        |  |                    | (120   | ) |                    |   | (91    | )
|Prepaid expenses                                                                                   |  |                    | 96     |   |                    |   | (1,071 | )
|Prepaid taxes                                                                                      |  |                    | 4,058  |   |                    |   |       |  
|Other current assets                                                                               |  |                    | (2,990 | ) |                    |   | (3     | )
|Other long-term assets                                                                             |  |                    | (666   | ) |                    |   |       |  
|Accounts payable, accrued expenses and other liabilities                                           |  |                    | 2,272  |   |                    |   | 2,330  |  
|Deferred revenue                                                                                   |  |                    | (193   | ) |                    |   |       |  
|Billings in excess of costs and estimated earnings                                                 |  |                    | 85     |   |                    |   | 427    |  
|Billings in excess of costs and estimated earnings, related party                                  |  |                    | (501   | ) |                    |   |       |  
|Income taxes                                                                                       |  |                    | (1,961 | ) |                    |   | (2,051 | )
|Other long-term liabilities                                                                        |  |                    | 321    |   |                    |   | 142    |  
|                                                                                                   |  |                    |        |   |                    |   |        |  
|Net cash (used in) provided by operating activities                                                |  | $                  | (3,905 | ) |                    | $ | 4,957  |  
|                                                                                                   |  |                    |        |   |                    |   |        |  



6



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##### Table of Contents

DEVCON INTERNATIONAL CORP.

AND SUBSIDIARIES



Condensed Consolidated Statement of Cash Flows



Nine Months Ended September 30, 2005 and 2004

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

(Unaudited)



|                                                           |  |                   |         |   |                    |   |         |  
|---------------------------------------------------------- |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                           |  | Nine months ended |        
|                                                           |  | September 30,2005 |         |   | September 30, 2004 |  
|Cash flows from investing activities:                      |  |                   |         |   |                    |   |         |  
|Purchases of property, plant and equipment                 |  | $                 | (8,518  | ) |                    | $ | (7,405  | )
|Cash used in business acquisition, net of cash acquired    |  |                   | (41,145 | ) |                    |   | (3,146  | )
|Proceeds from disposition of property, plant and equipment |  |                   | 352     |   |                    |   | 56      |  
|Payments received on notes receivable, other               |  |                   |        |   |                    |   | 481     |  
|Issuance of notes receivable                               |  |                   |        |   |                    |   | (171    | )
|Proceeds from disposition of business                      |  |                   | 1,342   |   |                    |   |        |  
|Payments received on notes related to sale of assets       |  |                   | 508     |   |                    |   |        |  
|Investments in unconsolidated joint ventures               |  |                   | 4       |   |                    |   | (78     | )
|                                                           |  |                   |         |   |                    |   |         |  
|Net cash used in investing activities                      |  | $                 | (47,457 | ) |                    | $ | (10,263 | )
|                                                           |  |                   |         |   |                    |   |         |  
|Cash flows from financing activities:                      |  |                   |         |   |                    |   |         |  
|Proceeds from issuance of common stock                     |  | $                 | 1,480   |   |                    | $ | 17,888  |  
|Purchase of treasury stock                                 |  |                   | (234    | ) |                    |   |        |  
|Proceeds from debt                                         |  |                   | 23,603  |   |                    |   |        |  
|Principal payments on debt                                 |  |                   | (1,297  | ) |                    |   | (47     | )
|Principal payments on debt, related party                  |  |                   |        |   |                    |   | (75     | )
|Net borrowing, lines of credit                             |  |                   | 782     |   |                    |   | 173     |  
|                                                           |  |                   |         |   |                    |   |         |  
|Net cash provided by financing activities                  |  | $                 | 24,334  |   |                    | $ | 17,939  |  
|                                                           |  |                   |         |   |                    |   |         |  
|Effect of exchange rate changes on cash                    |  |                   | (44     | ) |                    |   | (133    | )
|                                                           |  |                   |         |   |                    |   |         |  
|Net (decrease) increase in cash and cash equivalents       |  | $                 | (27,072 | ) |                    | $ | 12,500  |  
|                                                           |  |                  
|Cash and cash equivalents, beginning of period             |  | $                 | 34,928  |   |                    | $ | 10,030  |  
|                                                           |  |                   |         |   |                    |   |         |  
|Cash and cash equivalents, end of period                   |  | $                 | 7,856   |   |                    | $ | 22,530  |  
|                                                           |  |                   |         |   |                    |   |         |  
|Supplemental disclosures of cash flow information:         |  |                   |         |   |                    |   |         |  
|Cash paid for interest                                     |  | $                 | 612     |   |                    | $ | 126     |  
|                                                           |  |                   |         |   |                    |   |         |  
|Cash paid for income taxes                                 |  | $                 | 691     |   |                    | $ | 89      |  
|                                                           |  |                   |         |   |                    |   |         |  
|Supplemental non-cash items:                               |  |                   |         |   |                    |   |         |  
|Non-cash reduction of note receivable                      |  | $                 | 52      |   |                    | $ | (249    | )
|Retirement of treasury stock                               |  |                   | 254     |   |                    |   | 127     |  
|Translation gain adjustment                                |  |                   | 519     |   |                    |   | 203     |  



See accompanying notes
to the unaudited condensed consolidated financial statements.



7



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##### Table of Contents

Notes to Unaudited Condensed Consolidated Financial Statements



Devcon International Corp. and its subsidiaries (the Company) produce and distribute ready-mix concrete, crushed stone, concrete block, and asphalt and distribute bagged cement in the Caribbean. The
Company also performs earthmoving, excavating and filling operations, builds golf courses, roads, and utility infrastructures, dredges waterways and constructs deep-water piers and marinas in the Caribbean. The Company also provides electronic
security services and related products to residential homes, financial institutions, industrial and commercial businesses and complexes, warehouses, facilities of government departments and healthcare and educational facilities.



The unaudited condensed consolidated financial statements include the
accounts of Devcon International Corp. and its majority-owned subsidiaries. The accounting policies followed by the Company are set forth in Note (l) to the Companys financial statements included in its Consolidated Annual Report on Form
10-K for the fiscal year ended December 31, 2004 (the 2004 Form 10-K). The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2005 and 2004 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, 2005 and the results of its operations for the three and nine months ended
September 30, 2005 and 2004 and cash flows for the nine months ended September 30, 2005 and 2004. The results of operations for the three and nine months ended September 30, 2005 and 2004 are unaudited and are not necessarily
indicative of the results to be expected for the full year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and related footnotes included in the Companys
2004 Form 10-K. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these unaudited condensed consolidated
financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.



During 2004, the Company reclassified certain amounts in the consolidated Statements of Cash Flows from investing activities to operating activities,
including certain items relating to its customer financing activities, as a result of guidance given by the Securities and Exchange Commission.



The following table shows the effects of this reclassification for the nine months ended September 30, 2004:



|                                                                 |  |                        |         |  
|---------------------------------------------------------------- |  | ---------------------- | ------- | -
|                                                                 |  | (dollars in thousands) |        
|Net cash provided by operating activities as previously reported |  | $                      | 3,752   |  
|Reclassification                                                 |  |                        | 1,205   |  
|                                                                 |  |                        |         |  
|Revised net cash provided by operating activities                |  | $                      | 4,957   |  
|                                                                 |  |                        |         |  
|Net cash used in investing activities as previously reported     |  | $                      | (9,058  | )
|Reclassification                                                 |  |                        | (1,205  | )
|                                                                 |  |                        |         |  
|Revised net cash used in investing activities                    |  | $                      | (10,263 | )
|                                                                 |  |                        |         |  



8



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##### Table of Contents

Acquisition



On February 28, 2005, the Company, through Devcon Security Services Corporation, (DSSC) a wholly owned subsidiary, completed the
acquisition of certain net assets of Starpoint Limiteds electronic security services operation (an entity controlled by Adelphia Communications Corporation, a Delaware corporation) for approximately $40.2 million in cash based substantially
upon contractually recurring monthly revenue of approximately $1.15 million. The transaction was completed pursuant to the terms of an Asset Purchase Agreement, dated as of January 21, 2005 as amended (the Asset Purchase Agreement).
Other than the Asset Purchase Agreement, there is no material relationship between the parties. The transaction received approval by the United States Bankruptcy Court for the Southern District of New York in an order issued on January 28,
2005.



The Company utilized $24.6 million of the $35.0 million
available under a Credit Facility provided by CIT (described below) to satisfy a portion of the cash purchase price for the acquisition. The balance of the purchase price, including payment of $0.6 million of transaction costs, was satisfied by
using cash on hand.



The acquisition was recorded using the
purchase method of accounting. The purchase price allocation is based upon a report issued by an independent appraisal firm as to fair value. The purchase price, adjusted for certain non-performing contracts as well as certain working capital
adjustments, has been recorded pursuant to the terms of the Asset Purchase Agreement and appropriately allocated to each account set out below. Results included for the acquisition are for the period February 28, 2005 to September 30,
2005.



The purchase price allocation is as
follows:



|                                      |  |                        |        |  
|------------------------------------- |  | ---------------------- | ------ | -
|Preliminary Purchase Price Allocation |  | (dollars in thousands) |       
|Accounts Receivable                   |  | $                      | 1,021  |  
|Inventory                             |  |                        | 276    |  
|Fixed Assets                          |  |                        | 313    |  
|Deferred Revenue                      |  |                        | (2,192 | )
|Other Liabilities                     |  |                        | (487   | )
|Contractual Agreements                |  |                        | 6,929  |  
|Customer Relationships                |  |                        | 13,367 |  
|Goodwill                              |  |                        | 19,634 |  
|                                      |  |                        |        |  
|Total Price Allocation                |  | $                      | 38,861 |  



The following table
shows the condensed consolidated results of continuing operations of the Company and Starpoint Limited, as though this acquisition had completed at the beginning of each period reported on:



|                                             |  |                                                              |           |                        |                    |   |                    |  |   |                    |   |  |   |          
|-------------------------------------------- |  | ------------------------------------------------------------ | --------- | ---------------------- | ------------------ | - | ------------------ |  | - | ------------------ | - |  | - | ---------
|                                             |  | Three Months Ended                                           |           | Nine Months Ended     
|                                             |  | (dollars in thousands)                                       |           | (dollars in thousands)
|                                             |  | September 30, 2005                                           |           |                        | September 30, 2004 |   | September 30, 2005 |  |   | September 30, 2004
|Revenue                                      |  | $                                                            | 20,070    |                        |                    | $ | 20,477             |  | $ | 63,804             |   |  | $ | 52,731   
|Net (loss) income from continuing operations |  | $                                                            | (3,239    | )                      |                    | $ | 2,171              |  | $ | (5,549             | ) |  | $ | 4,028    
|                                             |  |                                                              |           |                       
|(Loss) income per common share - basic       |  | $                                                            | (0.54     | )                      |                    | $ | 0.44               |  | $ | (0.94              | ) |  | $ | 1.03     
|(Loss) income per common share - diluted     |  | $                                                            | (0.54     | )                      |                    | $ | 0.36               |  | $ | (0.94              | ) |  | $ | 0.90     
|                                             |  |                                                              |           |                       
|Weighted average shares outstanding:         |  |                                                              |           |                        |                    |   |                    |  |   |                    |   |  |   |          
|Basic                                        |  |                                                              | 5,959,358 |                        |                    |   | 4,977,252          |  |   | 5,872,736          |   |  |   | 3,914,482
|Diluted                                      |  |                                                              | 5,959,358 |                        |                    |   | 5,968,580          |  |   | 5,872,736          |   |  |   | 4,463,107
|                                             |  | (Amounts shown in thousands except share and per share data)



9



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##### Table of Contents

Discontinued Operations



On September 30, 2005, the Company and its wholly owned subsidiary, V.I. Cement & Building Products, Inc. completed the sale of its U.S.
Virgin Islands material operations to Heavy Materials, LLC, a U.S. Virgin Islands limited liability company and private investor group (Purchaser), pursuant to an Asset Purchase Agreement dated as of August 15, 2005, for $10.7
million in cash plus the issuance of a promissory note (the Note) to the Company in the aggregate principal amount of $2.6 million. The Note has a term of three years bearing interest at 5% per annum with only interest being paid
quarterly in arrears during the first 12 months and principal and accrued interest being paid quarterly (principal being paid in 8 equal quarterly installments) for the remainder of the term of the Note until the maturity date. As of
September 30, 2005, the cash proceeds, net of closing costs, totaling $10.4 million are included in accounts receivable on the accompanying condensed consolidated balance sheet. This amount was received in October 2005.



The accompanying Unaudited Condensed Consolidated Financial Statements for
all the periods presented have been adjusted to classify the U.S Virgin Islands material operations as discontinued operations. Selected statement of operations data for the Companys discontinued operations is as follows:



|                                                         |  |                                 |        |                                |      |   |       |  |   |        |   |  |   |       
|-------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ----- |  | - | ------ | - |  | - | ------
|                                                         |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                         |  | (dollars in thousands)          |        | (dollars in thousands)        
|                                                         |  | 2005                            |        |                                | 2004 |   | 2005  |  |   | 2004  
|Total revenue                                            |  | $                               | 5,271  |                                |      | $ | 4,185 |  | $ | 14,020 |   |  | $ | 11,737
|                                                         |  |                                 |        |                                |      |   |       |  |   |        |   |  |   |       
|Pre-tax income from discontinued operations              |  | $                               | 696    |                                |      | $ | 838   |  | $ | 2,159  |   |  | $ | 1,327 
|Pre-tax gain on disposal of discontinued operations      |  |                                 | 2,302  |                                |      |   |      |  |   | 2,302  |   |  |   |      
|                                                         |  |                                 |        |                                |      |   |       |  |   |        |   |  |   |       
|Income before tax                                        |  |                                 | 2,998  |                                |      |   | 838   |  |   | 4,461  |   |  | $ | 1,327 
|                                                         |  |                                 |        |                               
|Income tax (provision) benefit                           |  |                                 | (1,543 | )                              |      |   | 1,454 |  |   | (2,296 | ) |  |   | 1,685 
|                                                         |  |                                 |        |                                |      |   |       |  |   |        |   |  |   |       
|Income from discontinued operations, net of income taxes |  | $                               | 1,455  |                                |      | $ | 2,292 |  | $ | 2,165  |   |  | $ | 3,012 
|                                                         |  |                                 |        |                                |      |   |       |  |   |        |   |  |   |       



A summary of the total
assets of discontinued operations included in Other Current Assets is as follows:



|                                      |  |                                         |      
|------------------------------------- |  | --------------------------------------- | -----
|                                      |  | December 31, 2004(dollars in thousands)
|Accounts receivable, net of allowance |  | $                                       | 1,515
|Inventory                             |  |                                         | 1,285
|Property and equipment, net           |  |                                         | 6,883
|                                      |  |                                         |      
|Total Assets                          |  | $                                       | 9,683
|                                      |  |                                         |      



10



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##### Table of Contents

Credit Facility



DSSC and its direct parent, Devcon Security Holdings, Inc. (DSH) (together, the Borrowers), both wholly owned subsidiaries of the
Company, financed the acquisition of the net operating assets of Starpoint Limited through available cash and a senior secured revolving credit facility (the CIT Senior Loan). The CIT Senior Loan is governed by the terms of a Credit
Agreement (the CIT Credit Agreement), dated as of February 28, 2005, by and among Borrowers and the Lenders signatory thereto from time to time, as Lenders (the CIT Lenders). The maximum amount available under the CIT
Senior Loan is $35 million dollars, but this amount may be increased up to $50 million dollars at the request of Borrowers if no Event of Default has occurred, the lenders prior written consent is obtained and certain other customary
conditions are satisfied. Borrowers may draw amounts under the CIT Senior Loan until March 30, 2007 and all amounts outstanding under the CIT Senior Loan will be due on February 28, 2011. The CIT Senior Loan is secured by, among other
things, a security interest in substantially all of the assets of Borrowers, including a first mortgage on certain real property owned by DSSC. The interest rate charged under the CIT Senior Loan varies depending on the types of advances or loans
Borrowers select under the CIT Senior Loan. Borrowings under the CIT Senior Loan may bear interest at the higher of (i) the prime rate as announced in the Wall Street Journal or (ii) the Federal Funds Rate plus 50 basis points, plus a
spread which ranges from 125 to 300 basis points. Alternatively, borrowings under the CIT Senior Loan may bear interest at LIBOR-based rates plus a spread which ranges from 250 to 425 basis points (LIBOR plus 425 basis points as of the date hereof).
The spread depends upon DSHs ratio of total debt to recurring monthly revenues. Borrowers pay a variable commitment fee each quarter on the unused portion of the commitment equal to 37.5 basis points. Borrowers are subject to certain covenants
and restrictions specified in the CIT Senior Loan, including covenants that restrict their ability to pay dividends, make certain distributions, pledge certain assets or repay certain indebtedness. As of September 30, 2005, the Company was in
compliance with the above-referenced covenants.



As more fully
described below (see Subsequent Events), on November 10, 2005, the Borrowers entered into a new senior secured revolving credit facility and a senior secured term loan.



Inventories



|                                     |  |                        |       |                        |   |      
|------------------------------------ |  | ---------------------- | ----- | ---------------------- | - | -----
|                                     |  | September 30, 2005     |       | December 31, 2004     
|                                     |  | (dollars in thousands) |       | (dollars in thousands)
|Aggregates and Sand                  |  | $                      | 1,188 |                        | $ | 2,097
|Block, Cement, and Material Supplies |  |                        | 706   |                        |   | 940  
|Other Construction and Materials     |  |                        | 145   |                        |   | 264  
|Security Inventory                   |  |                        | 324   |                        |   | 23   
|                                     |  |                        |       |                        |   |      
|                                     |  | $                      | 2,363 |                        | $ | 3,324
|                                     |  |                        |       |                        |   |      



Fair Value of Financial Instruments



The carrying amount of financial instruments, including
cash, cash equivalents, the majority of the receivables net, other current assets, accounts payable trade and other, accrued expenses and other liabilities, and notes payable to banks approximated fair value at September 30, 2005 because of the
short maturity of these instruments. The carrying amount of the credit facility approximated fair value at September 30, 2005.



Income Tax



In February 2005, one of the Companys Antiguan subsidiaries declared and paid a $16.0 million gross dividend, of which $4.0 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. In the first quarter of 2005, the Company determined that it had available foreign tax credit to offset the income tax payable on the Antiguan dividend repatriation, which was accrued by the
Company in the fourth quarter of 2004.



11



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##### Table of Contents

In accordance with Section 965 of the U.S. Internal Revenue Code, enacted as part of the American
Jobs Creation Act of 2004 (the AJCA), a company can repatriate earnings from foreign subsidiaries at a reduced rate. In January 2005, the Company adopted a Domestic Reinvestment Plan (DRP) in order to qualify for an 85%
dividend exclusion on all qualifying cash dividends received during the 2005 tax year. The plan outlines the Companys intention to utilize qualifying cash dividends received from its foreign subsidiaries to either invest in the Companys
electronic security services and utility services businesses or to repay outstanding third party indebtedness.



Included in income tax expense for the third quarter of 2005 is $0.4 million related to the valuation of net operating losses based on certain tax
positions taken by the Company.



Net (Loss) Income Per Share



Basic earnings-per-share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding
during the period, increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued, by application of the treasury stock method. Certain options were not included
in the computations of diluted earnings per share because the options exercise prices were greater than the average market prices of the common shares.



The computation of weighted-average shares used in the calculation of basic and diluted income per share is as follows:



|                                                                               |  |                        |  |                   |  |                   |  |                   
|------------------------------------------------------------------------------ |  | ---------------------- |  | ----------------- |  | ----------------- |  | ------------------
|                                                                               |  | (numbers in thousands)
|                                                                               |  | Three Months Ended     |  | Nine Months Ended
|                                                                               |  | September 30,2005      |  | September 30,2004 |  | September 30,2005 |  | September 30, 2004
|Weighted average shares outstanding used to calculate basic income per share   |  | 5,959                  |  | 4,977             |  | 5,873             |  | 3,914             
|Dilutive effect of:                                                            |  |                        |  |                   |  |                   |  |                   
|Options, warrants, and employee stock options                                  |  |                       |  | 992               |  |                  |  | 549               
|                                                                               |  |                        |  |                   |  |                   |  |                   
|Weighted average shares outstanding used to calculate diluted income per share |  | 5,959                  |  | 5,969             |  | 5,873             |  | 4,463             



For
additional disclosures regarding the employee stock options, see the Companys 2004 Form 10-K.



Comprehensive (Loss) Income



The Companys total comprehensive (loss) income, comprised of net (loss) income and foreign currency translation adjustments, for the three and nine months ended September 30, 2005 and 2004 was as follows:



|                                                                           |  |                        |        |                   |                   |   |                   |  |   |                    |   |  |   |       |  
|-------------------------------------------------------------------------- |  | ---------------------- | ------ | ----------------- | ----------------- | - | ----------------- |  | - | ------------------ | - |  | - | ----- | -
|                                                                           |  | (dollars in thousands) |       
|                                                                           |  | Three Months Ended     |        | Nine Months Ended |                  
|                                                                           |  | September 30,2005      |        |                   | September 30,2004 |   | September 30,2005 |  |   | September 30, 2004 |  
|Net (loss) income                                                          |  | $                      | (1,784 | )                 |                   | $ | 3,597             |  | $ | (3,769             | ) |  | $ | 4,353 |  
|Other comprehensive (loss) income Foreign currency translation adjustments |  |                        | (12    | )                 |                   |   | 67                |  |   | (520               | ) |  |   | (203  | )
|                                                                           |  |                        |        |                   |                   |   |                   |  |   |                    |   |  |   |       |  
|Total comprehensive (loss) income                                          |  | $                      | (1,796 | )                 |                   | $ | 3,664             |  | $ | (4,289             | ) |  | $ | 4,150 |  
|                                                                           |  |                        |        |                   |                   |   |                   |  |   |                    |   |  |   |       |  



12



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##### Table of Contents

Stock-Based Compensation



The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock
Issued to Employees and Related Interpretations. The following table illustrates the effect on net (loss) income and (loss) earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock Based Compensation, to stock based compensation:



|                                                                                                                        |  |                        |        |   |                    |   |       |                    |  |   |                    |   |  |   |       |  
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ------------------ | - | ----- | ------------------ |  | - | ------------------ | - |  | - | ----- | -
|                                                                                                                        |  | (dollars in thousands) |       
|                                                                                                                        |  | Three Months Ended     |        |   | Nine Months Ended  |  
|                                                                                                                        |  | September 30, 2005     |        |   | September 30, 2004 |   |       | September 30, 2005 |  |   | September 30, 2004 |  
|Net (loss) income, as reported                                                                                          |  | $                      | (1,784 | ) |                    | $ | 3,597 |                    |  | $ | (3,769             | ) |  | $ | 4,353 |  
|Add: Total stock based employee compensation expense included in reported net income, net of tax                        |  |                        | 19     |   |                    |   |      |                    |  |   | 57                 |   |  |   |      |  
|                                                                                                                        |  |                        |        |  
|Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of taxes |  |                        | (22    | ) |                    |   | (107  | )                  |  |   | (67                | ) |  |   | (163  | )
|                                                                                                                        |  |                        |        |   |                    |   |       |                    |  |   |                    |   |  |   |       |  
|Net (loss) income, as adjusted                                                                                          |  | $                      | (1,787 | ) |                    | $ | 3,490 |                    |  | $ | (3,779             | ) |  | $ | 4,190 |  
|                                                                                                                        |  |                        |        |  
|Earnings per share:                                                                                                     |  |                        |        |   |                    |   |       |                    |  |   |                    |   |  |   |       |  
|Basic, as reported                                                                                                      |  | $                      | (.30   | ) |                    | $ | .72   |                    |  | $ | (.64               | ) |  | $ | 1.11  |  
|Diluted, as reported                                                                                                    |  |                        | (.30   | ) |                    |   | .60   |                    |  |   | (.64               | ) |  |   | .98   |  
|                                                                                                                        |  |                        |        |  
|Basic, as adjusted                                                                                                      |  |                        | (.30   | ) |                    |   | .70   |                    |  |   | (.64               | ) |  |   | 1.07  |  
|Diluted, as adjusted                                                                                                    |  |                        | (.30   | ) |                    |   | .58   |                    |  |   | (.64               | ) |  |   | .94   |  



The fair value of each
stock option is estimated on the date of grant using the Black-Scholes option-pricing model.



13



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##### Table of Contents

Segment Reporting



The following sets forth the revenue and income before income taxes for each of the Companys business segments for the three and nine months ended
September 30, 2005 and 2004:



|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|------------------------------------------------------------- |  | ---------------------- | ------ | - | ------------------ | - | ------ | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                                              |  | (dollars in thousands) |       
|                                                              |  | Three Months Ended     |        |   | Nine Months Ended  |  
|                                                              |  | September 30, 2005     |        |   | September 30, 2004 |   |        | September 30, 2005 |  |   | September 30, 2004 |  
|Revenue (including inter-segment)                             |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Construction                                                  |  | $                      | 9,201  |   |                    | $ | 7,766  |                    |  | $ | 28,966             |   |  | $ | 16,561  |  
|Materials                                                     |  |                        | 6,222  |   |                    |   | 7,501  |                    |  |   | 20,310             |   |  |   | 21,437  |  
|Security                                                      |  |                        | 4,591  |   |                    |   | 369    |                    |  |   | 11,146             |   |  |   | 369     |  
|Other                                                         |  |                        | 65     |   |                    |   | 74     |                    |  |   | 542                |   |  |   | 80      |  
|Elimination of inter-company revenue                          |  |                        | (9     | ) |                    |   | (47    | )                  |  |   | (206               | ) |  |   | (286    | )
|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Total revenue                                                 |  | $                      | 20,070 |   |                    | $ | 15,663 |                    |  | $ | 60,758             |   |  | $ | 38,161  |  
|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Operating (loss) income                                       |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Construction                                                  |  | $                      | (3,268 | ) |                    | $ | 1,879  |                    |  | $ | (979               | ) |  | $ | 3,578   |  
|Materials                                                     |  |                        | (597   | ) |                    |   | (896   | )                  |  |   | (2,774             | ) |  |   | (1,432  | )
|Security                                                      |  |                        | (217   | ) |                    |   | (98    | )                  |  |   | (175               | ) |  |   | (98     | )
|Other                                                         |  |                        | (23    | ) |                    |   | 6      |                    |  |   | 15                 |   |  |   | (37     | )
|Unallocated corporate overhead                                |  |                        | (670   | ) |                    |   | (1,677 | )                  |  |   | (3,380             | ) |  |   | (2,860  | )
|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Total operating loss                                          |  | $                      | (4,775 | ) |                    | $ | (786   | )                  |  | $ | (7,293             | ) |  | $ | (849    | )
|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Other income, net                                             |  |                        | 248    |   |                    |   | 523    |                    |  |   | 43                 |   |  |   | 1,266   |  
|                                                              |  |                        |        |  
|(Loss) income from continuing operations, before income taxes |  | $                      | (4,527 | ) |                    | $ | (263   | )                  |  | $ | (7,250             | ) |  | $ | 417     |  
|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|                                                              |  |                        |        |  
|                                                              |  |                        |        |   |                    |   |        | September 30, 2005 |  |   | December 31,2004   |  
|Assets                                                        |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|Construction                                                  |  |                        |        |   |                    |   |        |                    |  | $ | 22,428             |   |  | $ | 19,683  |  
|Materials                                                     |  |                        |        |   |                    |   |        |                    |  |   | 41,717             |   |  |   | 50,565  |  
|Security                                                      |  |                        |        |   |                    |   |        |                    |  |   | 56,258             |   |  |   | 6,654   |  
|Other                                                         |  |                        |        |   |                    |   |        |                    |  |   | 2,352              |   |  |   | 24,763  |  
|                                                              |  |                        |        |   |                    |   |        |                    |  |   |                    |   |  |   |         |  
|                                                              |  |                        |        |   |                    |   |        |                    |  | $ | 122,755            |   |  | $ | 101,665 |  



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##### Table of Contents

The following table sets forth the Companys revenue by geographic area. Revenue by geographic area
includes sales to unaffiliated customers based on customer location, not the selling entitys location. The Company moves its equipment from country to country; therefore, to make this disclosure meaningful, the geographic area separation for
assets is based upon the location of the legal entity owning the assets.



|                               |  |                        |        |                        |   |                   |  |                   |        |  |   |       
|------------------------------ |  | ---------------------- | ------ | ---------------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|                               |  | Three Months Ended     |        | Nine Months Ended     
|                               |  | (dollars in thousands) |        | (dollars in thousands)
|                               |  | September 30,2005      |        | September 30,2004      |   | September 30,2005 |  | September 30,2004
|Revenue by Geographic location |  |                        |        |                        |   |                   |  |                   |        |  |   |       
|U.S. and its territories       |  | $                      | 6,022  |                        | $ | 1,628             |  | $                 | 16,224 |  | $ | 3,302 
|                               |  |                        |        |                        |   |                   |  |                   |        |  |   |       
|Netherlands Antilles           |  |                        | 2,812  |                        |   | 2,624             |  |                   | 10,522 |  |   | 7,370 
|Antigua and Barbuda            |  |                        | 3,259  |                        |   | 2,676             |  |                   | 9,918  |  |   | 8,893 
|French West Indies             |  |                        | 1,839  |                        |   | 1,683             |  |                   | 4,912  |  |   | 5,052 
|Bahamas                        |  |                        | 6,138  |                        |   | 6,275             |  |                   | 19,164 |  |   | 11,849
|Other foreign areas            |  |                        |       |                        |   | 777               |  |                   | 18     |  |   | 1,695 
|                               |  |                        |        |                        |   |                   |  |                   |        |  |   |       
|Total foreign countries        |  |                        | 14,048 |                        |   | 14,035            |  |                   | 44,534 |  |   | 34,859
|                               |  |                        |        |                        |   |                   |  |                   |        |  |   |       
|Total (including U.S)          |  | $                      | 20,070 |                        | $ | 15,663            |  | $                 | 60,758 |  | $ | 38,161



|                                             |  |                   |        |                  |   |       
|-------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                             |  | September 30,2005 |        | December 31,2004
|Long-lived assets, net, by geographic areas: |  |                   |        |                  |   |       
|U.S. and its territories                     |  | $                 | 6,552  |                  |   | 10,948
|                                             |  |                   |        |                  |   |       
|Netherlands Antilles                         |  |                   | 1,203  |                  |   | 1,199 
|Antigua and Barbuda                          |  |                   | 9,482  |                  |   | 8,314 
|French West Indies                           |  |                   | 1,564  |                  |   | 1,635 
|Bahamas                                      |  |                   | 5,912  |                  |   | 5,649 
|Other foreign areas                          |  |                   |        |                  |   |       
|                                             |  |                   |        |                  |   |       
|Total foreign countries                      |  |                   | 18,161 |                  |   | 16,797
|                                             |  |                   |        |                  |   |       
|Total (including U.S)                        |  | $                 | 24,713 |                  | $ | 27,745



Pension



The Company has a defined benefit pension plan covering Antigua employees
who meet certain minimum requirements and also maintains an accrual for retirement agreements with Company executives and certain other employees. This accrual is based on the life expectancy of these persons and an assumed weighted average discount
rate of 4.49% for the U.S. pension. This rate was determined using the AA corporate bond rates as of September 30, 2005. Foreign pension assumes a discount rate of 8.0%. Should the actual longevity vary significantly from the United States
insurance norms, or should the discount rate used to establish the present value of the obligation vary, the accrual may have to be significantly increased or diminished at that time. The net pension cost of the Companys pension plans for the
three and nine months ending September 30, 2005 and 2004 was as follows:



|                               |  |                                |      |   |                                     |   |      |                   |  |   |                   |   |  |   |     |  
|------------------------------ |  | ------------------------------ | ---- | - | ----------------------------------- | - | ---- | ----------------- |  | - | ----------------- | - |  | - | --- | -
|                               |  | (dollars in thousands)         |     
|                               |  | US Pension Three months ending |      |   | Foreign Pension Three months ending |  
|                               |  | September 30,2005              |      |   | September 30,2004                   |   |      | September 30,2005 |  |   | September 30,2004 |  
|Weighted avg. discount rate    |  |                                | 4.49 | % |                                     |   | 4.53 | %                 |  |   | 8.0               | % |  |   | 8.0 | %
|Expected return on plan assets |  |                                | N/A  |   |                                     |   | N/A  |                   |  |   | N/A               |   |  |   | N/A |  
|Rate of compensation increase  |  |                                | 0.0  | % |                                     |   | 0.0  | %                 |  |   | 3.0               | % |  |   | 3.0 | %
|Service cost                   |  | $                              | 22   |   |                                     | $ | 75   |                   |  | $ | 42                |   |  | $ | 44  |  
|Net pension costs              |  | $                              | 12   |   |                                     | $ | 78   |                   |  | $ | 19                |   |  | $ | 200 |  



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|                               |  |                               |      |   |                                    |   |      |                   |  |   |                   |   |  |   |     |  
|------------------------------ |  | ----------------------------- | ---- | - | ---------------------------------- | - | ---- | ----------------- |  | - | ----------------- | - |  | - | --- | -
|                               |  | (dollars in thousands)        |     
|                               |  | US Pension Nine months ending |      |   | Foreign Pension Nine months ending |  
|                               |  | September 30,2005             |      |   | September 30,2004                  |   |      | September 30,2005 |  |   | September 30,2004 |  
|Weighted avg. discount rate    |  |                               | 4.49 | % |                                    |   | 4.53 | %                 |  |   | 8.0               | % |  |   | 8.0 | %
|Expected return on plan assets |  |                               | N/A  |   |                                    |   | N/A  |                   |  |   | N/A               |   |  |   | N/A |  
|Rate of compensation increase  |  |                               | 0.0  | % |                                    |   | 0.0  | %                 |  |   | 3.0               | % |  |   | 3.0 | %
|Service cost                   |  | $                             | 71   |   |                                    | $ | 121  |                   |  | $ | 127               |   |  | $ | 127 |  
|Net pension cost               |  | $                             | 154  |   |                                    | $ | 261  |                   |  | $ | 79                |   |  | $ | 289 |  



Business and Credit Concentrations



The Companys customer base is primarily located in
the Caribbean with the most substantial credit concentration within the Construction Division. Typically, customers within this division engage the Company to develop large marinas, resorts and other site improvements and consequently, make up a
larger percentage of total sales. For the nine months ended September 30, 2005 and September 30, 2004, the Company reported revenue for two Bahamian customers of 21.9% and one Bahamian customer of 13.0%, respectively. For the three months
ended September 30, 2005 and 2004, the Company reported revenue for two Bahamian customers of 20.7% and one Bahamian customer of 22.1% of total revenue, respectively. As of September 30, 2005 and 2004, the ongoing projects for the above
mentioned customers had a backlog of $4.8 million and $7.7 million, respectively. A subsidiary, the Companys Chairman of the Board and one of the Companys former directors estate are minority partners, and the Companys
Chairman of the Board is a member of the managing committee of the entity developing one of these projects. No single customer within the Materials or the Security Division accounted for more than 10% of total sales.



For the period ended September 30, 2005, there were no receivables from
a single customer that represented more than 10% of total receivables with the exception of the customers mentioned above. As of September 30, 2005, the total receivable from these customers was $4.4 million consisting of $1.5 million of
current accounts receivable and $2.9 million of notes receivable. As of December 31, 2004, the total receivable from these customers was $3.7 million consisting of $0.9 million of current accounts receivable and $2.8 million of notes
receivable.



New Accounting Standards



In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123R, Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB 25. SFAS No. 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize the
cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. On April 14, 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance date,
and the Company is required to adopt SFAS 123R effective January 1, 2006. SFAS No. 123R permits companies to adopt its requirements using either a modified prospective method or a modified retrospective method.
Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date,
and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the modified retrospective method, the requirements are the same as under the modified
prospective method, except that entities also are allowed to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123. The Company has not determined which of the adoption
methods it will use. The Company currently utilizes Black-Scholes, a standard option pricing model, to measure the fair value of stock options granted to employees. While SFAS No. 123R permits entities to continue to use such a model, the
standard also permits the use of a lattice model. The Company has not yet determined which model it will use to measure the fair value of employee stock options upon the adoption of SFAS No. 123R.



In November 2004, the FASB issued Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 in fiscal 2006 is not expected to have a significant impact on the Companys
Consolidated Financial Statements.



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##### Table of Contents

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  an
Amendment of APB No. 29 (SFAS 153). The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. This standard is effective for
nonmonetary asset exchanges occurring after July 1, 2005. The adoption of this standard is not expected to have a significant impact on the Companys Consolidated Financial Statements.



Contingent Liabilities



On July 25, 1995, a Company subsidiary, Société des Carriéres de Grande Case (SCGC),
entered into an agreement with Mr. Fernand Hubert Petit, Mr. Francois Laurent Petit and Mr. Michel Andre Lucien Petit, (collectively, 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. (BBW), entered into a material supply agreement with Petit on July 31, 1995. This
agreement was amended on October 27, 1999. Pursuant to the amendment, the Company became a party to the materials supply agreement.



In May 2004, the Company advised Petit that it would possibly be removing its equipment within the timeframes provided in its 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 it would not renew the 1999 lease when it expired on October 27, 2004. Petit has refused to accept the remainder of the quarterly payment from the Company 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 include 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 alleged that $7.6 million is due on the supply agreement (the full payment that would be due by the Company 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. The materials supply agreement provided that it could be terminated by the Company on July 31, 2004.



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



| |  |  | The purchase by SCGC of three hectares of partially mined land located within the quarry property previously leased from Petit (the Three Hectare Parcel) for
approximately $1.1 million, the purchase of which was settled in February 2005;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | The granting of an option to SCGC to purchase two hectares of unmined property prior to December 31, 2006 for $2.0 million, with $1.0 million on December 31, 2006 and $1.0
million payable on December 31, 2008, subject to the below terms:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In the event that SCGC exercises this option, Petit agrees to withdraw all legal actions against the Company and its subsidiaries.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

| |  |  | The granting of an option to SCGC to purchase five hectares of unmined land 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 December 31, 2008 (with annual rent of $55,000) if the two hectares are purchased and subsequent
extensions of the lease (with annual rent of $65,000) equal to the terms of mining authorizations obtained from the French Government agencies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



After conferring with its French counsel and upon review by management, the Company believes that it has valid defenses and offsets to Petits
claims, including, among others, those relating to its termination rights and the benefit to Petit from the Company not mining the property. Based on the foregoing agreements and its review, management does not believe that the ultimate outcome of
this matter will have a material adverse effect on the consolidated financial position or results of operations of the Company.



The Company will obtain independent appraisals to determine the fair value of any non-cash consideration, including the exercise of the options listed
above, used in settlement of a judgment received by Petit, if any.



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 have not
had a material adverse impact 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 impact in the foreseeable future.



Details regarding the Companys other contingent liabilities are
described fully in the Companys 2004 Form 10-K. During 2005, there have been no material changes to the Companys contingent liabilities.



Other Events



Puerto Rico Lease Extension.The Company decided, in 2001, to cease its operation in Aguadilla, Puerto Rico and leased, effective
October 1, 2001, all its equipment on the site to a company affiliated with one of the joint venture owners of the subsidiary in Puerto Rico. In March 2005, the lease was extended through February 2007, on substantially similar terms.



Subsequent Events



Credit Facility with CapitalSource Finance, LLC



On November 10, 2005, DSSC and its direct parent, Devcon Security
Holdings, Inc. (DSH) (together, the Borrowers), both wholly owned subsidiaries of the Company, entered into a new senior secured revolving credit facility (the Senior Loan) provided by certain lenders and
CapitalSource Finance, LLC serving as agent (CapitalSource). Additionally on November 10, 2005, the Borrowers entered into a senior secured term loan (the Bridge Loan), also provided by certain lenders and CapitalSource.
Both the Senior Loan and the Bridge Loan are governed by the terms of a Credit Agreement (the Credit Agreement) dated as of November 10, 2005, by and among Borrowers and the Lenders signatory thereto from time to time, as Lenders
(the Lenders). A portion of the proceeds from the Senior Loan and the Bridge Loan was used to finance the acquisition of the outstanding capital stock of Coastal Security Company (Coastal) on November 10, 2005 (see
below) and a portion was used to repay in full amounts outstanding under the CIT Senior Loan, also on November 10, 2005. Upon repayment, the terms of the CIT Senior Loan and CIT Credit Agreement were extinguished.



The maximum amount available under the Senior Loan is $70 million dollars,
but this amount may be increased up to $100 million dollars at the request of Borrowers if no Event of Default has occurred, the lenders prior written consent is obtained and certain other customary conditions are satisfied. Borrowers may draw
amounts under the Senior Loan until November 8, 2008 and all amounts outstanding under the Senior Loan will be due on



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##### Table of Contents

November 9, 2008. The Senior Loan is secured by, among other things, a security interest in substantially all of the
assets of Borrowers, including a first mortgage on certain real property owned by DSSC. The interest rate charged under the Senior Loan varies depending on the types of advances or loans Borrowers select under the Senior Loan. Borrowings under the
Senior Loan may bear interest at the higher of (i) the prime rate as announced in the Wall Street Journal or (ii) the Federal Funds Rate plus 50 basis points, plus a spread which ranges from 150 to 425 basis points. Alternatively,
borrowings under the Senior Loan may bear interest at LIBOR-based rates plus a spread which ranges from 325 to 575 basis points (LIBOR plus 575 basis points as of the date hereof). The spread depends upon DSHs ratio of amounts outstanding
under the Senior Loan, decreased by a factor of Qualified Wholesale RMR, to Qualified Retail RMR. Borrowers pay a variable commitment fee each quarter on the unused portion of the commitment equal to 37.5 basis points. Borrowers are subject to
certain covenants and restrictions specified in the Senior Loan, including covenants that restrict their ability to pay dividends, make certain distributions, pledge certain assets or repay certain indebtedness.



The amount of the Bridge Loan is $8 million dollars and is repayable 120 days
from closing (March 10, 2006) and bears interest at the prime rate as announced in the Wall Street Journal. The Bridge Loan is cross-collateralized to the Senior Loan and also carries (a) the guaranty of Devcon International Corp. and
(b) a stock pledge from certain subsidiaries of Devcon International Corp., and (c) a negative pledge on the assets from certain subsidiaries of Devcon International Corp.



Acquisition of Coastal Security Company



On November 10, 2005, DSH acquired all of the outstanding capital stock of Boca Raton, Florida-based Coastal Security Company
(Coastal) for $50.4 million in cash based substantially upon contractually recurring monthly revenue of $1.26 million. Coastal provides retail electronic security services to commercial and residential customers principally in South
Florida, and wholesale monitoring services to dealers throughout the United States; Coastal provides monitoring and servicing to more than 165,000 security systems. The transaction was completed pursuant to the terms of that certain Purchase
Agreement, dated as of November 10, 2005 (the Purchase Agreement), as amended. Other than the Purchase Agreement, there is no material relationship between the parties.



Definitive Merger Agreement to Acquire Guardian International, Inc.



On November 9, 2005, Devcon Acquisition, Inc. (Devcon
Acquisition), an indirect wholly-owned subsidiary of Devcon International Corp., entered into a definitive merger agreement pursuant to which Devcon Acquisition will acquire all of the outstanding capital stock of Guardian International, Inc.
for an estimated aggregate cash price of approximately $65.5 million, including certain Guardian debt obligations and expenses. Guardian, headquartered in Hollywood, Florida, provides electronic security services primarily in the State of Florida
and in the New York-metropolitan area through its brands, Guardian International, Mutual Central Alarm Services and Stat-Land to over 40,000 homes and businesses. The Company made a $3.0 million deposit towards the cash price on signing of the
merger agreement.



In order to obtain the necessary funds to
complete the transaction, the Company will need to raise additional capital. It is anticipated that a combination of equity and debt will be raised. The Company currently anticipates that it will pursue a common equity offering and if the number of
common shares to be issued in an offering exceeds 20% of the then-outstanding common shares, the approval of the Companys shareholders will be required. The closing of the merger is contingent upon customary regulatory review and the approval
by shareholders of Guardian, among other conditions. The Board of Directors of both companies have approved the transaction. The transaction is expected to close by March 2006.



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##### Table of Contents

Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations



The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, as well as the
financial statements and related notes included in the Companys 2004 Form 10-K. Dollar amounts of $1.0 million or more are rounded to the nearest one tenth of a million.



Forward-Looking Statements



The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a safe harbor for forward-looking statements made by or on
behalf of the Company. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Companys filings with the Securities and Exchange Commission and in its
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 the Company expects or anticipates 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 managements then-current views and assumptions regarding
future events and operating performance, and are applicable only as of the dates of such statements. The Company undertakes 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 revenues from the Companys Construction, Materials and new Security Divisions, expenses, gross margins, cash flows, financial condition, and net income, as well as factors such as the
Companys competitive position, inventory levels, backlog, the demand for its products and services, customer base and the liquidity and needs of its customers, may differ materially from those contemplated by the forward-looking statements or
those currently being experienced by the Company for a number of reasons, including but not limited to those set forth under Factors Affecting Our Operating Results, Financial Condition, Business Prospects and Market Price of Stock set
forth in the Companys Annual Report on Form 10-K for the year ended December 31, 2004 and the following:



| |  |  | The strength of the construction economies on various islands in the Caribbean, primarily in the United States Virgin Islands, Sint Maarten, St. Martin, Antigua, Puerto Rico and the
Bahamas. The Companys business is subject to economic conditions in its markets, including recession, inflation, deflation, general weakness in construction and housing markets and changes in infrastructure requirements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to maintain mutually beneficial relationships with key customers. The Company has a number of significant customers. The loss of significant customers,
the financial condition of its customers or an adverse change to the financial condition of the Companys significant customers could have a material adverse effect on its business or the collectibility of its receivables.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Unforeseen inventory adjustments or significant changes in purchasing patterns by the Companys customers and the resultant impact on manufacturing volumes and inventory
levels.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adverse changes in currency exchange rates or raw material commodity prices, both in absolute terms and relative to competitors risk profiles. The Company has businesses in
various foreign countries in the Caribbean. As a result, the Company is exposed to movements in the exchange rates of various currencies against the United States dollar. The Company believes its most significant foreign currency exposure is the
Euro. However, management does not believe a change in the Euro exchange rate will materially affect the Companys financial position or results of operations as the Companys St. Martin operation, which reports in Euros, is less than 10%
of the Companys total operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | The Materials and Security Divisions operate in markets which are highly competitive on the basis of price and quality. The divisions compete with local suppliers of ready-mix, and
foreign suppliers of aggregates and concrete block. Competition from certain of these manufacturers has intensified in recent years and is expected to continue. The Construction Division has local and foreign competitors in its markets. Customer and
competitive pressures sometimes have an adverse effect on the divisions pricing.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys foreign operations may be affected by factors such as tariffs, nationalization, exchange controls, interest rate fluctuations, civil unrest, governmental changes,
limitations on foreign investment in local business and other political, economic and regulatory conditions, risks or difficulties.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The effects of litigation, environmental remediation matters, and product liability exposures, as well as other risks and uncertainties detailed from time to time in the
Companys filings with the Securities and Exchange Commission.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to generate sufficient cash flows to support capital expansion, business acquisition plans and general operating activities, and its ability to obtain
necessary financing at favorable interest rates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in laws and regulations, including changes in accounting standards, taxation requirements, including tax rate changes, new tax laws and revised tax law interpretations, and
environmental laws, in both domestic and foreign jurisdictions, and restrictions on repatriation of foreign investments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The outcome of the compliance review of the Companys past EDC benefits and the application for the extension of those benefits in the U.S. Virgin Islands.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The impact of unforeseen events, including war or terrorist activities, on economic conditions and consumer confidence.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Interest rate fluctuations and other capital market conditions.
| | - |  | ---------------------------------------------------------------



| |  |  | Construction contracts with a fixed price sometimes suffer penalties that cannot be recovered by additional billing, which penalties may be due to circumstances in completing
construction work, errors in bidding contracts, or changed conditions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adverse weather conditions, specifically heavy rains or hurricanes, which could reduce demand for the Companys products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to execute and profitably perform any contracts in the water desalination or sewage treatment business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to find suitable targets to purchase for the Security Division.
| | - |  | -------------------------------------------------------------------------------------



| |  |  | The Companys ability to fully integrate new acquisitions.
| | - |  | ----------------------------------------------------------



| |  |  | The Companys operations are highly dependent upon its ability to acquire adequate supplies of cement and sand. The Company has experienced, in the past, short term shortages
of both cement and sand which, temporarily, adversely affected the Companys operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to raise additional capital to repay the Bridge Loan and consummate the Guardian acquisition.
| | - |  | -------------------------------------------------------------------------------------------------------------------



The foregoing list is not exhaustive. There can be no assurance that the
Company has correctly identified and appropriately assessed all factors affecting its business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not
presently known to the Company or that the Company currently believes to be immaterial also may adversely impact the Company. Should



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any risks and uncertainties develop into actual events, these developments could have material adverse effects on the
Companys business, financial condition, and results of operations. For these reasons, you are cautioned not to place undue reliance on the Companys forward-looking statements.



Critical Accounting Policies And Estimates



The Companys discussion of its financial condition and results of operations is an analysis of the condensed consolidated financial statements,
which have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), consistently applied. Although the Companys significant accounting policies are described in Note 1 of the
notes to the Companys consolidated financial statements included in its Consolidated Annual Report on Form 10-K for the fiscal year ended December 31, 2004, the following discussion is intended to describe those accounting policies and
estimates most critical to the preparation of the Companys unaudited condensed consolidated financial statements. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for credit losses,
inventories and loss reserve for inventories, cost to complete construction contracts, assets held-for-sale, intangible assets, income taxes, taxes on un-repatriated earnings, warranty obligations, impairment charges, business divestitures,
pensions, deferral compensation and other employee benefit plans or arrangements, environmental matters, and contingencies and litigation. The Company bases its estimates on historical experience and on various other factors that the Company
believes 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.



The Company believes the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of its condensed consolidated financial statements.



Revenue and earnings on construction contracts, including construction joint ventures, are recognized on the percentage-of-completion-method based upon
the ratio of costs incurred to estimated final costs, for which collectibility is reasonably assured. Provisions are recognized in the statement of income for the full amount of estimated losses on uncompleted contracts whenever evidence indicates
that the estimated total cost of a contract exceeds its estimated total revenue. The Company recognizes revenue relating to claims only when there exists a legal basis supported by objective and verifiable evidence and additional identifiable costs
are incurred due to unforeseen circumstances beyond the Companys control. Change-orders for additional contract revenue are recognized if it is probable that they will result in additional revenue and the amount can be reliably estimated.



Contract cost is recorded as incurred and revisions in
contract revenue and cost estimates are reflected in the accounting period when known. The Company estimates costs to complete its construction contracts based on experience from similar work in the past. If the conditions of the work to be
performed change or if the estimated costs are not accurately projected, the gross profit from construction contracts may vary significantly in the future. The foregoing, as well as weather, stage of completion and mix of contracts at different
margins may cause fluctuations in gross profit between periods and these fluctuations may be significant.



Notes receivable are recorded at cost. Management, considering current information and events regarding the borrowers ability to repay their
obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, it is written down by the
amount of the impairment which is measured based on the present value of expected future cash flows discounted at the notes effective interest rate.



The Company maintains allowances for doubtful accounts for estimated losses resulting from managements review and assessment of its customers
ability to make required payments. The Company considers the age of specific accounts, a customers payment history and specific collateral given by the customer to secure the receivable. If the financial condition of the Companys
customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. If the customers pay a previously impaired receivable, income is then recognized.



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Inventory is written down for estimated obsolescence or lack of marketability arising from the difference
between the cost of inventory and the estimated market value based upon assessments about current and future demand and market conditions. If actual market conditions were to be less favorable than those projected by management, additional inventory
reserves could be required. If the actual market demand surpasses the projected levels, inventory write downs are not reversed.



The Company has a defined benefit pension plan covering Antigua employees who meet certain minimum requirements and also maintains an accrual for
retirement agreements with Company executives and certain other employees. This accrual is based on the life expectancy of these persons and an assumed weighted average discount rate. Should the actual longevity vary significantly from the United
States insurance norms, or should the discount rate used to establish the present value of the obligation vary, the accrual may have to be significantly increased or diminished at that time.



A valuation allowance is recorded to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that the Company were
to determine that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such a determination was made. Likewise, should the
Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such a determination is made.



Fixed assets recoverability is determined on a subsidiary level or group of
asset level. If the Company, as a result of its valuation in the future, assess the assets not to be recoverable, a negative adjustment to the book value of those assets may occur. On the other hand, if an asset is impaired and the asset continues
to produce income, the Company may record earnings higher than they should have been if no impairment had been recorded.



Goodwill and other intangible assets have been acquired in a purchase business combination. Some of these assets the Company determine to have an
indefinite useful life and are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB 142. This testing is based on subjective analysis and may change from time to time. Other identifiable
intangible assets with estimatable useful lives are amortized over their respective estimated useful lives. The review of impairment and estimation of useful life is subjective and may change from time to time. The Company completed its annual
impairment testing as of June 30, 2005, noting no impairment of these assets.



The Company is not presently considering changes to any of its critical accounting policies and the Company does not presently believe that any of its critical accounting policies are reasonably likely to change in
the near future. There have not been any material changes to the methodology used in calculating the Companys estimates during the last three months. The CEO, CFO and the Audit Committee have reviewed all of the foregoing critical accounting
policies and estimates.



Comparison Of Three Months Ended September 30,
2005 With Three Months Ended September 30, 2004



Summary



In the third quarter of 2005, consolidated revenue from
continuing operations amounted to $20.1 million, an increase of $4.4 million or approximately a 28% increase when compared to the three months ended September 30, 2004 revenue from continuing operations of $15.7 million. This revenue increase
was principally due to an increase of $4.2 million in revenue recorded by the Security Division. The Security Division revenue was primarily a result of the acquisition of Starpoint Limiteds (Starpoint) electronic security services
operations. Security Equipment Corporation, Inc. (SEC), the Companys initial security acquisition, and Starpoint were acquired on July, 31, 2004 and February 28, 2005, respectively. These acquisitions were accounted for
utilizing the purchase method of accounting. The results of these operations are included in the financial statements only from the respective acquisition dates. During the three months ended September 30, 2005, the Company recognized an
operating loss from continuing operations of $4.8 million compared to $0.8 million during the comparable period in



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2004, an increased loss of $4.0 million. This increase was principally due to a $5.1 million reduction in the
Construction Divisions operating income due to certain operational difficulties encountered on a marina project currently being worked on in the U.S. Virgin Islands. Offsetting this increase was a decrease in corporate administrative expense
of $1.0 million principally due to reduction in charges for distribution of warrants and bad debt expense. In addition during the same period in 2004, the Company incurred an expense of $0.4 million of option expense. During the three months ended
September 30, 2005, other non-operating income amounted to $0.2 million compared to $0.5 million during the comparable three months ended September 30, 2004. This $0.3 million decrease is principally due to a decrease in interest income
earned, principally on notes receivable due from the Government of Antigua and Barbuda, which were settled during the fourth quarter of 2004, and $0.5 million additional interest expense incurred as a result of the Starpoint acquisition. The Company
recorded a tax benefit from continuing operations during the third quarter of 2005 amounting to $1.3 million compared to a benefit of $1.6 million in the comparable period in 2004. As a result of the items discussed above, the Company, for the three
months ended September 30, 2005, recorded a net loss from continuing operations of $3.2 million compared to net income from continuing operations of $1.3 million during the comparable period in 2004. During the three months ended
September 30, 2005 and 2004 the Company recognized income from discontinued operations, net of tax, of $1.5 million and $2.3 million, respectively.



Revenue



Consolidated revenue from continuing operations during the third quarter of 2005 amounted to $20.1 million, as compared to $15.7 million during the same period in 2004. This increase was primarily due to an increase
of $1.4 million recorded by the Construction Division, an increase of $4.2 million in the Security Division and a decrease of $1.3 million in the Materials Division.



The Construction Divisions revenue increased approximately 18% to $9.2 million during the third quarter of 2005 when
compared to $7.7 million for the comparable period in 2004. This increase was principally due to increased revenue generated by construction contracts in Sint Maarten and the U.S. Virgin Islands, offset by slightly lower revenue recorded in the
Bahamas. The divisions backlog of contracts at September 30, 2005 was $17.6 million, involving 17 contracts. The division is actively bidding and negotiating additional projects in areas throughout the Caribbean and, since
September 30, 2005, has added one additional contract and change order in the Bahamas totaling $4.5 million.



The Materials Division continuing operations revenue decreased 16.7% to $6.2 million during the third quarter of 2005 when compared to $7.5 million for
the comparable period in 2004. This was principally attributable to a decrease in the combined operations on Sint Maarten/St. Martin of 23.0% or $0.9 million, due to shortages of cement supply which were experienced in 2004 and have continued in
2005 and which have added to operational inefficiencies and declining sales. Management is continuing to implement an alternative sourcing strategy for cement, which it believes should help in minimizing potential outages in the future. Given the
current worldwide demand for cement and the pressures on supply, there can be no assurances cement outages will not happen from time to time in the future.



Revenue from the Security Division amounted to $4.6 million, which is comprised of contractual recurring revenue for the monitoring and maintenance of
security systems at subscribers premises (RMR), billable services performed on a time and materials basis (Service 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. During the third quarter the division recorded RMR and Service Revenue totaling $4.2 million and net installation revenue of $0.4 million. The revenue in 2005 is a
result of the Companys acquisitions of SEC and Starpoints electronic security services operations. SEC and Starpoint were acquired by the Company on July 31, 2004 and February 28, 2005, respectively. These acquisitions were
accounted for utilizing the purchase method of accounting. The results of these operations are included in the Companys financial statements only from their respective acquisition dates



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Cost of Construction



Cost of Construction as a percentage of Construction revenue increased 57% to 125% during the third quarter of 2005 from 68% percent during the same
period in 2004. The increase is principally attributable to a substantial increase in the estimated costs to complete a marina project in the U.S Virgin Islands as a result of operational difficulties. As a result of this matter, the gross margin
was reduced by approximately $3.0 million during the quarter. The division also needed to perform additional work in excess of estimated cost of approximately $0.3 million, on certain projects in the Bahamas. In addition, the Construction Division
continued to experience declining margins due to the completion of high margin projects that are being replaced by lower margin projects.



Cost of Materials



Cost of Materials for continuing operations as a percentage of revenue increased to 85.8% during the third quarter of 2005 from 83.4% during the same
period in 2004. Continued delays and shortages in cement supply experienced in 2004 have continued and added to operational inefficiencies and cost. Management is continuing to implement an alternative sourcing strategy for cement, which it believes
should help in minimizing potential outages in the future. Given the current worldwide demand for cement and the pressures on supply there can be no assurances that cement outages will not happen from time to time in the future.



Cost of Security



Cost of Security amounted to $2.0 million or 43.2 % of revenue. Included in this cost 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 after taking into consideration the effects of SAB 104. This cost arises as a result of the
Companys acquisitions of SEC and Starpoints electronic security services operations. SEC and Starpoint were acquired by us on July 31, 2004 and February 28, 2005, respectively.



Operating Expenses



Selling, general and administrative expense (SG&A expense) during the third quarter of 2005 increased $2.1
million to $6.0 million when compared to $3.9 million for the comparable period in 2004. The increase of $2.1 million was due to an increase in the Construction Division of $0.3 and $2.6 million of SG&A expense incurred by the Security Division,
offset by a decrease of $1.0 million in corporate overhead. The corporate overhead decrease is principally due to a reduction in wages and additional expenses recorded in 2004, including of $0.4 million charge for distribution of warrants and bad
debt expense of $0.2 million. Included in the Security Divisions SG&A is $1.1 of amortization expense associated with the amounts allocated, based upon an independent appraisal, to contractual agreements and customer relationships acquired
and $0.4 million of direct selling expense after considering the effects of SAB 104. The Security Division SG&A was a result of the acquisition of Starpoint and SEC.



Severance and retirement decreased $0.8 million when compared to the same period in 2004. This was primarily due to a charge
of $0.5 million in the third quarter of 2004 related to the separation agreement with the chief financial officer.



Operating Loss



For the three months ended September 30, 2005, the Company recorded an Operating loss from continuing operations of $4.8 million, compared to $0.8
million for the comparable period in 2004. During the period, the Construction Division reported operating loss of $3.3 million, a decrease of $5.2 million when compared to operating income of $1.9 million for the comparable period in 2004. This
decrease is principally attributed to a substantial increase in the estimated costs to complete a marina project in the U.S. Virgin Islands as a result of operational difficulties. As a result of this matter, the gross margin was reduced by
approximately $3.0 million during the quarter. The division also needed to perform additional work in excess of prior estimated cost of approximately $0.3 million, on certain projects in the Bahamas. As anticipated, the Construction Division was
also affected by declining margins due to the completion of high margin projects that are being replaced by lower margin projects.



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The Materials Division reported an operating loss from continuing operations of $0.6 million for the
third quarter of 2005, compared to $0.9 million during the comparable period in 2004. This decrease in the divisions operating loss is primarily attributable to a reduction of operating income of $0.2 million reported by operations on Puerto
Rico, offset by increases reported by the Sint Maarten/St. Martin and Antigua operations of $0.3 million each.



In the Materials Division, management is continuing to implement new procedures and financial controls. During the quarter management has been able to
implement a portion of the necessary changes to improve profitability, which include a combination of price increases and operating expense reductions. The Company expects that the Materials operations conducted in Sint Maarten/St. Martin and Puerto
Rico will continue to incur operating losses throughout 2005, however, with respect to Sint Maarten/St. Martin operations, the Company currently anticipates that the operating losses to be incurred in the fourth quarter should be at the same level
to those experienced during the third quarter of 2005, which were at a reduced level from those experienced during the first and second quarters of 2005.



The Security Division reported an operating loss of $0.2 million during the third quarter of 2005. This result includes $1.1 million of amortization
expense associated with the contractual agreements and customer relationships acquired and a net loss on the installation of new security systems amounting to $0.5 million, after considering the effects of SAB 104.



Other Income (Expense)



Other non-operating income amounted to $0.2 million for the third quarter of 2005 compared to $0.5 million for the same
period in 2004. This decrease is principally due to a decrease in the interest income recognized on the note receivable from the Government of Antigua and Barbuda (Government), which was settled during the fourth quarter of 2004, and by
the increased interest expense incurred on long term debt associated with the financing of the Starpoint acquisition. The interest expense charge relating to the financing amounted to $0.5 million, during the third quarter of 2005. The company also
recognized the gain on the sale of property owned by an unconsolidated joint venture of $0.4 million in the third quarter of 2005.



Income Taxes



In February 2005, one of the Companys Antiguan subsidiaries declared and paid a $16.0 million gross dividend, of which $4.0 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 2004. In the first quarter of 2005, the Company determined that it had available foreign tax credits to offset the income tax payable on the Antiguan dividend repatriation, which was accrued by the
Company in the fourth quarter of 2004.



In accordance with
Section 965 of the U.S. Internal Revenue Code, enacted as part of the American Jobs Creation Act of 2004 (the AJCA), a company can repatriate earnings from foreign subsidiaries at a reduced rate. In January 2005, the Company adopted
a Domestic Reinvestment Plan (DRP) in order to qualify for an 85% dividend exclusion on all qualifying cash dividends received during the 2005 tax year. The plan outlines the Companys intention to utilize qualifying cash dividends
received from its foreign subsidiaries to either invest in the Companys electronic security services and utility services businesses or to repay outstanding third party indebtedness.



Included in income tax expense for the third quarter of 2005 is $0.4 million
related to the valuation of net operating losses based on certain tax positions taken by the Company.



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Comparison Of Nine Months Ended September 30, 2005 With Nine Months Ended September 30, 2004



Summary



In the first nine months of 2005, consolidated revenue from continuing operations amounted to $60.8 million, an increase of
$22.6 million or approximately a 59.2% increase when compared to the first nine months of 2004 consolidated revenue from continuing operations of $38.2 million. This revenue increase was principally due to an increase of $12.5 million in revenue
recorded by the Construction Division and $10.8 million increase in revenue recorded by the Security Division. The Security Division revenue was primarily a result of the acquisition of Starpoint and SEC. These acquisitions were accounted for
utilizing the purchase method of accounting. The results of these operations are included in the Companys financial statements only from the respective acquisition dates. Operating income for the nine months ended September 30, 2005
decreased $6.5 million to operating loss of $7.3 million when compared to an operating loss for the comparable period in 2004 of $0.8 million. This decrease was principally due to an operating loss incurred by the Construction Division amounting to
$1.0 million, compared to an operating income of $3.6 million during the comparable period in 2004 due to certain operational difficulties encountered on a marine project currently being worked in the U.S. Virgin Islands. In addition, the Material
Division operating income was reduced by $1.3 million, as well as an increase of $0.5 million in corporate administrative expenses. Other income decreased $1.2 million to a non-operating income of $42,600, due to a decrease in interest income earned
principally on notes receivable due from the Government of Antigua and Barbuda, which were settled during the fourth quarter of 2004, and additional interest expense incurred as a result of the Starpoint acquisition. As a result, the net loss from
continuing operations for the nine months ended September 30, 2005 was $5.9 million compared to net income of $1.3 million during the comparable period in 2004.



Revenue



Consolidated revenue from continuing operations for the nine months ended September 30, 2005 amounted to $60.8 million as compared to $38.2 million
during the same period in 2004. This increase was primarily due to an increase of $12.5 million recorded by the Construction Division, an increase of $10.8 million in the Security Division and a decrease of $1.2 million in the Materials Division.



The Construction Division revenue increased by
approximately 76.2% to $29.0 million during the first nine months of 2005, when compared to $16.4 million for the comparable period in 2004. This increase was principally due to increased revenue generated by construction contracts in the Bahamas
and the US Virgin Islands, offset by lower revenue recorded in Antigua. The divisions backlog of contracts at September 30, 2005 was $17.6 million, involving 17 contracts. The division is actively bidding and negotiating additional
projects in areas throughout the Caribbean and, since September 30, 2005, has added one additional contract and change order in the Bahamas totaling $4.5 million.



The Materials Division continuing operations revenue decreased 5.0% to $20.1 million during the first nine months of 2005
when compared to $21.2 million for the comparable period in 2004. This decrease is attributable to shortages of cement supply which were experienced in 2004 and have continued in 2005 and which have added to operational inefficiencies and declining
sales. Management is continuing to implement an alternative sourcing strategy for cement, which it believes should help in minimizing potential outages in the future. Given the current worldwide demand for cement and the pressures on supply there
can be no assurances that cement outages will not happen from time to time in the future.



Revenue from the Security Division amounted to $11.1 million. This revenue resulted from the acquisitions of SEC and Starpoint. SEC and Starpoint were acquired by us on July 31, 2004 and February 28, 2005,
respectively. These acquisitions were accounted for utilizing the purchase method of accounting. The results of these operations are included in the Companys financial statements only from their respective acquisition dates.



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Cost of Construction



Cost of Construction as a percentage of Construction revenue increased 28.0% to 94.0% during the nine months ended September 30, 2005 from 66.0%
percent during the same period in 2004. The increase is principally attributable to a substantial increase in the estimated costs to complete a marina project in the U.S Virgin Islands as a result of operational difficulties. As a result of this
matter, the gross margin was reduced by approximately $4.8 million, during the first nine months. The division also needed to perform additional work in excess of estimated cost of approximately $0.6 million, on certain projects in the Bahamas. In
addition, the Construction Division continued to experience declining margins due to the completion of high margin projects that are being replaced by lower margin projects.



Cost of Materials



Cost of Materials as a percentage of revenue increased to 92.1% during the first nine months of 2005 from 80.9% during the same period in 2004. This
resulted from continued delays and shortages in cement supply which were experienced in 2004 and have continued in 2005 and which added to operational inefficiencies and cost. Management is continuing to implement an alternative sourcing strategy
for cement, which it believes should help in minimizing potential outages in the future. Given the current worldwide demand for cement and the pressures on supply there can be no assurances that cement outages will not happen from time to time in
the future.



Cost of Security



Cost of Security amounted to $4.7 million or 42.4% of revenue during the
first nine months of 2005. Included in this cost 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 after
taking into consideration the effects of SAB 104. This cost arises as a result of the acquisitions of SEC and Starpoints electronic security services operations. SEC and Starpoint were acquired by us on July 31, 2004 and February 28,
2005, respectively.



Operating Expenses



Selling, general and administrative expense (SG&A expense)
during the first nine months of 2005 increased $7.2 million to $16.6 million when compared to $9.4 million for the comparable period in 2004. The increase is attributed to an increase in corporate overhead of $0.5 million, an increase in the
Construction Division of $0.6 million and $6.4 million of additional SG&A expense incurred by the Security Division.



Severance and retirement decreased $0.6 million when compared to the same period in 2004. This was primarily due to a charge of $0.2 million in the third
quarter of 2004 related to the separation agreements with senior management.



The corporate overhead increase is principally due to recording a severance charge of $0.3 million associated with the realignment of the senior management team of the Materials Division. Additional costs include
advisory and legal costs incurred with respect to the implementation of certain requirements set out in the Sarbanes-Oxley Act. Management expects to continue to recognize increased costs with respect to this implementation.



Operating Loss



Operating loss for the first nine months of 2005 amounted to $7.3 million, compared to an operating loss of $0.8 million for
the comparable period in 2004. The Construction Division reported a decrease in operating income of $4.6 million to an operating loss of $1.0 million during the first nine months of 2005, compared to operating income of $3.6 million for the
comparable period in 2004. The decrease is principally attributable to a substantial increase in the estimated costs to complete a marina project in the U.S Virgin Islands as a result of operational difficulties. As a result of this matter, the
gross margin was reduced by approximately $4.8 million during the first nine months. The division also needed to perform additional work in excess of original estimated cost of approximately $0.6 million, on certain projects in the Bahamas. In
addition, the Construction Division continued to experience declining margins due to the completion of high margin projects that are being replaced by lower margin projects.



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The Materials Division continuing operations reported a $2.8 million operating loss during the first nine
months of 2005, compared to $1.4 million during the comparable period in 2004. This increase in the divisions operating loss is primarily attributable to increases in operating losses incurred in the divisions Sint Maarten/St. Martin,
and Puerto Rico operations. Puerto Ricos operating loss increased $0.5 million due to decreased revenue from their largest customer. Sint Maarten/St. Martins operating loss increased $1.2 million, principally due to an increase in
overhead expenses and production cost.



In the Materials
Division, management is continuing to implement new procedures and financial controls. During the second and third quarter of 2005, management has been able to implement a portion of the necessary changes to improve profitability, which include a
combination of price increases and operating expense reductions. The Company expects the Materials operations conducted in Sint Maarten/St. Martin and Puerto Rico will continue to incur operating losses throughout 2005, however, with respect to Sint
Maarten/St. Martin operations, the Company currently anticipates that the operating losses to be incurred in the fourth quarter should be at the same level to those experienced during the third quarter of 2005, which were at a reduced level from
those experienced during the first and second quarters of 2005.



During the first nine months of 2005, the Security Division reported an operating loss of $0.2 million. This result includes $2.4 million of amortization expense associated with the contractual agreements and customer relationships acquired
and net loss on the installation of new security systems amounting to $1.1 million after considering the effects of SAB 104. The results include the acquisitions of Starpoints electronic security services operations acquired by the Company on
February 28, 2005. In addition, the division incurred approximately $0.1 million of expense associated with the contractual commitment to cease using the name Adelphia Security or any variation thereof by May 31, 2005 and other
matters. In addition, during May 2005 the division sold to a third party for net $1.7 million cash, subject to certain adjustments, the Buffalo operation acquired as part of the Starpoint acquisition. Cash consideration received at closing amounting
to $1.3 million was utilized to reduce debt outstanding under the CIT credit facility and the remaining balance was placed in an escrow account for twelve months to be available to satisfy any post-closing adjustments. Approximately $62,000 of RMR
was sold with the Buffalo operation.



Other Income (Deductions)



Other non-operating income amounted to $42,600 for the
nine months ended September 30, 2005 as compared to $1.3 million for the same period in 2004. This decrease is principally due to a decrease in interest income recognized on the note receivable from the Government of Antigua and Barbuda
(Government), which was settled during the fourth quarter of 2004, and by the increased interest expense incurred on the long term debt associated with the financing of the Starpoint acquisition. The interest expense charge relating to
the Starpoint acquisition amounted to $1.1 million, for the nine months ended September 30, 2005. The company also recognized the gain on the sale of property owned by an unconsolidated joint venture of $0.4 million in the third quarter of
2005.



Income Taxes



In February 2005, one of the Companys Antiguan subsidiaries declared
and paid a $16.0 million gross dividend, of which $4.0 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 2004. In the first quarter of 2005, the Company determined that it had available foreign tax credits to offset the income tax
payable on the Antiguan dividend repatriation, which was accrued by the Company in the fourth quarter of 2004.



In accordance with Section 965 of the U.S. Internal Revenue Code, enacted as part of the American Jobs Creation Act of 2004 (the AJCA), a
company can repatriate earnings from foreign subsidiaries at a reduced rate. In January 2005, the Company adopted a Domestic Reinvestment Plan (DRP) in order to qualify for an 85%



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dividend exclusion on all qualifying cash dividends received during the 2005 tax year. The plan outlines the
Companys intention to utilize qualifying cash dividends received from its foreign subsidiaries to either invest in the Companys electronic security services and utility services businesses or to repay outstanding third party
indebtedness.



Included in income tax expense for the nine
months ended September 30, 2005 is $0.4 million related to the valuation of net operating losses based on certain tax positions taken by the Company.



Liquidity and Capital Resources



The Company generally funds its working capital needs from operations and bank borrowings. In the construction business, considerable funds are expended
for equipment, labor and supplies. In the Construction Division, the capital needs are greatest at the start of a new contract, since generally the division must complete 45 to 60 days of work before receiving the first progress payment. As a
project continues, a portion of the progress billing is usually withheld as retainage until the work is complete. The Company sometimes provides long-term financing to customers who utilize the Construction Divisions services. During the first
nine months of 2005, the Company financed $2.0 million for such contracts. The outstanding balance of financed construction contracts as of September 30, 2005 was $3.9 million, all of which is due to be paid at different times within the next
three years. Accounts receivable for the Materials operation are typically established with terms between 30 and 45 days, but are typically outstanding for a minimum of 60 days. Accounts receivable for the Security Division are typically outstanding
less than 30 days. Accounts receivable increased during the third quarter due to a $10.4 million receivable from the sale of assets to Heavy Materials, LLC. This receivable was collected in October 2005.



The Construction and Materials Divisions require continuing investment in
plant and equipment, along with the related maintenance and upkeep costs. Purchases of equipment and land totaled $8.3 million during the first nine months this year. The high volume of purchases of equipment is due to increased work in the
Construction Division. The Company continues to fund most of these expenditures out of its current working capital. Management believes the cash flow from operations, existing working capital, and funds available from lines of credit will be
adequate to meet the Companys needs during the next 12 months. Historically, the Company has used a number of lenders to finance a portion of its machinery and equipment purchases; however, there are no outstanding amounts owed to these
lenders as of September 30, 2005. Management believes it has the collateral and financial stability to be able to obtain financing, should it be required, although no assurance can be made that such will be available or on terms acceptable to
the Company. The Security Division is expected to make investments in its subscriber base during 2005 relating to installation activity.



As of September 30, 2005, the Companys liquidity and capital resources included cash and cash equivalents of $7.9 million and working capital
of $28.7 million. As of September 30, 2005, total outstanding liabilities were $48.7 million. As of September 30, 2005, the Company had availability under its lines of credit totaling $5.8 million.



Cash used to fund operating activities for the nine months ended
September 30, 2005 were $4.0 million compared to $5.0 million provided by operating activities for the same period in 2004. The primary uses of cash for the first nine months in 2005 were increased cost and estimated earnings in excess of
billings and notes receivable of $2.6 million and $1.9 million, respectively. The primary source of cash was an increase in accounts payable and accruals of $2.3 million.



Net cash used in investing activities was $47.5 million in the first nine months of 2005. Purchases of property, plant and
equipment were $8.5 million and cash used in business acquisitions was $41.1 million.



Net cash provided by financing activities was $24.3 million for the first nine months of 2005, consisting primarily of the long-term debt.



The Companys accounts receivable averaged 48 days of sales outstanding (DSO) as of September 30, 2005. This is a
decrease of 18 days compared to 65 days at the end of December 2004. The Materials Division accounts receivable remained in excess of 60 days, mainly due to slower collections on Sint Maarten /St. Martin. The improvement in DSO was primarily due to
the addition of the Security Division.



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The Company has an unsecured credit line of $1.0 million with a bank in Florida. The credit line was
renewed in June 2005 for a one year period. The bank can demand repayment of the loan and cancellation of the overdraft facility, if certain financial or other covenants are in default. The credit line was amended on November 15, 2005 so the
Company is in compliance with all covenants. There was a $0.8 million outstanding balance as of September 30, 2005. The interest rate on indebtedness outstanding under the credit line is at a rate variable with LIBOR. No assurance can be made
that this line will be renewed under similar terms and conditions.



In February 2005 the Company acquired certain net assets of the electronic security services operation of Adelphia Communications Corporation. This acquisition was financed through available cash and a senior secured revolving credit
facility (the CIT Loan) provided by certain lenders and CIT Financial USA, Inc., serving as agent (CIT). The maximum amount available under the CIT Loan is thirty-five million dollars ($35.0 million), but this amount may be
increased to fifty million dollars ($50.0 million) at the request of the Companys subsidiary borrowers if no Event of Default has occurred, the Lenders prior written consent is obtained and certain other customary conditions are
satisfied. Borrowers may draw amounts under the CIT Loan until March 30, 2007 and all amounts outstanding under the CIT Loan will be due on February 28, 2011. The CIT Loan is secured by, among other things, a security interest in substantially
all the assets of Borrowers, including a first mortgage on certain real property owned by DSSC. The interest rate charged under the CIT Loan varies depending on the types of advances or loans Borrowers select under the CIT Loan. Borrowings under the
CIT Loan may bear interest at the higher of (i) the prime rate as announced in the Wall Street Journal or (ii) the Federal Funds Rate plus 50 basis points, plus a spread which ranges from 125 to 300 basis points. Alternatively, borrowings
under the CIT Loan may bear interest at LIBOR-based rates plus a spread which ranges from 250 to 425 basis points (LIBOR plus 425 basis points as of the date hereof). The spread depends upon DSHs ratio of total debt to recurring monthly
revenues. Borrowers pay a variable commitment fee each quarter on the unused portion of the commitment equal to 37.5 basis points. Borrowers are subject to certain covenants and restrictions specified in the CIT Loan, including covenants that
restrict their ability to pay dividends, make certain distributions, pledge certain assets or repay certain indebtednesses. As of September 30, 2005, the Company had $23.3 million outstanding on this facility.



As more fully described in Subsequent Events, on
November 10, 2005, DSSC and its direct parent, Devcon Security Holdings, Inc. (DSH) (together, the Borrowers), entered into a new senior secured revolving credit facility (the Senior Loan). Additionally on
November 10, 2005, the Borrowers entered into a senior secured term loan (the Bridge Loan). Both the Senior Loan and the Bridge Loan are governed by the terms of a Credit Agreement (the Credit Agreement) dated as of
November 10, 2005, by and among Borrowers and the Lenders signatory thereto from time to time, as Lenders (the Lenders). A portion of the proceeds from the Senior Loan and the Bridge Loan was used to finance the acquisition of the
outstanding capital stock of Coastal Security Company (Coastal) on November 10, 2005 and a portion was used to repay in full amounts outstanding under the CIT Senior Loan, also on November 10, 2005. Upon repayment, the terms of
the CIT Senior Loan and CIT Credit Agreement were extinguished.



The Company believes the senior loan provides the Company with sufficient future availability as it grows its RMR base to fund its operations. Repayment of the bridge loan may require the Company to raise additional capital although, no
assurance can be made that such will be available or on terms acceptable to the Company.



On June 6, 1991, the Company issued a promissory note in favor of Donald L. Smith, Jr., the Companys Chairman, in the aggregate principal amount of $2.1 million. The note provided that the balance due under
the note was due on January 1, 2004, but this maturity date was extended by agreement between Mr. Smith and the Company to October 1, 2006. The note is unsecured and bears interest at the prime rate. Presently $1.7 million is
outstanding under the note. The balance under the note becomes immediately due and payable upon a change of control (as defined in the note). However, under the terms of a guarantee dated March 10, 2004, by and between the Company and
Mr. Smith where Mr. Smith guarantees a receivable from Emerald Bay Resort amounting to $2.4 million, Mr. Smith must maintain collateral in the amount of $1.7 million. The note defines a change of control as the acquisition
or other beneficial ownership, the commencement of an offer to acquire beneficial ownership, or the filing of a Schedule 13D or 13G with the SEC indicating an intention to acquire beneficial ownership, by any person or group, other than
Mr. Smith and members of his family, of 15% or more of the outstanding shares of the Companys common stock.



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The Company has entered into retirement agreements with certain existing and retired executives of the
Company. The net present value of future liabilities for these arrangements as of September 30, 2005 was $3.7 million, of which $1.9 million is for the Chairman. The Company has used an average discount rate of 4.49 percent, determined using
the AA corporate bond rates as of September 30, 2005, and standard mortality tables to estimate these liabilities.



As part of the 1995, subsequently renegotiated in 1999, acquisition of Société des Carriéres de Grand Case (SCGC), a
French company operating a ready-mix concrete plant and quarry in St. Martin, the Company agreed to pay the quarry owners, who were also the owners of SCGC, a royalty payment of $0.6 million per year through July 2004 and rent of $50,000 per year
through October 2004. The agreements cover a 15-year period, but may be cancelled at either partys option in 2004 and 2005, respectively. In May 2004, the Company entered into discussions about terminating the lease and to stop the quarry
operations on St. Martin. In June 2004, the quarry owner terminated the lease contract as of October 27, 2004, and terminated a material supply contract. The landlord has commenced certain proceedings with respect to the foregoing. The Company
has continued its discussions with the landlord, as further described in Contingent Liabilities. The Company accrued for quarry restoration costs and recognized an impairment charge on the assets in the first quarter of 2003 and does not expect any
further impairment, restoration costs or closing costs, except for possible severance cost depending of the future actions of the parties.



During the second quarter of 2002, the Company issued a construction contract performance guaranty together with one of the Companys customers for
$5.1 million. The Company issued a letter of credit for $0.5 million, which was cancelled in November 2004, as collateral for the transaction and has not had any expenses in connection with this transaction. The construction project was
substantially complete as of October 1, 2003, however the construction contract provides for a guarantee of materials and workmanship for a period of two years subsequent to the issuance of a certificate of occupancy. If the owner of the
project does not declare a default during a one-year period, the letter of credit will be voided. The Company received an up front fee of $0.2 million. At the same time, a long-term liability of the same amount was recorded. During the third quarter
it was determined that no obligation exists for the project, and the Company recognized $0.2 million of other income.



Related Party Transactions



The Company has certain transactions with some of the Directors or employees. Details regarding the Companys transactions with related parties are
described fully in the Companys 2004 Form 10-K and Form 10-K/A.



The Company leases from the wife of the Companys Chairman, Mr. Donald L. Smith, Jr., 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 annual rent for the period 1996 through 2001 was $49,000. In January 2002, a new 5-year agreement was signed; the rent was increased to $95,400. This rent was based on comparable rental contracts for similar properties in
Deerfield Beach, as evaluated by management.



As of
January 1, 2003, the Company entered into a payment deferral agreement with a resort project in the Bahamas, in which the Companys Chairman, one of the Companys former directors estate and a Company subsidiary are minority
partners. Several notes, which are guaranteed partly by certain owners of the project, evidence the loan totaling $2.5 million and the Chairman of the Company has issued a personal guarantee for the total amount due under this loan agreement to the
Company. The current balance, including accrued interest, is $2.9 million.



The Company has various construction contracts with an entity in the Bahamas. The Companys Chairman, a former directors estate and a subsidiary of the Company are minority shareholders in the entity,
owning 11.3 percent, 1.55 percent and 1.2 percent, respectively. Mr. Smith, the Chairman, is also a member of the entitys managing committee. The contract for $29.3 million was completed during the second quarter of 2004. The



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Company entered into various smaller contracts with the entity the first half of 2004, totaling $1.0 million, which have
all been completed. In April 2004, the Company entered into a $13.0 million contract to construct a marina and breakwater for the same entity. The entity secured third-party financing for this latter contract. The Company entered into a vertical
construction contract with another entity for $3.0 million during the second quarter of 2005. The Companys Chairman is a partner of this entity. In connection with contracts with the entities in the Bahamas, the Company recorded revenue
of $6.5 million for each of the nine months ended September 30, 2004 and 2005, and $4.4 million and $0.1 million for the three month period ended September 30, 2004 and 2005, respectively.



The outstanding balance of trade receivables from the entity in the Bahamas
was $0.6 million and $1.0 million as of September 30, 2005 and December 31, 2004, respectively. The outstanding balance of note receivables was $2.9 million and $2.8 million as of September 30, 2005 and December 31, 2004,
respectively. The Company has recorded interest income of $57,000 and $165,000 for the three and nine month periods ended September 30, 2005 compared to $52,000 and $154,000 for the three and nine month periods ending September 30, 2004.
The billings in excess of cost and estimated earnings, net, was $10,000 as of September 30, 2005. The billings in excess of costs and estimated earnings, net, was $0.5 million as of December 31, 2004. Mr. Smith has guaranteed the
payment of the receivables from the entity, up to a maximum of $2.5 million, including the deferral agreement described above.



On June 6, 1991, the Company issued a promissory note in favor of Donald Smith, Jr., the Companys Chairman, in the aggregate principal amount
of $2.1 million. The note provided that the balance due under the note was due on January 1, 2004, but this maturity date has been extended by agreement between Mr. Smith and the Company to October 1, 2006. The note is unsecured and
bears interest at the prime rate. Presently $1.7 million is outstanding under the note. The balance under the note becomes immediately due and payable upon a change of control (as defined in the note). However, under the terms of a guarantee dated
March 10, 2004, by and between the Company and Mr. Smith, where Mr. Smith guarantees a receivable from Emerald Bay Resort amounting to $2.4 million, Mr. Smith must maintain collateral in the amount of $1.7 million. The note
defines a change of control as the acquisition or other beneficial ownership, the commencement of an offer to acquire beneficial ownership, or the filing of a Schedule 13D or 13G with the SEC indicating an intention to acquire beneficial
ownership, by any person or group, other than Mr. Smith and members of his family, of 15% or more of the outstanding shares of the Companys common stock.



Company policies and codes provide that related party transactions be approved in advance by either the Audit Committee or a
majority of disinterested directors. As indicated, the Company has a construction contract totaling $29.3 million with an entity in the Bahamas in which the Companys Chairman and a former directors estate are minority shareholders.
During the last half of 2003 and the first half of 2004, a Company subsidiary commenced certain additional work for this entity for it; which it has billed or is billing approximately $1.0 million, all of which has been paid through November 5,
2004. The Company did not obtain Audit Committee approval prior to doing the additional work. Subsequently, the Audit Committee has reviewed the work and determined that the terms and conditions under which the Company entered into such work were
similar to the terms and conditions of work the Company has agreed to perform for unrelated third parties. Mr. Smith guaranteed $0.3 million of the amount due for this work, and due to failure of the entity to pay the invoice, Mr. Smith
paid said amount to the Company in November 2004.



On
April 1, 2004, the Audit Committee approved a transaction to enter into an excavation contract with the entity in the Bahamas to excavate certain parcels of the entitys real estate. The payment of the contract was guaranteed in
full by Donald L. Smith, Jr., the Companys Chairman and Chief Executive Officer and two other owners of the entity. The outstanding amount for the contract was paid by the entity in the third quarter of 2004.



On August 24, 2005, the Company recorded a gain of $0.4 million on the
sale of property owned by an unconsolidated joint venture. One of the Companys directors owns a 5% interest in the partnership.



On August 12, 2005, Devcon International Corp. (the Company) entered into a Management Services Agreement, dated as of August 12, 2005
(the Management Agreement), with Royal Palm Capital Management, LLLP (Royal Palm), to provide management services assisting the Company with, among other matters, establishing certain office, accounting and
administrative procedures, obtaining financing relating to business operations and acquisitions, developing and implementing advertising, promotional and marketing programs, facilitating certain securities matters (both proposed offerings and
ongoing compliance issues) and future acquisitions and dispositions, developing tax planning strategies, and formulating risk management policies. Under the terms of the Management Agreement, the Company shall pay Royal Palm a management fee in the
amount of $30,000 per month. In connection with this agreement the Company incurred $90,000 and $165,000 during the three months and nine months ending September 30, 2005.



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Item 3. Quantitative And Qualitative Disclosures About Market Risk



The Company is exposed to financial market risks due primarily to changes in interest rates, which it manages primarily by managing the maturities of its
financial instruments. The Company does not use derivatives to alter the interest characteristics of its financial instruments. A change in interest rate may materially affect the Companys financial position or results of operations.



The Companys exposure to market risk resulting from
changes in interest rates results from the variable rate of the Companys senior secured revolving credit facility, as an increase in interest rates would result in lower earnings and increased cash outflows. The interest rate on the
Companys senior secured revolving credit facility is payable at variable rates indexed to LIBOR. The effect of each 1% increase in the LIBOR rate on the Companys senior secured revolving credit facility would result in an annual increase
in interest expense of approximately $0.5 million. Based on the U.S. yield curve as of December 31, 2004 and other available information, the Company projects interest expense on its variable rate debt to increase approximately $2.0, $3.6, $0.0
and $0.0 million for the years ended December 31, 2005, 2006, 2007 and 2008, respectively.



The Company has significant operations overseas. Generally, all significant activities of the overseas affiliates are recorded in their functional
currency, which is generally the currency of the country of domicile of the affiliate. The foreign functional currencies that the Company deals with are Netherlands Antilles Guilders, Eastern Caribbean Units and Euros. The first two are pegged to
the U.S. dollar and have remained fixed for many years. Management does not believe a change in the Euro exchange rate will materially affect the Companys financial position or results of operations. The Companys St. Martin operation,
which reports in Euros, is less than 10% of the Companys total operations. During the nine month period ended September 30, 2005, the Euro declined 11% which did not have a material impact on the operating results.



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 the Companys Chief Executive Officer and the Companys Interim Chief Financial 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, 2005, 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, 2005, the Companys disclosure controls and procedures were 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 SEC, 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 its management, including the Companys Chief Executive Officer
and the Companys Interim 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 condensed consolidated financial
statements for the fiscal year ended December 31, 2004, the Companys independent registered public accounting firm, KPMG, LLP (KPMG), communicated to the Companys management and Audit Committee that certain matters
involving the Companys internal controls were considered to be significant deficiencies, as defined under the standards established by the Public Company Accounting Oversight Board, or PCAOB. These matters pertained to the review
and oversight of subsidiary financial results originating in the Companys Construction and Materials Divisions constituting material weaknesses in the Companys internal controls over financial reporting.



In addition, the Companys independent registered public accounting firm
informed the Companys management and the Companys Audit Committee that the combination and nature of the significant deficiencies indicated that the Company did not have adequate controls pertaining to the review and oversight of
subsidiary financial results originating in the Companys Construction and Materials Divisions, thus constituting, in the aggregate, for material weaknesses in the Companys internal controls over financial reporting.



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In light of the material weaknesses described above, the Company performed additional analyses and other
post-closing procedures in connection with the financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2004 and the financial statements included herein, to ensure the Companys condensed
consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes the financial statements included in the Companys Form 10-K and the financial statements included
herein fairly represent in all material respects, the Companys financial condition, results of operations and cash flows for the periods presented.



The certifications of the Companys Chief Executive Officer and the Companys Interim Chief Financial Officer, required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002, are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 9A contain information concerning the evaluation of the Companys disclosure
controls and procedures and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the
matters covered by the certifications.



Changes in Internal Controls



The Company is committed to continuously improving its
internal controls and financial reporting. Since July 2004, the Company has been working with consultants with experience in internal controls to assist management and the Audit Committee in reviewing the Companys current internal controls
structure with a view towards meeting the formalized requirements of Section 404 of the Sarbanes-Oxley Act.



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



| |  |  | Certain of the Companys procedures have been formalized and documented.
| | - |  | ------------------------------------------------------------------------



| |  |  | The Company is addressing access issues with respect to its information technology systems and has formalized and enhanced some of the Companys mitigating controls.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The implementation of additional review procedures and improved financial controls.
| | - |  | -----------------------------------------------------------------------------------



| |  |  | The Companys consultant has completed the initial phase of its Sarbanes-Oxley assessment of internal controls.
| | - |  | ---------------------------------------------------------------------------------------------------------------



The Company believes the above measures have appropriately addressed the
matters identified by the Companys independent registered public accounting firm as material weaknesses. This process is ongoing, however, and the Companys management and its Audit Committee will continue to monitor the effectiveness of
the Companys internal controls and procedures on a continual basis and will take further action as appropriate.



The Companys management does not expect that its disclosure or internal controls will prevent all errors or fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit
of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



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Part II. Other Information



Item 1. Legal Proceedings



The Company is from time to time involved in routine litigation arising in the ordinary course of its business, primarily related to its construction activities.



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 impact 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 impact in the foreseeable future.



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



None



Item 3. Defaults Upon Senior Securities



None



Item 4. Submission of Matter to a Vote of Security Holders



None



Item 5. Other Information



None



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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    



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 21, 2005 |  | By: |  | /s/ Stephen J. Ruzika                                                          
|                        |  |     |  | Stephen J. Ruzika, Chief Executive Officer                                     
|                        |  |     |  | (on behalf of the Registrant and as Principal Executive Officer)               
|                        |  |    
|                        |  | By: |  | /s/ Robert C. Farenhem                                                         
|                        |  |     |  | Robert C. Farenhem, Interim Chief Financial Officer,                           
|                        |  |     |  | (on behalf of the Registrant and as Principal Financial and Accounting Officer)



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EXHIBIT INDEX



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



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