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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-K

                                  ANNUAL REPORT
                        PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                      FOR THE YEAR ENDED DECEMBER 31, 2006

                                       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 NUMBER: 001-32865

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                                    KSW, INC.
             (Exact Name of Registrant as Specified in its Charter)

                Delaware                               11-3191686
      (State or Other Jurisdiction                  (I.R.S. Employer
   of Incorporation or Organization)              Identification No.)

37-16 23rd Street, Long Island City, New York           11101
  (Address of Principal Executive Offices)           (Zip Code)

       Registrant's telephone number, including area code: (718) 361-6500

           Securities registered pursuant to Section 12(b) of the Act:

    TITLE OF EACH CLASS            NAME OF EACH EXCHANGE ON WHICH REGISTERED
    -------------------            -----------------------------------------
       COMMON STOCK                         AMERICAN STOCK EXCHANGE
      $.01 par value

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Indicate by check mark if the  Registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes[ ] No [X]

Indicate  by  check  mark if the  Registrant  is not  required  to file  reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]

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

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

Large Accelerated Filer [ ]   Accelerated Filer [ ]    Non-Accelerated Filer [X]

Indicate by check mark whether the  Registrant is a shell company (as defined in
Rule 12b-2 of Exchange Act). Yes [ ] No[X]

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  of the Registrant on June 30, 2006 was  $19,295,003  (based on a
price of $3.95 per share).

As of March 14, 2007,  there were  5,803,643  shares of Common  Stock,  $.01 par
value per share, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

The Registrant's  definitive proxy statement to be filed with the Securities and
Exchange  Commission  (the  "Commission")  pursuant to Regulation 14A within 120
days after the end of the  Registrant's  last  fiscal  year is  incorporated  by
reference into Part III of this Annual Report on Form 10-K.

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FORWARD-LOOKING STATEMENTS.....................................................2

PART I.........................................................................3

      ITEM 1.    BUSINESS......................................................3

      ITEM 1A.   RISK FACTORS..................................................7

      ITEM 1B.   UNRESOLVED STAFF COMMENTS.....................................9

      ITEM 2.    PROPERTIES....................................................9

      ITEM 3.    LEGAL PROCEEDINGS.............................................9

      ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                 HOLDERS.......................................................9

                 EXECUTIVE OFFICERS OF THE REGISTRANT.........................10

PART II.......................................................................11

      ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
                 STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
                 SECURITIES...................................................11

      ITEM 6.    SELECTED FINANCIAL DATA......................................11

      ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF
                 OPERATIONS...................................................13

      ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
                 RISK.........................................................26

      ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY
                 DATA.........................................................27

      ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                 ACCOUNTING AND FINANCIAL DISCLOSURE..........................27

      ITEM 9A.   CONTROLS AND PROCEDURES......................................27

      ITEM 9B.   OTHER INFORMATION............................................27

PART III......................................................................27

      ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.......27

      ITEM 11.   EXECUTIVE COMPENSATION.......................................28

      ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT AND RELATED STOCKHOLDER
                 MATTERS......................................................28

      ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                 DIRECTOR INDEPENDENCE........................................28

      ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES.......................28

PART IV.......................................................................29

      ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES...................29

SIGNATURES....................................................................31

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                           FORWARD LOOKING STATEMENTS

Certain statements  contained under "Item 1 - Business",  "Item 7 - Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
elsewhere in this Form 10-K  regarding  matters that are not  historical  facts,
constitute "forward-looking  statements" (as such term is defined in the Private
Securities  Litigation  Reform Act of 1995).  These  forward-looking  statements
generally  can  be  identified  as  statements  that  include  phrases  such  as
"believe", "expect", "anticipate", "intend", "plan", "foresee", "likely", "may",
"will"  or other  similar  words or  phrases.  Such  forward-looking  statements
concerning management's expectations,  strategic objectives, business prospects,
anticipated  economic  performance  and  financial  condition  and other similar
matters  involve  known and unknown  risks,  uncertainties  and other  important
factors that could cause the actual  results,  performance  or  achievements  of
results  to  differ   materially  from  any  future   results,   performance  or
achievements  discussed or implied by such forward-looking  statements.  Many of
the risks,  uncertainties  and other  important  factors that could cause actual
results to differ  materially  from  expectations  of the Company are  described
under  "Item  1A - Risk  Factors"  in this  Form  10-K.  All  written  and  oral
forward-looking  statements  attributable  to the  Company or persons  acting on
behalf of the Company are qualified in their entirety by such factors.

There  is no  assurance  that  any of the  actions,  events  or  results  of the
forward-looking  statements  will occur,  or if any of them do, what impact they
will have on our results of operations or financial condition.  Because of these
uncertainties,  you  should  not  put  undue  reliance  on  any  forward-looking
statements. Other than as required by applicable law, we disclaim any obligation
to  update to  announce  publicly  the  result  of any  revisions  to any of the
forward-looking statements to reflect future events or developments.

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                                     PART I

ITEM 1      BUSINESS

         General.  KSW, Inc., a Delaware  corporation  (the "Company" or "KSW"),
furnishes  and  installs  heating,  ventilating  and air  conditioning  ("HVAC")
systems and process piping systems for  institutional,  industrial,  commercial,
high-rise  residential and public works projects.  The Company does not actively
pursue projects under $3,000,000.  The Company also serves as a mechanical trade
manager,  performing  project  management  services  relating to the  mechanical
trades. The Company conducts operations through its wholly-owned subsidiary, KSW
Mechanical  Services,  Inc. ("KSW  Mechanical").  The Company's  common stock is
traded on the American Stock Exchange ("AMEX") under the symbol "KSW".

         Some of the Company's ongoing projects include:  Cardiovascular  Center
at New  York  Presbyterian  Hospital,  the  conversions  from  office  space  to
residential rental apartments in lower Manhattan at 40 Broad Street, in Brooklyn
at 360 Furman Street, and new high rise luxury buildings in Manhattan at Fifteen
Central Park West, 170 East End Avenue, 206 East 86th Street, 1330 First Avenue,
the  residential/hotel  complex at 123  Washington  Street  and the  hotel/condo
project at 246 Spring Street.  The Company is not currently  performing  work on
projects in the public sector.

         The Company's primary strategic objectives are to increase its revenues
and  profitability in its present  business.  The Company may look to expand its
business into new geographic areas in the Northeastern  United States or acquire
businesses  which would be  complementary  to its current line of business.  The
Company may also pursue  acquisitions  outside its current lines of business for
greater diversification.

         The Company's  primary  business is providing  HVAC and process  piping
systems under direct  contracts  with owners of buildings or  subcontracts  with
general  contractors  or  construction  managers.  Historically,  some of  these
contracts  were awarded  through  competitive  bids,  as some of the owners were
public entities.

         During  2006,  the Company has focused on the  favorable  New York City
private  construction  market and has been successful in obtaining projects from
private owners and construction companies by utilizing its value engineering and
trade  management  skills.  Many of these  projects  are  obtained  from  repeat
customers,  who invite the Company to  participate  in the  project  while it is
still in the design phase,  or to assist in bringing a project's  budget in line
with the customer's requirements.

         The Company provides value engineering assistance,  whereby the Company
uses its experienced  staff to recommend  economical  changes to streamline HVAC
and process piping systems. These changes reduce costs, but still yield the same
results as the original plans. The Company's ability to provide this service has
become increasingly recognized in the industry and has resulted in the Company's
ability to secure  projects  without bidding  against  competitors.  The Company
believes that this service  provides  additional  bidding  opportunities  in the
future.

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         The  Company's   management  pioneered  the  concept  of  managing  the
mechanical  trade  portion of large  construction  projects.  On larger  complex
projects   (generally   those  having  a  mechanical   portion  valued  at  over
$10,000,000),  such  as  the  Cardiovascular  Center  at New  York  Presbyterian
Hospital,  Weill Cornell  Ambulatory  Care Facility,  Morgan Stanley  Children's
Hospital at New York  Presbyterian  and the Long Island Jewish  Hospital  Energy
Center,  it is often beneficial for a construction  manager to lock in the costs
of the  mechanical  portion of the contract  prior to completion of the contract
documents.  By engaging the services of a trade  manager,  the Company  believes
construction  managers can more accurately  evaluate design alternatives so that
the completed construction documents balance costs and project objectives.  As a
mechanical trade manager,  the Company performs a construction  manager function
for  the  mechanical  trade  portion  of a  project.  The  Company  divides  the
mechanical  portion of the contract  into bid packages  for  subcontractors  and
equipment,  negotiates  subcontracts  and  coordinates  the  work.  The  Company
believes  coordination  provides a  significant  benefit in keeping a project on
schedule and within budget.

         As a mechanical trade manager,  the Company may subcontract  parts of a
large project to different  subcontractors,  thereby  increasing  competition on
projects and lowering bids by allowing  smaller  contractors  to compete for the
subcontract  work. On some projects,  the Company may  self-perform a portion of
the work for a fixed price. The Company believes  customers  benefit by having a
single  source  responsible  for the  cost,  coordination  and  progress  of the
mechanical  portion of the  projects.  Although  trade  management  is typically
available  only on large jobs, the Company  believes  there is  opportunity  for
expanding this line of business.

         On trade management projects, the Company provides a guaranteed maximum
price  ("GMP") to its  customer  for its scope of  responsibility.  The  Company
controls  the  GMP by  obtaining  price  quotes  from  potential  suppliers  and
subcontractors, requiring payment or performance bonds from major subcontractors
and adding a  contingency  allowance  to these price  quotes  before the Company
submits  its GMP.  The  Company  also  works to  control  costs  because it is a
mechanical  contractor  and can perform some of the  guaranteed  work on its own
should bid prices exceed its  estimate.  These costs are subject to certain risk
factors discussed in "Item 1A - Risk Factors".

         While trade management  projects provide a net profit margin lower than
that for contracting projects, the Company believes there is generally less risk
associated with trade  management  projects  because there is a contingency fund
which can be drawn from if necessary.  A  contingency  fund is a line item which
the Company includes in the GMP to account for any contingencies the Company may
not have  anticipated  in estimating  the GMP. In the event the Company's  costs
exceed the relevant  line items quoted in the GMP, the Company may draw from the
contingency fund to cover such expenses. The Company is at risk for any costs in
excess of the GMP.  There is no assurance  that potential cost overruns will not
exceed this contingency.

         Operations.  Historically,  the Company has obtained projects primarily
through  negotiations  with private  owners,  construction  managers and general
contractors  and  by  competitive   bidding  and  negotiations  in  response  to
advertisements by federal, state and local governmental  agencies.  During 2006,
the Company has not bid on public  projects,  but has  obtained  projects in the
private sector by working with owners,  developers,  construction  companies and
design professionals on a cooperative basis. The Company's ability to suggest

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<PAGE>

alternative  design  concepts has allowed its  customers to reduce their cost of
projects.  By providing  value  engineering  and trade  management  services the
Company has been able to secure contracts without participating in a competitive
bidding process.

         For all projects,  the Company develops a comprehensive  project budget
using what it believes is a proven cost estimating system.  Projects are divided
into  phases and line items  indicating  separate  labor,  equipment,  material,
subcontractor  and  overhead  cost  estimates.  As  a  project  progresses,  the
Company's  project  managers  are  responsible  for  planning,   scheduling  and
overseeing operations and reviewing project costs compared to the estimates. The
Company's  costs  have been and may in the  future  be  impacted  by lower  than
expected labor productivity and higher than expected material costs.

         While the  Company  is not  actively  pursuing  projects  in the public
sector at this time, it has received letters of approval as an authorized bidder
by various government  agencies,  including the New York City Transit Authority,
the New York City  Health and  Hospitals  Corporation,  the New York City School
Construction  Authority,  the New York City Housing  Authority  and the New York
State Dormitory Authority.

         Markets.  The Company  competes for business  primarily in the New York
City metropolitan area. However,  the Company has performed work outside of that
area in the past.

         Backlog.  The  Company  has a  backlog  (anticipated  revenue  from the
uncompleted  portions  of awarded  projects)  of orders  totaling  approximately
$110,200,000 as of December 31, 2006,  compared to approximately  $82,200,000 as
of December 31, 2005,  and  approximately  $36,000,000 at December 31, 2004. The
Company believes that approximately $40,000,000 of the December 31, 2006 backlog
is not reasonably  expected to be completed in the next fiscal year. The Company
is actively  seeking new  contracts to add to its backlog.  Management  believes
that its value  engineering  services  will  continue  to assist the  Company in
obtaining new contracts.

         A  portion  of the  Company's  anticipated  revenue  in any year is not
reflected  in its backlog at the start of the year  because  some  projects  are
awarded and performed in the same year. The Company believes that its backlog is
firm,   notwithstanding  provisions  contained  in  the  contracts  which  allow
customers  to modify or cancel  the  contracts  at any time,  subject to certain
conditions,  including  reimbursement  of costs incurred in connection  with the
contracts and the possible payment of cancellation fees.

         Competition.  The mechanical  contracting market is highly competitive.
There are many larger  regional and national  companies with  resources  greater
than  those  of the  Company.  However,  some of  these  large  competitors  are
unfamiliar  with the New York City  metropolitan  area. The Company  believes it
competes favorably with such companies because of its reputation in the New York
City area and its  knowledge  of the local  labor force and its ability to value
engineer projects. There are also many smaller contractors and subcontractors in
the New York City metropolitan  area, who may also compete for work. The Company
believes there are barriers to entry for smaller competitors,  including bonding
requirements, relationships with subcontractors, suppliers and union workers.

                                        5
<PAGE>

         Regulations.   The   construction   industry   is  subject  to  various
governmental  regulations  from local,  state and federal  authorities,  such as
Occupational  Safety  and  Health  Administration   ("OSHA")  and  environmental
agencies.  The  Company  is also  governed  by state  and  federal  requirements
regarding  the  handling and  disposal of lead paint,  but the impact  cannot be
predicted at this time  because it varies from  project to project.  The Company
must also comply with  regulations  as to the use and  disposal of solvents  and
hazardous wastes, compliance with which are a normal part of its operations. The
Company does not perform asbestos abatement, but has occasionally  subcontracted
that part of a contract to duly licensed asbestos  abatement  companies with the
Company being named as an additional insured on the asbestos abatement company's
liability  insurance  policy.  The Company has not  incurred any  liability  for
violations of environmental laws.

         Employees.  At December  31,  2006,  the Company had  approximately  45
full-time office and project support  employees.  The Company also employs field
employees,  who are union  workers.  The number of field union workers  employed
varies at any given time,  depending on the number and types of ongoing projects
and the scope of projects  under  contract.  The  Company  hires union labor for
specific  work  assignments  and can reduce the number of union workers hired at
will with no penalties.

         The Company pays benefits to union employees  through payments to trust
funds established by the unions. The Company's obligation is to pay a percentage
of the wages of union workers to these trust funds.  Thus,  the Company does not
accrue  liabilities  for  pension and medical  benefits to union  retirees.  The
Company  provides its  full-time  office  employees,  not subject to  collective
bargaining  agreements,  with medical  insurance  benefits  and a  discretionary
matching 401(k) plan. In 2006, the Company matched 25% of its employees'  yearly
401(k) contributions.

         Dependence Upon Customers. At any given time, a material portion of the
Company's  contract  revenue may be generated from a single customer through one
large contract or various  contracts.  The Company's customer base can vary each
year based on the nature and scope of the projects undertaken in that year.

         For the year ended December 31, 2006,  work under  contracts with Bovis
Lend Lease LMB, Inc., Newmark  Construction  Services,  LLC, Glenwood Management
Corporation and related entities, and Skanska USA Building Inc. constituted 40%,
18%, 10% and 10% of the Company's total revenues, respectively.

         For the year ended December 31, 2005,  work under  contracts with Bovis
Lend Lease LMB, Inc., Newmark Construction  Services,  LLC and related entities,
Skanska  USA  Building  Inc.,  M.D.  Carlisle   Construction  Corp.,  and  Plaza
Construction Corp. constituted 31%, 11%, 11%, 11% and 10% of the Company's total
revenues, respectively.

         For the year ended December 31, 2004,  work under  contracts with Bovis
Lend Lease LMB, Inc., Newmark Construction  Services,  LLC and related entities,
and  Glenwood  Management  Corporation,  constituted  32%,  23%  and  16% of the
Company's total revenues, respectively.

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<PAGE>

         Historically,  a portion of the  Company's  revenue has been  generated
from  contracts  with federal,  state and local  governmental  authorities.  The
Company's  current  revenue and backlog does not include any contracts  directly
with these governmental authorities.

         As is  customary  and  required in the  industry,  the Company is often
requested to provide a surety bond. The Company's ability to obtain bonding, and
the amount of bonding required, is solely at the discretion of the surety and is
primarily based upon the Company's net worth,  working  capital,  the number and
size  of  projects  under  construction  and  the  surety's   relationship  with
management. The larger the project and/or the number of projects under contract,
the greater the requirements are for bonding, net worth and working capital. The
Company  generally pays a fee to the bonding company of an amount  approximately
1% of the amount of the contract to be performed.  Since inception,  the Company
has neither been denied any request for payment or performance  bonds, nor has a
bonding  company  been  required  to make a payment on any bonds  issued for the
Company.  At December  31,  2006,  approximately  $39,000,000  of the  Company's
backlog was bonded.

         Other Matters.  The Company does not own any patents,  patent rights or
similar  intellectual  property.  The Company's business is not subject to large
seasonal  variations.  The  Company  did  not  expend  funds  for  research  and
development  during  2006,  2005 and  2004,  and  anticipates  no  research  and
development expenses in 2007.

ITEM 1A.    RISK FACTORS

         The  Company  is subject  to a variety  of risks,  including  the risks
described  below  as  well  as  adverse  business  conditions.   The  risks  and
uncertainties  described  below  are not  the  only  ones  facing  the  Company.
Additional risks and uncertainties, not known or described below, which have not
been  determined  to  be  material  may  also  impair  the  Company's   business
operations.  You should  carefully  consider the risks  described below together
with all other information in this report,  including  information  contained in
the "Business", "Management's Discussion and Analysis of Financial Condition and
Result of Operations" and "Quantitative and Qualitative  Disclosure about Market
Risk"  sections.  If any of the following risks occur,  the Company's  financial
condition and results of operations could be adversely affected. Such events may
cause actual results to differ materially from expected and historical  results,
and the trading price of the Company's  stock could decline.  For these reasons,
the reader is  cautioned  not to place  undue  reliance  on our  forward-looking
statements.

         The Company has a written  employment  agreement with Floyd Warkol, its
Chairman and CEO,  which expires on December 31, 2009.  The Company has no other
current  employment or non-competition  agreements with senior  management.  The
failure to retain senior  management would have a material adverse effect on the
Company's business.

         The Company's  continued  ability to obtain  bonding is critical to its
ability to bid on most public work and on certain private projects. The surety's
provision of bonding  pursuant to its arrangement  with the Company is solely at
the  surety's  discretion,  and the  arrangement  with the  surety is an at-will
arrangement  subject to  termination.  If the Company is unable to obtain surety
bonds as needed, this could have a material adverse effect on the Company.

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<PAGE>

         The Company has in the past experienced erosion in gross profit margins
due to lower than anticipated labor  productivity and higher labor costs related
to shortages of skilled labor and unforeseen jobsite conditions. There can be no
assurance that these factors will not affect productivity in the future.

         The Company has in the past  experienced  significant  increases in the
cost of steel  piping  materials,  which  is the  primary  material  used by the
Company on projects.  Future  increases may impact the Company's  profit margins
beyond the Company's estimates.

         An  economic  downturn  could  result  in a  decrease  in  construction
spending in the private and public  sectors,  which could  reduce the  Company's
revenues.

         The Company  relies on a relatively  small  number of  customers  for a
significant  share  of its  revenues.  The  loss of  business  from any of these
significant  customers  could have a material  adverse  effect on the  Company's
business and its operating results.

         The Company faces  intense  competition  due to the highly  competitive
nature of the  mechanical  contracting  market  that could  limit its ability to
increase its market share and its revenues.

         During  the  construction  period,  owners or general  contractors  may
require the Company to perform  certain work which is a change to or in addition
to the  original  contract.  Such work often  requires  months to obtain  formal
change orders (including dollar amounts). Change orders are often the subject of
dispute and sometimes litigation.  The failure of an owner or general contractor
to issue  change  orders or make  payments  could  delay  receipt of revenue and
require litigation to collect sums due the Company.

         Slow receipt of collections may also result from financial difficulties
of a general  contractor  or an owner.  The  Company's  inability to collect its
contract  balance  on a project  could  have a  material  adverse  effect on its
operating results.

         Although  the  Company's   operations  are  not  directly  affected  by
inflation,  both  New York  City and New York  State  have  large  debt  service
burdens.  Inflationary pressures have tended to result in a reduction in capital
spending by both state and local agencies;  such capital expenditure  reductions
in turn could have a negative impact on the Company's revenues.

         Failure of the  Company's  subcontractors  or providers of equipment to
perform as anticipated  could have a negative  impact on the Company's  results.
The Company subcontracts a portion of its contracts to specialty subcontractors,
and the Company is ultimately responsible for the successful completion of their
work. The Company also utilizes equipment  manufacturers and suppliers which are
responsible for delivering  specified  products on a timely basis.  Although the
Company utilizes highly respected  companies and sometime  requires  performance
bonds, there is no guarantee that the Company will not incur a material loss due
to performance issues related to these arrangements.

         Accounting  for  contract  related  revenues and costs as well as other
cost items requires  management to make a variety of  significant  estimates and
assumptions.  Although the Company  believes it has  sufficient  experience  and
processes to enable it to formulate appropriate

                                        8
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assumptions and produce reliable estimates,  these assumptions and estimates may
change  significantly  in the future,  and these  changes  could have a material
adverse effect on the Company's financial position and results of operations.

         The Company's  success  depends on attracting  and retaining  qualified
personnel  in a  competitive  environment.  The  single  largest  factor  in the
Company's  ability to  profitably  execute  its work is its  ability to attract,
develop and retain  qualified  personnel.  The  Company's  success in attracting
qualified  personnel  is  dependent on the  resources  available,  the impact of
general  economic  conditions  on the labor  supply,  and the ability to provide
competitive compensation.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

         Not Applicable.

ITEM 2      PROPERTIES

         Pursuant to a Modification of Lease Agreement, dated as of May 1, 1998,
the Company  leases  office and warehouse  space in Long Island City,  New York,
consisting of 18,433 square feet.  The lease had an initial  annual base rent of
$173,000,  with yearly rent increases of approximately 2%. The lease is a triple
net lease and thus the Company will pay any  increases on real estate taxes over
base year taxes, maintenance, insurance and utilities. The Company has exercised
a three-year option extending the lease through June 2009.

         The Company also  occupies a building and a storage yard in Bronx,  New
York,  consisting of a 14,000 square foot building,  including 4,000 square feet
of offices and 10,000  square feet of shop space.  It also  occupies an adjacent
5,000 square foot storage yard.  This property is jointly owned by the Company's
Chief Executive Officer and a charitable foundation he controls. This tenancy is
on a triple net basis. The Company pays rent of approximately  $8,500 per month,
plus taxes (currently  approximately $2,000 per month),  maintenance,  insurance
and utilities.  The written lease for this property expired on December 31, 2002
and the property is currently being occupied on a month-to-month basis.

         The  properties  are well  maintained,  adequate and suitable for their
purposes.

ITEM 3      LEGAL PROCEEDINGS

         There is no material pending legal  proceedings to which the Company is
a party.

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

         No matters were submitted to a vote of  stockholders  during the fourth
quarter of 2006.

                                        9
<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT

Officers of the Company  serve at the  pleasure of the Board of  Directors.  The
name,  age and offices held by each of the executive  officers of the Company as
of December 31, 2006 were as follows:

NAME                 AGE   TITLE
------------------   ---   -----------------------------------------------------
Floyd Warkol         59    Chief Executive Officer, President, Secretary and
                           Chairman of the Board of Directors

Richard W. Lucas     40    Chief Financial Officer

James F. Oliviero    60    General Counsel

Vincent Terraferma   56    Chief Operating Officer of KSW Mechanical

         Mr.  Floyd  Warkol has been  employed  as  Chairman  of the Board since
December 1995 and as President,  Secretary  and Chief  Executive  Officer of the
Company and as Chairman  and Chief  Executive  Officer of KSW  Mechanical  since
January 1994.

         Mr. Richard W. Lucas has been employed as the Chief  Financial  Officer
of the Company and KSW  Mechanical,  since August 2002.  Prior  thereto,  he was
employed  from May 1994  through July 2002 by Marden,  Harrison & Kreuter  CPAs,
P.C., the Company's  independent  certified public  accountants.  Since February
2006, Mr. Lucas has been a Director of KSW Mechanical.

         Mr.  James F.  Oliviero  has been  employed  as General  Counsel of the
Company and KSW Mechanical since February 1998. From January 1994 until February
1998, he was employed as Director of Contract Administration of KSW Mechanical.

         Mr. Vincent  Terraferma has been employed as Chief Operating Officer of
KSW Mechanical  since January 2003.  From December 1995 to December 2002, he was
KSW Mechanical's Executive Vice President.

                                       10
<PAGE>

                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

         The  Company's  Common Stock is quoted on the American  Stock  Exchange
under the symbol "KSW."

         At March 14, 2007, the Company had 5,803,643 shares of KSW Common Stock
issued and outstanding held by approximately  3,200 shareholders of record based
on  shareholder  lists  provided by the Company's  stock  transfer agent and the
Depository Trust Company.

         On May 8, 2006,  the  Company's  Board of Directors  declared a special
cash  dividend of $.06 per share to  shareholders  of record as of May 24, 2006.
The aggregate  amount of the dividend was $341,000 and this dividend was paid on
June 15, 2006. The Company did not pay dividends in 2005.

         The following information on high and low bid data is provided for 2006
and 2005 based on intraday quotations:

                 2006              2005
            ---------------   ---------------
Quarter      High     Low      High     Low
---------   ------   ------   ------   ------
First ...   $ 4.06   $ 2.80   $  .75   $  .40
Second ..   $ 6.12   $ 3.40   $ 1.80   $  .66
Third ...   $ 4.60   $ 3.66   $ 2.30   $ 1.60
Fourth ..   $ 7.40   $ 3.80   $ 3.10   $ 2.06

These prices represent bid prices,  which are prices paid by broker dealers, and
do not include retail markups, markdowns or broker dealer commissions.

ITEM 6.     SELECTED FINANCIAL DATA

         The following  information for the years ended December 31, 2006, 2005,
2004 and 2003 is derived from and  incorporated  by reference  to, the financial
statements for those years audited by Marden,  Harrison & Kreuter CPAs, P.C. The
summary of certain  financial  information  relating to the Company for the year
ended  December  31, 2002 (as  restated)  is derived  from and  incorporated  by
reference  to, the  financial  statements  for the year audited by Rosen Seymour
Shapss  Martin  &  Company,  LLP.  Each of the  previously  mentioned  financial
statements is included herein or in prior years' annual reports on Form 10-K and
Form 10-K/A, and should be read in conjunction with such financial information

                                       11
<PAGE>

                         FOR THE YEAR ENDED DECEMBER 31,
           (Dollars in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                              2006             2005          2004           2003           2002
                                           -----------      -----------   -----------    -----------    -----------
                                                                                                        (Restated)
<S>                                        <C>              <C>           <C>            <C>            <C>
INCOME STATEMENT:
Revenues ...............................   $    77,128      $    53,378   $    26,281    $    35,002    $    46,448(a)
Costs of revenues ......................        67,155           46,897        24,139         31,148         40,808(a)
Gross profit ...........................         9,973            6,481         2,142          3,854          5,640
Selling, general and administrative
 expenses ..............................         5,147(b)         3,657         3,452          3,010          4,196
Operating income (loss) ................         4,826            2,824        (1,310)           844          1,444
Other income (expense) .................           361               39            52            (59)          (107)
Income (loss) before income taxes ......         5,187            2,863        (1,258)           785          1,337

Provision (benefit) for income
 taxes .................................         2,422              152(c)         22            (30)         1,714(c)
Income (loss) before cumulative effect
 of change in accounting
 principle .............................         2,765            2,711        (1,280)           815           (377)
Cumulative effect of change in
 accounting principle net ..............             -                -             -              -         (1,888)(d)
Net income (loss) ......................         2,765            2,711        (1,280)           815         (2,265)
Net income (loss) per share -
  Basic ................................           .49              .50          (.24)           .15           (.41)
  Diluted ..............................           .48              .50          (.24)           .15           (.41)
Number of shares used in computation :
  Basic ................................     5,667,090        5,470,311     5,470,311      5,470,311      5,470,311
  Diluted ..............................     5,793,772        5,470,311     5,470,311      5,470,311      5,470,311
Dividends per share ....................           .06                -             -              -              -

BALANCE SHEET DATA:
Total assets ...........................   $    35,545      $    22,710   $    13,913    $    16,834    $    17,171
Working capital ........................        12,361            8,056         3,181          4,496          3,495
Current liabilities ....................        22,422           13,192         7,127          8,785         10,029
Long-term liabilities ..................             -                -             -              -              -
Stockholders' equity ...................        13,123            9,518         6,786          8,049          7,142
OTHER DATA:
Current ratio ..........................        1.55:1           1.61:1        1.45:1         1.51:1         1.35:1
</TABLE>

(a) The Company's  management  identified and determined that reported  revenues
and costs of revenues during the year ended December 31, 2002 were overstated as
a result of an accounting error attributable to the failure to eliminate certain
intra-company  accounts.  The Company restated these previously reported amounts
and,  with  the  oversight  of its  Audit  Committee,  corrected  its  financial
reporting system. Gross profit for the year did not change due to the offsetting
effects of the misstatements.

(b) During the year ended December 31, 2006, selling, general and administrative
expenses include stock  compensation  expenses of approximately  $693 related to
the  exercise  of stock  options  and the  adoption,  as of January 1, 2006,  of
accounting standard SFAS 123-R. In addition,  during the fourth quarter of 2006,
the Company  reversed the allowance for doubtful  accounts  totaling $200, which
reduced selling,  general and administrative expenses.

                                       12
<PAGE>

(c) During the year ended  December 31, 2002,  the Company  recorded a valuation
allowance totaling $1,045 against its deferred tax assets, at the recommendation
of the Company's  outside auditors engaged in the preparation of the 2002 audit.
During the year ended December 31, 2005, the outstanding  deferred tax valuation
allowance  was  reversed,   after  the  Company's  management  re-evaluated  the
likelihood that these assets could be used in their entirety,  and concluded the
valuation allowance was not required.

(d) For the year ended  December  31,  2002,  the Company  recorded a cumulative
effect of a change in  accounting  principle  for the write-off of goodwill as a
result of the adoption of SFAS 142, which accounted for $1,888 of the net loss.

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         The following  discussion and analysis  explains the general  financial
condition  and the  results of  operations  for the  Company for the years ended
December 31, 2006, 2005 and 2004 including:

         o  factors that affect our business;
         o  our earnings and costs in the periods presented;
         o  changes in earnings and costs between periods;
         o  sources of earnings; and
         o  impacts of these factors on our overall financial condition.

         As you read this discussion and analysis, please refer to the Company's
consolidated  financial  statements  and the notes  thereto  for the years ended
2006, 2005 and 2004 included in this report.

OVERVIEW

         The  Company,  through  its  wholly-owned  subsidiary,   furnishes  and
installs HVAC systems and process piping systems for institutional,  industrial,
commercial,  high-rise  residential and public works projects.  The Company does
not actively  pursue  projects under  $3,000,000.  Some larger company  projects
involve  multi-year  contracts,  which  can  account  for  more  than 10% of the
Company's  revenue in any given year.  The Company  also serves as a  mechanical
trade manager, performing project management services relating to the mechanical
trades.

         The Company obtains  projects  through both  competitive and negotiated
bidding  processes  submitted to project owners or construction  managers,  many
with whom the Company has long standing commercial relationships.

         The  Company  is  awarded  many of its  contracts  by  providing  value
engineering assistance, whereby the Company recommends changes to project plans,
subject to the  approval of the design  professional.  This  assistance  reduces
costs and yields the same results as the original designs.  As a result,  during
2006, the Company  obtained many of its contracts  without  bidding  against its
competitors.

         The Company's  profitability is dependent on its ability to continue to
maintain its commercial  relationships and provide quality services necessary to
obtain projects. The Company's costs of revenues include field labor, equipment,
material,  subcontractor  and

                                       13
<PAGE>

overhead  costs.   Overhead  costs  include  project  supervision  and  drafting
salaries, as well as insurance costs. The Company must control costs of revenues
by having the ability to manage material costs,  purchase  equipment at or below
original  estimated  amounts and control labor costs  throughout the duration of
each project.

         For the year ended  December  31, 2006,  the  Company's  earnings  were
affected  by (1)  increased  volume  (2)  expenses  related to the  vesting  and
exercising of stock options, (3) an increase in corporate income tax expense and
(4) the reversal of the allowance for doubtful accounts.

         (1)      The Company's revenues for 2006  increased 44.5%,  as a result
of the Company's  performance on its backlog as of December 31, 2005, as well as
contracts  received  during 2006.  The Company does not anticipate a significant
increase in office  overhead will be needed during 2007 to complete the December
31, 2006 backlog of $110,200,000.

         (2)      On  January 1, 2006,  the  Company   adopted   the   Financial
Accounting  Standards  Board  Statement No. 123-R,  "Share Based Payment" ("SFAS
123-R").  SFAS  123-R  requires  all  share  based  payments  to  employees  and
non-employee  directors  including grants of stock options,  to be recognized in
the  financial  statements  based on the awards fair value at the date of grant.
The  Company  elected to adopt SFAS 123-R on the  modified  prospective  method.
Under  the  modified   prospective   method  of  transition  under  SFAS  123-R,
compensation  costs in 2006 include costs for options  granted prior to, but not
vested as of December 31, 2005, and options vested in 2006.  Therefore,  results
for prior periods have not been restated.

         Prior to January 1, 2006,  the Company  applied  Accounting  Principles
Board  Opinion 25,  "Accounting  for Stock  Issued to  Employees"  (APB 25), and
related interpretations. The Company did not record compensation expense because
the  exercise  price of the shares was equal to the market  price at the date of
the grant. SFAS 123,  "Accounting for Stock Based  Compensation - Transition and
Disclosure", requires proforma net income disclosures as if the fair value based
method defined in SFAS 123 has been applied.  The Company continued to apply the
provisions of APB 25 and provided the proforma  disclosures required by SFAS 123
and amended by SFAS 148.

         The adoption of SFAS 123-R lowered net income by approximately  $29,000
during  the  year  ended  December  31,  2006.  In  addition  during  2006,  six
individuals  exercised  options to purchase  287,832  shares,  which lowered net
income by approximately $345,000.

         (3)      The  corporate  income tax expense for the year ended December
31, 2006 was higher due to increased earnings.

         (4)      During  the  fourth  quarter of 2006, the Company reversed the
allowance  for  doubtful  accounts,  which increased net income by approximately
$107,000.

         The majority of the  Company's  contracts  are awarded on a fixed-price
basis. Subcontractor and equipment purchases are awarded on a fixed-price basis,
near the time the  Company's  contract is awarded.  The Company  purchases  most
materials  throughout  the  project  on a price in  effect  basis.  The  Company
includes  allowances in its estimates for future

                                       14
<PAGE>

escalations  in steel  prices.  On May 4,  2006,  the  Company  entered  into an
agreement with a supplier of piping materials, whereby the Company has committed
to purchase certain piping products normally used in its operations,  as well as
fabrication  services, at set prices through April 30, 2007. This agreement does
not cover all types of  materials  the  Company  utilizes on its  projects.  The
Company has not been able to obtain fixed pricing on certain materials,  such as
copper tubing, due to current pricing  volatility.  The Company does not believe
that pricing increases on items not covered by this purchase agreement will have
a material effect on the Company's results of operations.

         For the year ended December 31, 2005, the Company's  earnings increased
as a result of (1) increased  volume with primarily the same overhead  structure
as in the prior year, (2) the settlement of the Co-Op City  litigation,  and (3)
the reversal of the deferred tax asset valuation allowance.

         (1)      Even though the Company's revenues  increased  103.1%,  during
2005,  the Company was not required to materially  increase  office  overhead to
support this increase in revenues.

         (2)      On October 17, 2005,  KSW   Mechanical   Services,   Inc.,   a
wholly-owned subsidiary of the Company, entered into a Stipulation of Settlement
settling a lawsuit commenced in 1999, entitled KSW Mechanical Services,  Inc. v.
NAB Construction  Corp. et. al. ("the  Lawsuit"),  which had been pending in the
Supreme  Court of the  State of New  York,  County  of  Queens.  KSW  Mechanical
Services,  Inc. sued the general contractor and its bonding company on the Co-Op
City Project to recover its accounts receivable  applicable to the base contract
of  approximately  $437,000,  unpaid final retainage  billings of  approximately
$1,500,000,  plus a claim for  unanticipated  costs incurred through 1998 in the
sum, as presented at trial, of $2,303,727. The Defendant asserted counterclaims,
as presented at trial, totaling $1,440,905,  and a claim for $3,000,000 based on
the argument that KSW Mechanical's mechanic's lien was willfully overstated.

         The Lawsuit was tried for 47 days and further  trial  proceedings  were
scheduled.   Pursuant  to  the   Stipulation  of  Settlement,   all  claims  and
counterclaims were discontinued, and the Company received cash payments totaling
$2,900,000, with $1,200,000 paid as of December 15, 2005, $850,000 paid by March
31, 2006,  and $850,000  paid by September  30, 2006.  During the quarter  ended
December 31, 2005, the Company  recognized a pretax net gain,  after  settlement
expenses, of approximately $888,000, related to this matter.

         (3)      During  2001,  the Financial Accounting Standards Board issued
SFAS 142,  Goodwill and Other Intangible Assets  establishing,  as of January 1,
2002,  a test  whereby the fair value of  goodwill  is compared to its  carrying
value.  Based upon this test, the goodwill of the Company was written-off during
the first quarter of 2002. This write-off of goodwill created an increase in the
deferred  tax assets.  At December 31,  2002,  the Company  provided a valuation
allowance  (or  reserve)  against  its net  deferred  tax assets  based upon the
uncertainty  regarding the ultimate  realization  (or use) in their  entirety of
these deferred tax assets.  At December 31, 2004, the  outstanding  deferred tax
asset  valuation was  $1,220,000.  During the year ended  December 31, 2005, the
Company  generated  profits which reduced this deferred tax valuation  allowance
and the Company reversed the outstanding deferred tax valuation allowance.  This
allowance

                                       15
<PAGE>

was reversed after the Company's  management  re-evaluated  the likelihood  that
those assets could be used in their  entirety and  concluded  that the valuation
allowance was not required.

         During the year ended  December  31,  2004,  the Company  took steps to
further control its office cost  management.  These steps included  reduction in
office staff,  as well as the Company's  Chief  Executive  Officer  reducing his
salary by 20%,  with a  proportionate  reduction  in his work  week.  During the
latter half of 2005, the Company's  Chief  Executive  Officer resumed a five-day
work week and also negotiated a new employment agreement.

         Management  believes that the future success of the Company lies in its
ability to obtain new projects,  maintain  proper cost controls  related to this
work,  pursue new trade  management  contracts and continue  controlling  office
expenditures.  The Company is dependant  on outside  factors such as the general
health of the New York City metropolitan area economy and continued low interest
rates,  both of which relate to the  strength of the  building  industry and the
type of projects the Company has the ability to obtain.  Increasing governmental
deficits  could also  affect the amount of new  governmental  financed  projects
which the Company could pursue.  The Company must also continue to obtain surety
bonds,  when required on projects.  The Company's  management  has experience in
expanding into new geographic areas;  however, to date the Company has conducted
its operations primarily in the New York City metropolitan area.

RESULTS OF OPERATIONS

         The  following  table sets forth the amounts of and as a percentage  of
total revenues,  certain items of the Company's  statement of operations for the
periods indicated (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                               2006                    2005                    2004
                                       ---------------------   ---------------------   ---------------------
                                        Amount      Percent     Amount      Percent     Amount      Percent
                                       ---------   ---------   ---------   ---------   ---------   ---------
<S>                                    <C>             <C>     <C>             <C>     <C>             <C>
Revenues ...........................   $  77,128       100.0   $  53,378       100.0   $  26,281       100.0
Costs of revenues ..................      67,155        87.1      46,897        87.9      24,139        91.8
                                       ---------   ---------   ---------   ---------   ---------   ---------
Gross profit .......................       9,973        12.9       6,481        12.1       2,142         8.2
Expenses
     Selling, general and
      administrative expenses ......       5,147         6.7       3,657         6.8       3,452        13.1
                                       ---------   ---------   ---------   ---------   ---------   ---------
Operating income (loss) ............       4,826         6.2       2,824         5.3      (1,310)       (4.9)
Other income .......................         361          .5          39          .1          52          .1
                                       ---------   ---------   ---------   ---------   ---------   ---------
Income (loss) before provision for
 income taxes ......................       5,187         6.7       2,863         5.4      (1,258)       (4.8)
Provision for income taxes .........       2,422         3.1         152          .3          22          .1
                                       ---------   ---------   ---------   ---------   ---------   ---------
Net income (loss) ..................   $   2,765         3.6   $   2,711         5.1   $  (1,280)       (4.9)
                                       =========   =========   =========   =========   =========   =========
</TABLE>

                                       16
<PAGE>

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

Revenues

         Revenues increased  $23,750,000,  or 44.5%, to $77,128,000 for the year
ended December 31, 2006, as compared to $53,378,000  for the year ended December
31, 2005. Revenues for the fourth quarter of 2006 were $19,591,000,  an increase
of  $2,490,000,  or 14.6%,  as compared to  $17,101,000 in the fourth quarter of
2005.

         At  December  31,  2006,  the  Company  had  backlog  of  approximately
$110,200,000.  Approximately $40,000,000 of the December 31, 2006 backlog is not
reasonably  expected to be  completed  in the next fiscal  year.  The Company is
actively seeking new projects to add to its backlog.

         These increases in revenues were a result of the Company's  performance
on its backlog of work as of December 31, 2005, as well as work obtained  during
the period.

         During the year ended  December 31, 2006,  the Company earned 40%, 18%,
10% and 10% of revenues,  respectively,  from its largest customers. The Company
bids on large multi-year  contracts,  which can account for more than 10% of its
contract revenue in any given year.

Costs of Revenues

         Costs of revenues  increased by  $20,258,000,  or 43.2%, to $67,155,000
for the year ended  December 31, 2006, as compared to  $46,897,000  for the year
ended  December 31, 2005.  Costs of revenues for the fourth quarter of 2006 were
$16,666,000, an increase of $2,259,000 as compared to $14,407,000 for the fourth
quarter of 2005. Costs of revenues  include  subcontractor  costs,  field labor,
material,  equipment  and overhead  expenses.  Overhead  costs  include  project
supervision and drafting  salaries as well as insurance  costs.  The increase in
costs of revenues  corresponded  to the increase in revenues for the  applicable
periods.  Since higher revenues generally require higher  expenditures of costs,
the  increased  revenues  allowed the  Company to  allocate  the cost of project
supervision and drafting  salaries over multiple  projects and more  effectively
utilize its experienced  field labor  personnel.  In addition,  the Company took
steps to  reduce  pricing  volatility  of  piping  materials  by  entering  into
agreements to purchase these products at fixed prices.

Gross Profit

         For the year ended December 31, 2006, the Company had a gross profit of
$9,973,000 or 12.9% of revenues,  as compared to $6,481,000 or 12.1% of revenues
for the year ended  December 31, 2005. In the fourth  quarter of 2006, the gross
profit was  $2,925,000 or 14.9% of revenues,  as compared to $2,694,000 or 15.8%
of revenues for the fourth quarter of 2005. The increase  dollar amount in gross
profits was primarily a result of the overall  increase in revenues.  During the
fourth  quarter of 2005,  the gross  profit  included  an  $888,000  gain on the
settlement of the Co-Op City project claim settlement.

                                       17
<PAGE>

Selling, General and Administrative Expenses

         For  the  year  ended   December   31,  2006,   selling,   general  and
administrative ("S,G&A") expenses increased $1,490,000, or 40.7%, to $5,147,000,
as compared to  $3,657,000  for the year ended  December 31, 2005. In the fourth
quarter of 2006,  S,G&A expenses were  $1,146,000,  an increase of $320,000,  as
compared to $826,000 for the fourth quarter of 2005.

         For the above yearly and quarterly  periods, a portion of these changes
were a result of the vesting and exercising of stock options,  professional fees
and employment  costs.  During the year ended December 31, 2006, six individuals
exercised options to purchase 287,832 shares,  which increased S,G&A expenses by
approximately  $640,000.  In addition,  during the year ended December 31, 2006,
the  Company  incurred  expenses  related  to the  vesting  of stock  options of
approximately  $53,000.  Professional  fees,  related  to the  Company's  public
filings with the  Securities  and Exchange  Commission,  together  with American
Stock  Exchange  fees  increased  approximately  $130,000  during the year ended
December 31, 2006. In addition,  during the fourth  quarter of 2006, the Company
reversed the allowance for doubtful  accounts  totaling  $200,000,  which reduce
S,G&A expenses.

         The  remaining  changes in S,G&A  expenses  were  primarily a result of
increases in  employment  costs and office  expenses.  During the latter half of
2005, the Company's  Chief Executive  Officer  returned to a five-day work week,
and additional office staff was hired, contributing to the increases in 2006.

Other Income

         Other income for the year ended December 31, 2006 increased $322,000 or
825.6%,  to $361,000,  as compared to other income of $39,000 for the year ended
December  31, 2005.  This change in other  income was  primarily a result of the
Company's  ability to earn interest  income on its increased cash position.  Net
interest  income for the year ended December 31, 2006 was $317,000,  as compared
to $24,000 for the year ended December 31, 2005. During the years ended December
31,  2006 and  2005,  the  Company  realized  gains on the  sales of  marketable
securities totaling $44,000 and $15,000, respectively.

Provision for Income Taxes

         The  income  tax  expense  for the year  ended  December  31,  2006 was
$2,422,000,  or 46.7% of income  before taxes  compared to $152,000,  or 5.3% of
income  before taxes for the year ended  December  31, 2005.  For the year ended
December 31, 2005,  the  provision  for income taxes  differs from the Company's
effective income tax rate primarily due to the reversal of a deferred income tax
valuation allowance.

                                       18
<PAGE>

Net income

         As a result of all the items above,  the Company reported net income of
$2,765,000,  or $.49 per  share-basic and $.48 per  share-diluted,  for the year
ended December 31, 2006.  Included in net income for the year December 31, 2006,
are net expenses of approximately  $374,000 related to exercising and vesting of
stock  options  during  the  period,  which  resulted  in  a  reduction  in  the
calculation  of earnings per share of  approximately  $.07 per  share-basic  and
diluted.  During the fourth quarter of 2006, the Company  reversed the allowance
for doubtful accounts,  which increased net income by approximately  $107,000 or
$.02 per share-basic and diluted.  Excluding the effect of stock options and the
reversal of the allowance for doubtful  accounts,  net income for the year ended
December  31,  2006  would  have  been  approximately  $3,032,000,  or $.54  per
share-basic and $.53 per share-diluted.

         The Company  reported net income of $2,711,000 or $.50 per  share-basic
and diluted for the year ended  December 31, 2005.  Excluding  the effect of the
one time  adjustments  for the Co-Op City  litigation  and the  reversal  of the
deferred tax valuation allowance, net income for 2005 would have been $1,473,000
or $.27 per share-basic and diluted.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

Revenues

         Revenues from the Company's projects increased $27,097,000,  or 103.1%,
to $53,378,000  for the year ended December 31, 2005, as compared to $26,281,000
for the year ended December 31, 2004.  This increase in revenues was primarily a
result of the  Company's  increased  number of contracts in progress at December
31, 2004, as well as projects the Company obtained during 2005. Revenues for the
fourth quarter of 2005 were $17,101,000, an increase of $10,224,000, as compared
to $6,877,000 for the fourth quarter of 2004. The revenues in the fourth quarter
of 2005 include  approximately  $963,000 related to the Company's  settlement of
the Co-Op City  litigation.  At December  31,  2005,  the Company had backlog of
approximately  $82,200,000.  The backlog at December  31, 2005 did not include a
$9,000,000  contract,  which  commencement  is  subject to the  project's  owner
obtaining financing.

         During the year ended  December 31, 2005,  the Company earned 31%, 11%,
11%,  11% and 10% of revenues,  respectively,  from its largest  customers.  The
Company bids on large multi-year contracts,  which can account for more than 10%
of its contract revenue in any given year.

Costs of Revenues

         Costs of revenues  increased by $ 22,758,000,  or 94.3%, to $46,897,000
for the year ended  December 31, 2005, as compared to  $24,139,000  for the year
ended December 31, 2004. Costs of revenues for the fourth quarter of 2005 were $
14,407,000,  an increase of $8,068,000, as compared to $6,339,000 for the fourth
quarter of 2004.  The increases in costs of revenues  correspond to the increase
in revenue noted above.  During the fourth quarter of 2005, the Company incurred
expenses  related  to the Co-Op  City  litigation  settlement  of  approximately
$75,000.

                                       19
<PAGE>

         During year ended  December 31, 2004,  costs of revenues were increased
by the  following  factors  which were not present in 2005:  increased  costs of
steel  piping  products,  revenues  insufficient  to absorb  job-costed  project
supervision  and drafting  salaries,  and increased  labor costs incurred by the
Company to retain experienced field labor personnel.  These factors did not have
the same impact in 2005, and management does not expect these conditions to have
the same  impact in the  future.  The  Company  reduced  pricing  volatility  on
purchases  of steel  piping  material by entering  into an agreement to purchase
these products at fixed prices. In addition, increased revenues and backlog have
allowed the Company to allocate  the cost of project  supervision  and  drafting
salaries over multiple projects and to more effectively  utilize its experienced
field labor personnel.

Gross Profit

         For the year ended December 31, 2005, the Company had a gross profit of
$6,481,000,  or  12.1%  of  revenues,  as  compared  to  $2,142,000,  or 8.2% of
revenues,  for the year ended  December 31, 2004. In the fourth quarter of 2005,
the gross profit was $2,694,000,  or 15.8% of revenues, as compared to $538,000,
or 7.8% of revenues, for the fourth quarter of 2004. The increased dollar amount
in gross profits was primarily a result of the overall increase in revenues.  In
addition,  during the 2005 fourth quarter, the gross profit included an $888,000
gain on the settlement of the Co-Op City project claim litigation.

Selling, General and Administrative Expenses

         For  the  year  ended   December   31,  2005,   selling,   general  and
administrative  ("S,G&A")  expenses increased  $205,000,  or 5.9%, to $3,657,000
compared to $3,452,000 for the year ended  December 31, 2004.  During the fourth
quarter 2005,  S,G&A expenses were $826,000 as compared to $566,000 for the same
period in 2004,  an increase of  $260,000.  For the above  yearly and  quarterly
periods,  the  Company's  increase  in  S,G&A  was  primarily  a  result  of the
administration of increased revenues,  including an increase in employment costs
and office expenses. These increased costs include the Company's Chief Executive
Officer  resuming a five day work  week,  and the  hiring of  additional  office
staff. In addition,  professional  fees related to the Company's  public filings
with the Securities and Exchange  Commission,  as well as an increase in utility
costs related to its office contributed to this increase.

Other Income

         Other income for the year ended December 31, 2005 decreased $13,000, or
(25.0%),  to $39,000,  as compared  to $52,000 for the year ended  December  31,
2004.  During the years ended December 31, 2005 and 2004,  the Company  realized
gains  on  sales  of  marketable   securities   totaling  $15,000  and  $48,000,
respectively.  During the years ended  December  31, 2005 and 2004,  the Company
earned net interest income of $24,000 and $4,000, respectively.

Provision for Income Taxes

         The  income  tax  expense  for the year  ended  December  31,  2005 was
$152,000,  or 5.3% of income  before  taxes  compared  to income tax  expense of
$22,000, or 1.7% of the loss before income taxes in 2004.

                                       20
<PAGE>

         The provision  for income taxes  differs from the  Company's  effective
income tax rate  primarily due to a reversal of a deferred  income tax valuation
allowance.  During 2001, the Financial  Accounting  Standards  Board issued SFAS
142, Goodwill and Other Intangible Assets establishing, as of January 1, 2002, a
test whereby the fair value of goodwill is compared to its carrying value. Based
upon this test,  the  goodwill of the Company was  written-off  during the first
quarter of 2002. This write-off of goodwill  created an increase in the deferred
tax assets.

         At December 31, 2002,  the Company  provided a valuation  allowance (or
reserve)  against  its net  deferred  tax  assets  based  upon  the  uncertainty
regarding the ultimate  realization (or use) in their entirety of these deferred
tax assets.  At December 31, 2004, the outstanding  deferred tax asset valuation
allowance was  $1,220,000.  During the nine months ended September 30, 2005, the
Company generated profits which reduced this deferred tax valuation allowance by
$461,000.  Based upon the Company's backlog as of September 30, 2005, management
re-evaluated  the likelihood  that these assets could be used in their entirety,
and concluded  that the valuation  allowance was not required.  At September 30,
2005,  the Company  reversed the  outstanding  deferred tax valuation  allowance
totaling approximately $759,000.

         State  and  local tax rates  are not  affected  by the  above,  but are
determined by the Company's net worth.

Net Income

         As a result of all the items above,  the Company reported net income of
$2,711,000  or $.50 per share basic and diluted for the year ended  December 31,
2005 as compared to a reported net loss of $1,280,000 or $(.24) per  share-basic
and diluted for the year ended December 31, 2004.

         Excluding  the  effect of the one time  adjustments  for the Co-Op City
litigation  settlement and the reversal of the deferred tax valuation allowance,
net  income  for 2005 would have been  $1,473,000  or $.27 per  share-basic  and
diluted.

LIQUIDITY AND CAPITAL RESOURCES

General

         The  Company's  principal  capital  requirement  is to fund its work on
construction projects.  Projects are billed on a monthly basis based on the work
performed to date. These project billings, less a withholding of retention which
is  received as the  project  nears  completion,  are  collectible  based on the
respective  contract terms.  The Company has  historically  relied  primarily on
internally  generated  funds.  The Company has not relied on bank  borrowings to
finance its operations since July 2003. The Company has a line of credit,  which
is subject to certain conditions. See discussion of Credit Facility below.

         As of  December  31,  2006,  the  Company's  cash and cash  equivalents
balances  totaled  $14,085,000,  an increase of $8,886,000  from the  $5,199,000
reported as of December 31, 2005.

                                       21
<PAGE>

Net cash provided by (used in) Operating Activities

         Net cash provided by operating activities was $8,485,000 and $2,325,000
for the years ended December 31, 2006 and 2005,  respectively.  Net cash used in
operating activities was $168,000 for the year ended December 31, 2004. The cash
provided by  operations  in both 2006 and 2005 was primarily due to increases in
operating  income.  During  2004,  the cash  used in  operating  activities  was
primarily the result of losses  incurred  during the period that were  partially
offset by receivables  collected in excess of cash payments made.  Cash provided
by operations for the years ended December 31, 2006 and 2005 include receipts on
the Co-Op City  litigation  settlement of  $1,700,000 in 2006 and  $1,200,000 in
2005.

Cash used in Investing Activities

         Net cash used in investing  activities were $51,000 in 2006, $86,000 in
2005 and  $28,000  in 2004.  The  Company  purchased  marketable  securities  of
$12,000,  $163,000 and $685,000  during 2006, 2005 and 2004,  respectively.  The
Company  received  proceeds on the sales of  marketable  securities of $171,000,
$153,000 and $676,000 during 2006, 2005 and 2004, respectively. In addition, the
Company purchased property and equipment totaling $210,000,  $76,000 and $19,000
during 2006, 2005 and 2004, respectively.

Cash provided by Financing Activities

         During 2006,  net cash provided by financing  activities  was $452,000.
During 2005 and 2004, no cash was provided by or used in financing activities.

         During the year ended  December 31,  2006,  six  individuals  exercised
options to purchase an aggregate of 287,832 shares contributing cash proceeds of
$475,000 to the Company.

         Prior to adopting  SFAS 123-R,  the Company  presented all tax benefits
resulting  from the  exercise of stock  options as  operating  cash flows in the
Statement of Cash Flows.  SFAS 123-R  requires cash flows  resulting from excess
tax benefits to be classified as a part of cash flows from financing activities.
Excess tax  benefits  represent  tax benefits  related to  exercised  options in
excess of the  associated  deferred tax asset for such  options.  As a result of
adopting SFAS 123-R, $318,000 of excess tax benefits for the year ended December
31, 2006 have been  classified as an operating cash outflow and a financing cash
inflow.

         On May 8, 2006,  the  Company's  Board of Directors  declared a special
cash  dividend of $.06 per share to  shareholders  of record as of May 24, 2006.
The aggregate amount of the dividend was $341,000, and this dividend was paid on
June 15, 2006.

Credit Facility

         The Company has a line of credit  facility from Bank of America,  N.A.,
which provides  borrowings for working capital  purposes up to $2,000,000.  This
facility is secured by the  Company's  assets and is guaranteed by the Company's
subsidiary,  KSW Mechanical Services,  Inc. On March 8, 2007, the Company's bank
extended the working capital credit facility for a

                                       22
<PAGE>

term  expiring  March 30,  2008.  There  have been no  borrowings  against  this
facility during 2006 and 2005.

         Advances bear interest,  based on the Company's  option,  at either the
bank's  prime  lending  rate plus one percent per annum  (9.25% at December  31,
2006),  or the London  Interbank  Offered Rate  ("LIBOR")  plus two and one-half
percent per annum (7.84% at December 31, 2006).

         Payment  may be  accelerated  by  certain  events  of  default  such as
unfavorable  credit factors,  the occurrence of a material adverse change in the
Company's business,  properties or financial condition,  a default in payment on
the line, impairment of security,  bankruptcy, or the Company ceasing operations
or being unable to pay its debts. The line of credit must be paid in full at the
end of the term.

         The  Company   currently  has  no   significant   capital   expenditure
commitments.

Surety

         On some of its  projects,  the  Company is required to provide a surety
bond.  The  Company's  ability  to obtain  bonding,  and the  amount of  bonding
available, is solely at the discretion of the surety and is primarily based upon
the Company's net worth,  working capital, the number and size of projects under
construction  and the  surety's  relationship  with  management.  The Company is
contingently  liable to the  surety  under a general  indemnity  agreement.  The
Company  agrees to indemnify  the surety for any  payments  made on contracts of
suretyship,  guaranty  or  indemnity  as a result of the  Company not having the
financial capacity to complete projects.  Management  believes the likelihood of
the surety having to complete  projects is remote.  The contingent  liability is
the cost of completing all bonded projects,  which is an  undeterminable  amount
because it is subject to bidding by third parties.  Management believes that all
contingent  liabilities  will be satisfied by the Company's  performance  on the
specific bonded  contracts  involved.  The surety provides bonding solely at its
discretion,  and the  arrangement  with the  surety  is an  at-will  arrangement
subject to termination.

         As of December 31, 2006,  approximately  $39,000,000  of the  Company's
backlog of  approximately  $110,200,000  was bonded.  The Company  provides  its
surety with a detailed  schedule of backlog on a quarterly  basis. The Company's
bonding limits are sufficient  given the volume and size of the Company's bonded
contracts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The Company's  consolidated financial statements and accompanying notes
have been prepared in accordance with accounting  principles  generally accepted
in the United  States of America.  The  preparation  of  consolidated  financial
statements in conformity with accounting  principles  generally  accepted in the
United States of America  requires  management to make estimates and assumptions
that affect the reported  amounts of assets and  liabilities,  the disclosure of
contingent  assets and  liabilities  at the date of the  consolidated  financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting periods.

                                       23
<PAGE>

         The Company continually evaluates the accounting policies and estimates
it  uses  to  prepare  the  consolidated   financial  statements.   In  general,
management's estimates are based on historical  experience,  on information from
third party  professionals and on various other assumptions that are believed to
be reasonable  under the facts and  circumstances.  Actual  results could differ
from those estimates made by management.

         The  Company  believes  the  following  accounting  policies  represent
critical  accounting  policies.  Critical accounting policies are those that are
both most  important to the  portrayal of a company's  financial  condition  and
results  and  require  management's  most  difficult,   subjective,  or  complex
judgment,  often as a result of the need to make  estimates  about the effect of
matters that are inherently  uncertain and may change in subsequent  periods. We
discuss  our  significant  accounting  policies  in  Note  2  to  the  Company's
consolidated   financial  statements,   including  those  that  do  not  require
management to make difficult, subjective, or complex judgments or estimates.

Accounting for revenue recognition for construction contracts

         The Company recognizes revenue for long-term construction contracts not
yet completed  using the  "percentage  of  completion"  method,  measured by the
percentage of total costs incurred to date as compared to total  estimated costs
at the  completion  of each  contract.  When the  Company  bids on  projects,  a
comprehensive budget is prepared dividing the project into line items indicating
separate labor, equipment, material,  subcontractor and overhead cost estimates.
As projects progress,  the Company's project managers plan, schedule and oversee
operations  and review  project  costs  compared  to the  estimates.  Management
reviews on a bi-weekly  basis the  progression  of the contract with the project
manager.  An analysis is prepared and reviewed  monthly by management  comparing
the costs incurred to the budgeted amounts. The results of these procedures help
determine  the  anticipated  total  costs at  completion,  based  on  facts  and
circumstances  known at the time. Any revisions in cost and profit estimates are
reflected  in the  accounting  period  in which the  facts,  which  require  the
revisions,  become  known.  These  estimates  are  subject to  revisions  due to
unanticipated  increases  in  labor,  material  and  equipment  costs as well as
project  scope  changes.  The Company  receives  change orders for project scope
changes.  For some  project cost  overruns,  the Company can make a claim to the
project owner or general contractor to seek reimbursement of these overruns.  In
the past,  the Company has been  successful in the pursuit of such claims.  Such
claims are not carried on the books until they are  acknowledged by the owner or
contractor.

Accounts and retainage receivable

         Judgment is required to estimate  the  collectibility  of accounts  and
retainage  receivable.  The Company has in the past established an allowance for
uncollectible  trade  accounts and retainage  receivable  based upon  historical
collection experience and management's periodic evaluation of the collectibility
of outstanding accounts and retainage receivable on an account-by-account basis.
Accounts  receivable and contract  retentions  are due based on contract  terms.
Amounts are deemed  delinquent  when they are not received within their contract
terms.  Delinquent  receivables  are  written-off  based  on  individual  credit
evaluation and specific circumstances of the customer.

                                       24
<PAGE>

         At December  31, 2006,  the Company has not  recorded an allowance  for
uncollectible trade accounts and retainage receivable.

Accounting for income taxes

         Judgment is required in developing  the Company's  provision for income
taxes,  including  the  determination  of  deferred  tax  assets  and  valuation
allowances  that  might  be  required   against  the  deferred  tax  assets  and
liabilities.  The Company's consolidated balance sheets at December 31, 2006 and
2005 include deferred tax assets totaling $505,000 and $1,349,000, respectively.

Accounting for stock-based compensation

         The Company  accounts for  stock-based  compensation in accordance with
the fair value  recognition  provisions  of SFAS  123-R.  The  Company  uses the
Black-Scholes  option - pricing  model,  which  requires the input of subjective
assumptions.  These assumptions  include estimating the length of time employees
will retain their vested stock options before  exercising them (expected term"),
the estimated  volatility of the Company's  common stock price over the expected
term and the number of options that will  ultimately  not complete their vesting
requirements   ("forfeitures").   Changes  in  the  subjective  assumptions  can
materially  affect the estimate of fair value  stock-based  compensation and the
related amount recognized in the consolidated income statements.

NEW ACCOUNTING PRONOUNCEMENTS

         In July 2006, the Financial  Accounting  Standards  Board (FASB) issued
FASB  Interpretation  No. 48,  "Accounting  for  Uncertainty in Income Taxes, an
interpretation  of FASB  Statement  No.  109" (FIN  48).  FIN 48  clarifies  the
accounting  for  uncertainty  in income  taxes by  prescribing  the  recognition
threshold a tax  position is required  to meet before  being  recognized  in the
financial   statements.    It   also   provides   guidance   on   derecognition,
classification,  interest and penalties, accounting interim periods, disclosure,
and  transition.  FIN 48 is effective for fiscal years  beginning after December
15, 2006 and is required to be adopted by the Company in 2007.  The  adoption of
FIN 48 is not expected to have a material  impact on the Company's  consolidated
results of operations and financial condition.

         In  September   2006,  the  FASB  issued  SFAS  No.  157,  "Fair  Value
Measurements"  (SFAS 157).  SFAS 157  provides  guidance for using fair value to
measure  assets and  liabilities.  It also responds to  investors'  requests for
expanded  information  about the extent to which  companies  measure  assets and
liabilities at fair value,  the information  used to measure fair value, and the
effect of fair value  measurements on earnings.  SFAS 157 applies whenever other
standards  require  (or  permit)  assets or  liabilities  to be measured at fair
value, and does not expand the use of fair value in any new circumstances.  SFAS
157 is effective  for  financial  statements  issued for fiscal years  beginning
after  November  15,  2007.  The  adoption of SFAS 157 is not expected to have a
material  impact  on  the  Company's  consolidated  results  of  operations  and
financial condition.

                                       25
<PAGE>

         In February  2007,  the FASB issued  Statement No. 159, "The Fair Value
Option for Financial  Assets and Financial  Liabilities - Including an amendment
of FASB Statement No. 115" ("SFAS 159").  SFAS 159 permits entities to choose to
measure many financial  instruments and certain other items at fair value.  SFAS
159 is  effective  for  financial  statements  issued  beginning  with the first
quarter of 2008.  The  adoption  of SFAS 159 is not  expected to have a material
impact  on the  Company's  consolidated  results  of  operations  and  financial
conditions.

CONTRACTUAL OBLIGATIONS

         As of December 31, 2006,  outstanding  contractual  obligations  are as
follows:

                             PAYMENTS DUE BY PERIOD

<TABLE>
<CAPTION>
CONTRACTUAL OBLIGATIONS            TOTAL      LESS THAN 1 YEAR   1-3 YEARS    4-5 YEARS    AFTER 5 YEARS
------------------------------   ----------   ----------------   ----------   ----------   -------------
<S>                              <C>          <C>                <C>          <C>          <C>
Long- term debt                  $        -   $              -   $        -   $        -   $           -

Capital leases                            -                  -            -            -               -

Operating leases (a)                494,000            195,000      299,000            -               -

Purchase obligations under
 construction contracts (b)               -                  -            -            -               -

Other long-term obligations               -                  -            -            -               -
                                 ----------   ----------------   ----------   ----------   -------------
Total                            $  494,000   $        195,000   $  299,000   $        -   $           -
                                 ==========   ================   ==========   ==========   =============
</TABLE>

         (a)  The  Company  is  obligated  to  pay  monthly  rental  payments of
              approximately $16,000 on its lease for office space in Long Island
              City, New York. The Company has exercised its option to extend the
              lease for the period July 2006 through June 2009.

         (b)  On  May 4, 2006,  the  Company  entered  into  an agreement with a
              supplier of piping materials, whereby the Company has committed to
              purchase certain piping products  normally used in its operations,
              as well as fabrication  services,  at set prices through April 30,
              2007.

OFF -BALANCE SHEET ARRANGEMENTS

         No disclosures are required  pursuant to Item 303 (a) (4) of Regulation
S-K.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The  Company  does not  utilize  futures,  options or other  derivative
instruments.  As of December  31,  2006,  the Company has  invested  $663,000 in
marketable securities.

                                       26
<PAGE>

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Information required by this item, including the consolidated financial
statements and related notes, is  incorporated  herein by reference from Part IV
of this Annual Report on Form 10-K.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

         No disclosure required.

ITEM 9A.    CONTROLS AND PROCEDURES

         The Company  carried out an evaluation,  under the supervision and with
the participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules  13a-15(e) and 15d-15(e) under the Exchange Act)
as of December 31, 2006. Based on that evaluation,  its Chief Executive  Officer
and  Chief  Financial  Officer  concluded  that  its  disclosure   controls  and
procedures were effective as of December 31, 2006.

         There  has  been no  change  in the  Company's  internal  control  over
financial  reporting  (as defined in Rules  13a-15(f)  and  15d-15(f)  under the
Exchange Act) during the  Company's  fourth  fiscal  quarter ended  December 31,
2006, that has materially  affected or is reasonably likely to materially affect
the Company's internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

         None.

                                    PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

         Other  than  information  with  respect  to  the  Company's   executive
officers,  which is set  forth  after  Item 4 of Part I of this Form  10-K,  and
information  regarding the  Company's  Code of Ethics,  as set forth below,  the
information  required to be disclosed pursuant to Item 10 is incorporated in its
entirety herein by reference to the Company's  definitive  proxy statement to be
filed with the  Commission  pursuant to Regulation 14A within 120 days after the
end of the Company's last fiscal year.

CODE OF ETHICS

         The Company has adopted a written  Code of Business  Conduct and Ethics
(the  "Code  of  Ethics")  that  applies  to its  principal  executive  officer,
principal financial and accounting officer,  directors,  officers and employees.
Copies of the  Company's  Code of Ethics  will be  provided  free of charge upon
written request  directed to the Company's  Director of Investor  Relations,  at
37-16 23rd Street, Long Island City, New York 11101.

                                       27
<PAGE>

ITEM 11.    EXECUTIVE COMPENSATION

         The  information  required  to be  disclosed  pursuant  to  Item  11 is
incorporated  in its entirety  herein by reference to the  Company's  definitive
proxy  statement  to be filed with the  Commission  pursuant to  Regulation  14A
within 120 days after the end of the Company's last fiscal year.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
            RELATED STOCKHOLDER MATTERS

         The  information  required  to be  disclosed  pursuant  to  Item  12 is
incorporated  in its entirety  herein by reference to the  Company's  definitive
proxy  statement  to be filed with the  Commission  pursuant to  Regulation  14A
within 120 days after the end of the Company's last fiscal year.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
            INDEPENDENCE

         a. The  information  required  to  be  disclosed pursuant to Item 13 is
incorporated  in its entirety  herein by reference to the  Company's  definitive
proxy  statement  to be filed with the  Commission  pursuant to  Regulation  14A
within 120 days after the end of the Company's last fiscal year.

         b. Any  transaction  required  to be  disclosed  under  this item  must
be  approved  by the Board of Directors as being in the Company's interest.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The  information  required  to be  disclosed  pursuant  to  Item  14 is
incorporated  in its entirety  herein by reference to the  Company's  definitive
proxy  statement  to be filed with the  Commission  pursuant to  Regulation  14A
within 120 days after the end of the Company's last fiscal year.

                                       28
<PAGE>

                                     PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report:

         1. and 2. Financial statement and financial statement schedules.

         See Index to consolidated  financial statements and financial statement
         schedules on page F-1 of this Form 10-K.

         3. Exhibits

No.                                     Description
---------   --------------------------------------------------------------------
3.1         Amended  and  Restated   Articles  of  Incorporation  of  KSW,  Inc.
            (incorporated  herein by reference  to Exhibit 3.1 to the  Company's
            Registration Statement on Form S-8 (No. 333-217350),  filed with the
            Commission on February 13, 1997).

3.2         Amended and Restated  By-Laws of KSW, Inc.  (incorporated  herein by
            reference to Exhibit 3.2 to the Company's  Registration Statement on
            Form S-8 (No. 333-217350), filed with the Commission on February 13,
            1997).

10.1        Form of  Modification  of Lease Agreement dated as of May 1, 1998 by
            and between KSW,  Inc,  Irvjoy  Partners,  L.P. and I BLDG Co., Inc.
            (incorporated  herein by reference  to Exhibit 2.1 to the  Company's
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            1998 (Commission File No.  001-32865),  filed with the Commission on
            March 30, 1999).

10.2        1995  Stock  Option  Plan  of  KSW,  Inc.  (incorporated  herein  by
            reference to Exhibit 10.3 to the Company's Registration Statement on
            Form 10 (Commission File No.  001-32865),  filed with the Commission
            on November 24, 1995).

10.3        Employment  Agreement,  dated  September 12, 2005 by and between the
            Company,   KSW   Mechanical   Services,   Inc.   and  Floyd   Warkol
            (incorporated  herein by reference to Exhibit 10.20 to the Company's
            Current Report on Form 8-K (Commission  File No.  001-32865),  filed
            with the Commission on September 12, 2005.

10.4        Amendatory Employment  Agreement,  dated as of March 6, 2007, by and
            between  the  Company,  KSW  Mechanical  Services,  Inc.,  and Floyd
            Warkol.

                                       29
<PAGE>

10.5        Line of Credit Agreement Letter,  dated March 14, 2006, between KSW,
            Inc.  and Bank of  America,  N.A.  together  with forms of a Line of
            Credit  Note,  Rider  to Line of  Credit  Note,  a  pledge  security
            agreement and guaranty  (incorporated herein by reference to Exhibit
            10.21 to the Company's Annual Report on Form 10-K for the year ended
            December 3, 2005, filed with the Commission on March 16, 2006).

10.6        Line of Credit Agreement Letter,  dated March 8, 2007,  between KSW,
            Inc. and Bank of America, N.A.

11          Statement Regarding Computation of Net Earnings (Loss) Per Share.

21.1        List of Subsidiaries.

23.1        Consent of Marden, Harrison & Kreuter, CPAs, P.C.

31.1        Certification of Chief Executive Officer required by Rule 13a-14(a).

31.2        Certification of Chief Financial Officer required by Rule 13a-14(a).

32.1        Certification of Chief Executive  Officer required by Rule 13a-14(b)
            and 18 U.S.C. Section 1350.

32.2        Certification of Chief Financial  Officer required by Rule 13a-14(b)
            and 18 U.S.C. Section 1350.

                                       30
<PAGE>

                                   SIGNATURES


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

                                     KSW, INC.

                                     By: /s/ Floyd Warkol
                                         ---------------------------------------
                                         Floyd Warkol
                                         President, Chief Executive Officer,
                                         Secretary and Chairman of the Board of
                                         Directors (Principal Executive Officer)
                                         March 14, 2007

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

                                         /s/ Floyd Warkol
                                         ----------------
                                         Floyd Warkol
                                         President, Chief Executive Officer,
                                         Secretary and Chairman of the Board of
                                         Directors (Principal Executive Officer)
                                         March 14, 2007

                                         /s/ Stanley Kreitman
                                         ---------------------------------------
                                         Stanley Kreitman
                                         Director
                                         March 14, 2007

                                         /s/ Innis O'Rourke
                                         ---------------------------------------
                                         Innis O'Rourke
                                         Director
                                         March 14, 2007

                                         /s/ Warren O. Kogan
                                         ---------------------------------------
                                         Warren O. Kogan
                                         Director
                                         March 14, 2007

                                         /s/ John A. Cavanagh
                                         ---------------------------------------
                                         John A. Cavanagh
                                         Director
                                         March 14, 2007

                                         /s/ Richard W. Lucas
                                         ---------------------------------------
                                         Richard W. Lucas
                                         Chief Financial Officer
                                         (Principal Financial Officer and
                                         Principal Accounting Officer)
                                         March 14, 2007

                                       31
<PAGE>

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                         PAGE
                                                                         -------
Report of Independent Registered Public Accounting Firm                  F-2

Consolidated Financial Statements:

Consolidated Balance Sheets                                              F-3-4

Consolidated Statements of Operations                                    F-5

Consolidated Statements of Comprehensive Income (Loss)                   F-6

Consolidated Statements of Stockholders' Equity                          F-7

Consolidated Statements of Cash Flows                                    F-8-9

Notes to Consolidated Financial Statements                               F-10-31

Schedule II- Schedule of Valuation and Qualifying Accounts               F-32

                                       F-1
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
KSW, Inc. and Subsidiary
37-16 23rd Street
Long Island City, New York 11101

We have audited the  accompanying  consolidated  balance sheets of KSW, Inc. and
subsidiary  as of  December  31,  2006 and 2005,  and the  related  consolidated
statements of operations,  comprehensive income (loss), stockholders' equity and
cash flows for each of the three years in the period  ended  December  31, 2006.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of KSW,
Inc. and  subsidiary  as of December  31, 2006 and 2005,  and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December  31,  2006  in  conformity  with  U.S.  generally  accepted  accounting
principles.

Our audits  were  conducted  for the  purpose of forming an opinion on the basic
consolidated  financial statements taken as a whole. The accompanying  financial
statement Schedule II is presented for additional analysis and is not a required
part of the basic consolidated  financial statements.  Such information has been
subjected  to the  auditing  procedures  applied  in  the  audits  of the  basic
consolidated  financial  statements and in our opinion,  is fairly stated in all
material  respects in relation to the basic  consolidated  financial  statements
taken as a whole.

Marden, Harrison & Kreuter
Certified Public Accountants, P.C.

White Plains, New York
February 15, 2007, except for Note 17 (A), as to which the date is March 6, 2007
and for Note 17 (B), as to which the date is March 8, 2007.

                                       F-2
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2006 AND 2005
                        (in thousands, except share data)

                                   ----------

                                               2006       2005
                                             --------   --------
    ASSETS

Current assets:
  Cash and cash equivalents                  $ 14,085   $  5,199
  Marketable securities                           663        774
  Accounts receivable, net                     13,205     11,887
  Retainage receivable                          5,566      2,764
  Costs and estimated earnings in excess
   of billings on uncompleted contracts         1,017        480
  Prepaid expenses and other receivables          247        144
                                             --------   --------
      Total current assets                     34,783     21,248

Property and equipment, net                       256        112
Deferred income taxes and other                   506      1,350
                                             --------   --------
    Total assets                             $ 35,545   $ 22,710
                                             ========   ========

                                   (continued)

                                       F-3
<PAGE>

<TABLE>
<CAPTION>
                                                                     2006        2005
                                                                   ---------   ---------
<S>                                                                <C>         <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                 $  11,960   $   9,533
  Retainage payable                                                    2,798       1,576
  Accrued payroll and benefits                                           932         542
  Accrued expenses                                                       296         206
  Billings in excess of costs and
   estimated earnings on uncompleted contracts                         4,987       1,335
  Income taxes payable                                                 1,449           -
                                                                   ---------   ---------
    Total current liabilities                                         22,422      13,192
                                                                   ---------   ---------

Commitments and contingencies (Note 11)

Stockholders' equity:

  Preferred stock: $.01 par value, 1,000,000 shares authorized,
   no shares issued and outstanding                                        -           -
  Common stock:  $.01 par value, 25,000,000 shares authorized,
   5,758,143 and 5,470,311 shares issued and outstanding at 2006
   and 2005, respectively                                                 58          54
  Additional paid-in capital                                          10,890       9,729
  Retained earnings (deficit)                                          2,077        (347)
  Accumulated other comprehensive income:
    Net unrealized holding gains on available for sale
     securities                                                           98          82
                                                                   ---------   ---------
      Total stockholders' equity                                      13,123       9,518
                                                                   ---------   ---------
      Total liabilities and stockholders' equity                   $  35,545   $  22,710
                                                                   =========   =========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-4
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                      (in thousands, except per share data)

                                   ----------

<TABLE>
<CAPTION>
                                                     2006           2005           2004
                                                 ------------   ------------   ------------
<S>                                              <C>            <C>            <C>
Revenues                                         $     77,128   $     53,378   $     26,281
Costs of revenues                                      67,155         46,897         24,139
                                                 ------------   ------------   ------------
Gross profit                                            9,973          6,481          2,142
Selling, general and administrative expenses            5,147          3,657          3,452
                                                 ------------   ------------   ------------
Operating income (loss)                                 4,826          2,824         (1,310)
                                                 ------------   ------------   ------------
Other income :
  Interest income, net                                    317             24              4
  Gain on sales of marketable securities                   44             15             48
                                                 ------------   ------------   ------------
Total other income                                        361             39             52
                                                 ------------   ------------   ------------
Income (loss) before provision for
 taxes                                                  5,187          2,863         (1,258)
Provision for income taxes                              2,422            152             22
                                                 ------------   ------------   ------------
Net income (loss)                                $      2,765   $      2,711   $     (1,280)
                                                 ============   ============   ============
Basic income (loss) per common share             $        .49   $        .50   $       (.24)
                                                 ============   ============   ============
Diluted income (loss) per common share           $        .48   $        .50   $       (.24)
                                                 ============   ============   ============
Weighted average common shares outstanding -
  Basic                                             5,667,090      5,470,311      5,470,311
  Diluted                                           5,793,772      5,470,311      5,470,311

Cash dividend declared and paid per share        $        .06   $          -   $          -
                                                 ============   ============   ============
</TABLE>

                 See notes to consolidated financial statements.

                                       F-5
<PAGE>

                            KSW, INC. AND SUBSIDIARY

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                 (in thousands)

                                   ----------

<TABLE>
<CAPTION>
                                                                       2006       2005       2004
                                                                     --------   --------   --------
<S>                                                                  <C>        <C>        <C>
Net income (loss)                                                    $  2,765   $  2,711   $ (1,280)
                                                                     --------   --------   --------
Other comprehensive income (loss) before tax:
  Net unrealized holding gains arising during the year                     73         55         79
  Less: reclassification adjustment for gains included in net
   income (loss)                                                          (44)       (15)       (48)
                                                                     --------   --------   --------
  Other comprehensive income before tax                                    29         40         31
Income tax related to items of other comprehensive
 income (loss)                                                            (13)       (19)       (14)
                                                                     --------   --------   --------
Other comprehensive income, net of tax                                     16         21         17
                                                                     --------   --------   --------
Total comprehensive income (loss)                                    $  2,781   $  2,732   $ (1,263)
                                                                     ========   ========   ========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-6
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

<TABLE>
<CAPTION>
                                                                                              ACCUMULATED
                                               COMMON STOCK        ADDITIONAL   RETAINED         OTHER
                                           ---------------------    PAID-IN     EARNINGS     COMPREHENSIVE
                                            SHARES      AMOUNT      CAPITAL     (DEFICIT)       INCOME         TOTAL
                                           ---------   ---------   ----------   ---------    -------------   ---------
<S>                                        <C>         <C>         <C>          <C>          <C>             <C>
Balances, December 31, 2003                5,470,311   $      54   $    9,729   $  (1,778)   $          44   $   8,049
Net loss                                           -           -            -      (1,280)               -      (1,280)
Net unrealized gains on available
 for sale securities                               -           -            -           -               17          17
                                           ---------   ---------   ----------   ---------    -------------   ---------
Balances, December 31, 2004                5,470,311          54        9,729      (3,058)              61       6,786
Net income                                         -           -            -       2,711                -       2,711
Net unrealized gains on available
 for sale securities                               -           -            -           -               21          21
                                           ---------   ---------   ----------   ---------    -------------   ---------
Balances, December 31, 2005                5,470,311          54        9,729        (347)              82       9,518

Net income                                         -           -            -       2,765                -       2,765
Exercise of stock options                    287,832           4        1,108           -                -       1,112
Stock-based compensation                           -           -           53           -                -          53
Cash dividend paid - $.06 per share                -           -            -        (341)               -        (341)
Net unrealized gains on available for
  sale securities                                  -           -            -           -               16          16
                                           ---------   ---------   ----------   ---------    -------------   ---------
Balances, December 31, 2006                5,758,143   $      58   $   10,890   $   2,077    $          98   $  13,123
                                           =========   =========   ==========   =========    =============   =========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-7
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                 (in thousands)

                                   ----------

<TABLE>
<CAPTION>
                                                             2006       2005       2004
                                                           --------   --------   --------
<S>                                                        <C>        <C>         <C>
Reconciliation of net income (loss) to net cash
 from operating activities:

    Net income (loss)                                      $  2,765   $  2,711   $ (1,280)
  Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
    Depreciation and amortization                                66         62         67
    Deferred income taxes (benefit)                             856        101        (14)
    Tax benefits from exercise of stock
     options                                                   (318)         -          -
    Allowance for doubtful accounts                            (200)         -          -
    Realized gains on sales of
     marketable securities                                      (44)       (15)       (48)
    Stock-based compensation expense
     related to stock option plan                               690          -          -
  Changes in assets (increase) decrease:
    Accounts receivable                                      (1,118)    (5,639)     1,992
    Retainage receivable                                     (2,802)      (776)       171
    Costs and estimated earnings in excess of
     billings on uncompleted contracts                         (537)      (244)       386
    Prepaid expenses and other receivables                     (103)        60        216

Changes in liabilities increase (decrease):
    Accounts payable                                          2,427      4,627        (72)
    Retainage payable                                         1,222        555       (120)
    Accrued payroll and benefits                                390        322       (257)
    Accrued expenses                                             90         58        (34)
    Billings in excess of costs and estimated
     earnings on uncompleted contracts                        3,652        503     (1,175)
    Income taxes payable                                      1,449          -          -
                                                           --------   --------   --------
      Net cash provided by (used in) operating
       activities                                             8,485      2,325       (168)
                                                           --------   --------   --------
</TABLE>

                                   (continued)

                                       F-8
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONCLUDED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                 (in thousands)

                                   ----------

<TABLE>
<CAPTION>
                                                        2006        2005        2004
                                                      --------    --------    --------
<S>                                                   <C>         <C>         <C>
Cash flows from investing activities:
  Proceeds received on sales of
   marketable securities                              $    171    $    153    $    676
  Purchases of marketable securities                       (12)       (163)       (685)
  Purchases of property and
   equipment                                              (210)        (76)        (19)
                                                      --------    --------    --------
    Net cash used in investing
     activities                                            (51)        (86)        (28)
                                                      --------    --------    --------
Cash flows from financing activities:
  Proceeds from exercise of stock
   options                                                 475           -           -
  Tax benefits from exercise of stock
   options                                                 318           -           -
  Cash dividends paid                                     (341)          -           -
                                                      --------    --------    --------
    Net cash provided by financing
     activities                                            452           -           -
                                                      --------    --------    --------
    Net increase (decrease) in cash                      8,886       2,239        (196)
Cash, beginning of year                                  5,199       2,960       3,156
                                                      --------    --------    --------
Cash and cash equivalents, end of year                $ 14,085    $  5,199    $  2,960
                                                      ========    ========    ========
Supplemental disclosure of cash
 flow information:

  Cash paid during the year for:

    Interest                                          $     13    $     13    $     15

    Income taxes                                      $    142    $     51    $     36
</TABLE>

                 See notes to consolidated financial statements.

                                       F-9
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(1)      PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS

         The consolidated  financial statements for the years ended December 31,
         2006,  2005  and  2004  include  the  accounts  of  KSW,  Inc.  and its
         wholly-owned  subsidiary,  KSW Mechanical Services,  Inc., collectively
         "the Company." All material intercompany accounts and transactions have
         been eliminated in consolidation.

         The  Company  furnishes  and  installs  heating,  ventilating  and  air
         conditioning  systems and processes  piping systems for  institutional,
         industrial,   commercial,   high-rise   residential  and  public  works
         projects,  primarily in the State of New York.  The Company also serves
         as a mechanical trade manager,  performing project management  services
         relating  to  the  mechanical   trades,   and  as  a   constructability
         consultant. The Company considers itself to be one operating segment.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A)      REVENUE AND COST RECOGNITION

                  Revenue  is  primarily   recognized  on  the   "percentage  of
                  completion"  method for long-term  construction  contracts not
                  yet  completed,  measured  by the  percentage  of total  costs
                  incurred to date to estimated  total costs at  completion  for
                  each  contract.  This  method is utilized  because  management
                  considers the cost-to-cost method the best method available to
                  measure  progress on these  contracts.  Revenues and estimated
                  total costs at completion  are adjusted  monthly as additional
                  information  becomes  available  and based upon the  Company's
                  internal   tracking   systems.   Because   of   the   inherent
                  uncertainties   in  estimating   revenue  and  costs,   it  is
                  reasonably possible that the estimates used will change within
                  the near term.

                  Contract costs include all direct material and labor costs and
                  those other  indirect  costs  related to contract  performance
                  including,  but not limited to,  indirect  labor,  subcontract
                  costs  and  supplies.  General  and  administrative  costs are
                  charged to expense as incurred.

                  The Company has  contracts  that may extend over more than one
                  year; therefore, revisions in cost and profit estimates during
                  the course of the work are reflected in the accounting  period
                  in which the facts, which require the revisions, become known.

                  Provisions for estimated  losses on uncompleted  contracts are
                  made in the period in which such losses are determined.

                                      F-10
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D

         (A)      REVENUE AND COST RECOGNITION - CONT'D

                  The Company does not  record  any income from claims until the
                  claims have been received or awarded.

                  Revenues  recognized in excess of amounts  billed are recorded
                  as a current  asset  under the  caption  "Costs and  estimated
                  earnings  in excess of  billings  on  uncompleted  contracts."
                  Billings in excess of revenues  recognized  are  recorded as a
                  current  liability  under the caption  "Billings  in excess of
                  costs and estimated earnings on uncompleted contracts."

                  In accordance with construction industry practice, the Company
                  reports  in  current  assets  and  liabilities  those  amounts
                  relating to construction contracts realizable and payable over
                  a period in excess of one year.

                  Fees for the  management of certain  contracts are  recognized
                  when services are provided.

         (B)      CASH AND CASH EQUIVALENTS

                  The  Company  considers  all highly  liquid  instruments  with
                  original  maturities  of  three  months  or  less  to be  cash
                  equivalents.   At  December  31,  2005,  there  were  no  cash
                  equivalents. At December 31, 2006, cash equivalents consist of
                  money market accounts.

         (C)      MARKETABLE SECURITIES

                  Marketable  securities,  consisting of equity securities,  are
                  classified as  "available-for-sale"  securities and are stated
                  at fair market value.  Realized  gains and losses,  determined
                  using the  specific  identification  method,  are  included in
                  earnings.  Unrealized holding gains and losses are reported as
                  comprehensive   income  (loss)  in  a  separate  component  of
                  stockholders' equity.

                                      F-11
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D

         (D)      CONTRACTS RECEIVABLE

                  Accounts  and  retainage   receivable   from   furnishing  and
                  installing heating,  ventilating and air conditioning  systems
                  and process piping systems are based on contracted prices. The
                  Company may  establish an allowance  for  uncollectible  trade
                  accounts  and  retainage   receivable  based  upon  historical
                  collection  experience and management's periodic evaluation of
                  the  collectibility  of  outstanding  accounts  and  retainage
                  receivable on an account-by-account basis. Accounts receivable
                  and  contract  retentions  are due  based on  contract  terms.
                  Amounts  are  deemed  delinquent  when  they are not  received
                  within  their  contract  terms.   Delinquent  receivables  are
                  written-off based on individual credit evaluation and specific
                  circumstances of the customer.

         (E)      CREDIT RISK

                  Financial instruments, which potentially expose the Company to
                  concentrations  of credit risk,  consist primarily of cash and
                  trade accounts and retainage receivables.

                  The Company  maintains  its cash  accounts at balances,  which
                  exceed federally insured limits for such accounts. The Company
                  limits its credit  risk by  selecting  financial  institutions
                  considered  to be highly  creditworthy.  At December 31, 2006,
                  amounts  in  excess  of  federally   insured   limits  totaled
                  approximately $15,176.

                  Trade accounts and retainage  receivables,  at times,  are due
                  from government  agencies,  municipalities  and private owners
                  located in the New York  metropolitan  area.  The Company does
                  not require  collateral in most cases,  but may file claims or
                  statutory liens against the construction projects if a default
                  in payment  occurs.  Trade accounts and retainage  receivables
                  from   the   Company's   three   largest   customers   totaled
                  approximately  $13,177  and $7,760 at  December  31,  2006 and
                  2005, respectively.

         (F)      PROPERTY AND EQUIPMENT

                  Property  and  equipment  is stated at cost.  Depreciation  is
                  computed  over the  estimated  useful  lives,  generally  five
                  years, of the assets using the straight-line method. Leasehold
                  improvements  are  amortized  over the lesser of the estimated
                  useful  lives of the assets to which they apply or the related
                  lease term.  Repairs and maintenance are charged to operations
                  in the period incurred.

                                      F-12
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D

         (G)      INCOME TAXES

                  The Company uses the asset and liability  method of accounting
                  for income taxes recommended in SFAS No. 109,  "Accounting for
                  Income  Taxes."  Deferred  taxes are  recognized for temporary
                  differences  between the bases of assets and  liabilities  for
                  financial  statement  and income tax  purposes.  The temporary
                  differences  relate primarily to different  accounting methods
                  used  for   depreciation  and  amortization  of  property  and
                  equipment,  goodwill,  allowance for doubtful accounts and net
                  operating  loss   carryforwards.   A  valuation  allowance  is
                  recorded  for  deferred tax assets when it is more likely than
                  not that some or all of the  deferred  tax assets  will not be
                  realized through future operations.

         (H)      EARNINGS PER SHARE

                  Basic  earnings per share includes no dilution and is computed
                  by dividing  income  available to common  shareholders  by the
                  weighted  average number of common shares  outstanding for the
                  period.  Diluted  earnings  per share  reflect,  in periods in
                  which they have a dilutive effect, the effect of common shares
                  issuable upon the exercise of stock  options.  The  difference
                  between  reported  basic and diluted  weighted  average common
                  shares  results from the  assumption  that all dilutive  stock
                  options outstanding were exercised.

         (I)      USE OF ESTIMATES

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

         (J)      STOCK OPTIONS

                  On January 1, 2006, the Company  adopted  Statement No. 123-R,
                  "Share Based Payment" ("SFAS 123-R").  SFAS 123-R requires all
                  share based payments to employees and non-employee  directors,
                  including  grants of stock  options,  to be  recognized in the
                  financial  statements  based on the  awards  fair value at the
                  date  of  grant  (pro  forma   disclosure   is  no  longer  an
                  alternative to financial statement  recognition).  The Company
                  has  elected to adopt SFAS 123-R on the  modified  prospective
                  method.

                                      F-13
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D

         (J)      STOCK OPTIONS - CONT'D

                  Under the modified prospective method of transition under SFAS
                  123-R,  compensation  costs in 2006 include  costs for options
                  granted prior to, but not vested as of December 31, 2005,  and
                  options vested in 2006.  Therefore,  results for prior periods
                  have not been restated.

                  Prior to January  1,  2006,  the  Company  applied  Accounting
                  Principles  Board Opinion 25,  "Accounting for Stock Issued to
                  Employees" (APB 25), and related interpretations.  The Company
                  did not record compensation expense because the exercise price
                  of the shares was equal to the market price at the date of the
                  grant.  SFAS 123,  "Accounting for Stock Based  Compensation -
                  Transition  and  Disclosure",  requires  proforma  net  income
                  disclosures  as if the fair value based method defined in SFAS
                  No. 123 has been applied.  The Company  continued to apply the
                  provisions  of APB 25 and provided  the  proforma  disclosures
                  required by SFAS 123 and amended by SFAS 148.

                  The Company  uses the  Black-Scholes  option - pricing  model,
                  which  requires  the input of  subjective  assumptions.  These
                  assumptions  include  estimating  the length of time employees
                  will retain their vested stock options before  exercising them
                  ("expected term"),  the estimated  volatility of the Company's
                  common  stock price over the  expected  term and the number of
                  options  that  will  ultimately  not  complete  their  vesting
                  requirements   ("forfeitures").   Changes  in  the  subjective
                  assumptions  can materially  affect the estimate of fair value
                  stock-based compensation and consequently,  the related amount
                  recognized on the consolidated statements of income.

         (K)      FINANCIAL INSTRUMENTS

                  The carrying value of marketable securities  approximates fair
                  value as determined by market  quotes.  The carrying  value of
                  receivables  and  payables  and other  amounts  arising out of
                  normal contract activities, including retentions, which may be
                  settled beyond one year, approximates fair value.

                                      F-14
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'D

         (L)      IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

                  In July 2006, the Financial  Accounting Standards Board (FASB)
                  issued FASB Interpretation No. 48, "Accounting for Uncertainty
                  in Income Taxes, an  interpretation of FASB Statement No. 109"
                  (FIN 48). FIN 48 clarifies the accounting  for  uncertainty in
                  income taxes by prescribing  the  recognition  threshold a tax
                  position is required to meet before  being  recognized  in the
                  financial   statements.   It   also   provides   guidance   on
                  derecognition,   classification,   interest   and   penalties,
                  accounting interim periods, disclosure, and transition. FIN 48
                  is effective  for fiscal years  beginning  after  December 15,
                  2006 and is required to be adopted by the Company in 2007. The
                  adoption of FIN 48 is not  expected to have a material  impact
                  on  the  Company's  consolidated  results  of  operations  and
                  financial condition.

                  In September  2006,  the FASB issued SFAS No. 157, "Fair Value
                  Measurements" (SFAS 157). SFAS 157 provides guidance for using
                  fair value to measure assets and liabilities. It also responds
                  to  investors'  requests  for expanded  information  about the
                  extent to which  companies  measure assets and  liabilities at
                  fair value,  the information  used to measure fair value,  and
                  the effect of fair value  measurements  on earnings.  SFAS 157
                  applies whenever other standards require (or permit) assets or
                  liabilities to be measured at fair value,  and does not expand
                  the use of fair  value in any new  circumstances.  SFAS 157 is
                  effective  for  financial  statements  issued for fiscal years
                  beginning after November 15, 2007. The adoption of SFAS 157 is
                  not  expected  to  have a  material  impact  on the  Company's
                  consolidated results of operations and financial condition.

                  In February 2007, the FASB issued Statement No. 159, "The Fair
                  Value Option for financial Assets and Financial  Liabilities -
                  including an amendment  of FASB  Statement  No. 115" (SFAS No.
                  159"). SFAS No. 159 permits entities to choose to measure many
                  financial  instruments  and certain other items at fair value.
                  SFAS  No.  159  is  effective  for  our  financial  statements
                  beginning with the first quarter of 2008. The adoption of SFAS
                  No.  159 is not  expected  to have a  material  impact  on the
                  Company's  consolidated  results of  operations  and financial
                  condition.

                                      F-15
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(3)      MARKETABLE SECURITIES

         The cost and fair values of the  marketable  securities,  classified as
         available-for-sale  securities  at December  31,  2006 and 2005,  is as
         follows:

<TABLE>
<CAPTION>
                                                  Gross
                                                Unrealized       Gross
                                                 Holding       Unrealized        Fair
                                        Cost      Gains      Holding Losses     Value
                                        -----   ----------   --------------   ----------
         <S>                            <C>     <C>          <C>              <C>
         December 31, 2006:
         Marketable equity securities   $ 481   $      195   $          (13)  $      663
                                        =====   ==========   ==============   ==========

         December 31, 2005:
         Marketable equity securities   $ 621   $      171   $          (18)  $      774
                                        =====   ==========   ==============   ==========
</TABLE>

         At  December  31, 2006 and 2005,  gross  unrealized  holding  losses on
         available  for  sale  securities  were $13 and  $18,  respectively.  At
         December 31, 2006 and 2005, gross unrealized holding gains on available
         for sale securities were $195 and $171, respectively. The change in net
         unrealized  holding  gains is $16 and $21 for the years ended  December
         31, 2006 and 2005,  respectively.  During the years ended  December 31,
         2006 and  2005,  available-for-sale  securities  were  sold  for  total
         proceeds  of  approximately  $171 and  $153,  respectively.  The  gross
         realized gains on these sales totaled approximately $44 and $15 for the
         years ended December 31, 2006 and 2005, respectively.

(4)      CONTRACTS RECEIVABLE

                                                       2006       2005
                                                     --------   --------
         Accounts receivable:
           Billed
             Contracts in progress                   $  9,809   $  7,779
             Completed contracts                        3,396      3,990
           Unbilled                                         -        318
                                                     --------   --------
                                                       13,205     12,087
         Less:  Allowance for doubtful collections          -        200
                                                     --------   --------
                                                     $ 13,205   $ 11,887
                                                     ========   ========
         Retainage receivable                        $  5,566   $  2,764
                                                     ========   ========

         During the year ended  December  31,  2006,  the Company  reversed  the
         allowance for doubtful  accounts totaling $200 and there were no direct
         write-downs of accounts and retainage receivable during the year.

         At December 31, 2006, retained contract receivables totaling $1,265 are
         not expected to be realized within one year.

                                      F-16
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(5)      CONSTRUCTION CONTRACTS

         Information  with respect to contracts in progress at December 31, 2006
         and 2005 is as follows:

                                                           2006       2005
                                                         --------   --------
           Costs on uncompleted contracts                $ 64,838   $ 25,385

           Estimated earnings thereon                       9,806      3,472
                                                         --------   --------
                                                           74,644     28,857

           Less billings applicable thereto                78,614     29,712
                                                         --------   --------
                                                         $ (3,970)  $   (855)
                                                         ========   ========

         Included in the  accompanying  consolidated  balance  sheets  under the
         following captions:

                                                           2006       2005
                                                         --------   --------
           Costs and estimated earnings in excess of
            billings on uncompleted contracts            $  1,017   $    480
           Billings in excess of costs and estimated
            earnings on uncompleted contracts              (4,987)    (1,335)
                                                         --------   --------
                                                         $ (3,970)  $   (855)
                                                         ========   ========

(6)      PROPERTY AND EQUIPMENT

         Property and  equipment  at December 31, 2006 and 2005  consists of the
         following:

                                                           2006       2005
                                                         --------   --------
           Machinery and equipment                       $    631   $    481
           Furniture and fixtures                             815        769
           Leasehold improvements                             845        831
                                                         --------   --------
                                                            2,291      2,081

           Less accumulated depreciation and
            amortization                                    2,035      1,969
                                                         --------   --------
                                                         $    256   $    112
                                                         ========   ========

         Depreciation  and   amortization   expense  relating  to  property  and
         equipment  was  approximately  $66,  $62 and $67  for the  years  ended
         December 31, 2006, 2005 and 2004, respectively.

                                      F-17
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(7)      INCOME TAXES

         For the years ended December 31, 2006, 2005 and 2004, components of the
         provision for income taxes are as follows:

                              2006      2005      2004
                             -------   -------   -------
         Current
           Federal           $   873   $     -   $     -
           State and local       693        51        36
                             -------   -------   -------
                             $ 1,566        51        36
                             -------   -------   -------
         Deferred
           Federal               540        60        (8)
           State and local       316        41        (6)
                             -------   -------   -------
                                 856       101       (14)
                             -------   -------   -------
             Total           $ 2,422   $   152   $    22
                             =======   =======   =======

         The Company provided a valuation allowance against its net deferred tax
         assets based upon an uncertainty  regarding the ultimate realization of
         these  deferred  tax  assets in their  entirety.  During the year ended
         December 31, 2004, the deferred tax valuation allowance increased $581.
         At December  31, 2004,  the  outstanding  deferred tax asset  valuation
         allowance  was $1,220.  During the year ended  December 31,  2005,  the
         Company  generated  profits  which  reduced this deferred tax valuation
         allowance  and  the  Company  reversed  the  outstanding  deferred  tax
         valuation  allowance.  This  allowance was reversed after the Company's
         management  re-evaluated the likelihood that these assets could be used
         in their  entirety and concluded  that the valuation  allowance was not
         required.

         A  reconciliation  of the  provision  for  income  taxes  with  amounts
         determined by applying the statutory  U.S.  federal  income tax rate to
         income before taxes is as follows:

<TABLE>
<CAPTION>
                                                                2006       2005       2004
                                                              --------   --------   --------
         <S>                                                  <C>        <C>        <C>
         Computed tax at the federal statutory rate of 34%    $  1,764   $    974   $   (428)
         State and local taxes, net of federal benefit             628        347       (152)
         Valuation allowance                                         -     (1,220)       581
         Other items, net                                           30         51         21
                                                              --------   --------   --------
         Provision for income taxes                           $  2,422   $    152   $     22
                                                              ========   ========   ========
</TABLE>

                                      F-18
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(7)      INCOME TAXES - CONT'D

         The details of deferred tax assets and liabilities at December 31, 2006
         and 2005 are as follows:

                                                            2006       2005
                                                          --------   --------
         Deferred income tax assets:

           Net operating loss carry forwards              $      -   $    362
           Amortization of goodwill                            313        621
           Property and equipment                              225        236
           Allowance for doubtful accounts                       -         92
           Other tax carryforwards                              51        109
                                                          --------   --------
         Total deferred income tax assets                      589      1,420
                                                          --------   --------

         Deferred income tax liabilities:
             Unrealized gains on marketable securities          84         71
                                                          --------   --------
                                                                84         71
                                                          --------   --------

             Deferred income tax assets, net              $    505   $  1,349
                                                          ========   ========

         At December 31, 2005, the Company had net operating loss carry forwards
         remaining of approximately  $1,500, which were utilized during the year
         ended  December  31,  2006.  At  December  31,  2006 and 2005,  the net
         deferred tax asset is included in long-term  assets in the accompanying
         balance sheets.

(8)      STOCKHOLDERS' EQUITY

         (A)      STOCK OPTION PLAN

                  In 1995,  the Board of  Directors  of the Company  adopted the
                  1995 Stock  Option  Plan ("the  Plan").  The Plan  enabled the
                  Company  to make  incentive-based  compensation  awards to its
                  employees, officers, directors and consultants.

                                      F-19
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(8)      STOCKHOLDERS' EQUITY - CONT'D

         (A)      STOCK OPTION PLAN - CONT'D

                  On  August  8,  2005,  the  Board of  Directors  extended  the
                  expiration date of the 526,667 outstanding options to December
                  2010 from December  2005,  and increased the exercise price to
                  $1.66 from $1.50. In addition,  on August 8, 2005, the Company
                  issued 80,000  options,  at $1.66 per share, to an officer and
                  three Directors.  The plan expired December 2005, therefore no
                  new options can be granted  under this plan.  At December  31,
                  2005,  the  Company  had  50,000  outstanding  options  at  an
                  exercise price of $1.50 and 606,667  outstanding options at an
                  exercise price of $1.66.

                  On January 1, 2006,  the Company  adopted FASB  Statement  No.
                  123-R,  "Share  Based  Payment"  ("SFAS  123-R").  SFAS  123-R
                  requires   all  share   based   payments  to   employees   and
                  non-employee directors,  including grants of stock options, to
                  be recognized in the financial  statements based on the awards
                  fair value at the date of grant (pro  forma  disclosure  is no
                  longer an alternative to financial statement recognition). The
                  Company  has  elected  to adopt  SFAS  123-R  on the  modified
                  prospective method.

                  Under the modified prospective method of transition under SFAS
                  123-R,  compensation  costs in 2006 include  costs for options
                  granted prior to, but not vested as of December 31, 2005,  and
                  options vested in 2006.  Therefore,  results for prior periods
                  have not been restated.

                  On November 6, 2006,  the Company  corrected the vesting dates
                  for options  issued to three outside  directors to comply with
                  the plan requirement that options be issued when a Director is
                  elected to the Board.

                  For the year ended  December  31, 2006,  the Company  incurred
                  expenses  related  to six  individuals  exercising  options to
                  purchase  287,832  shares  totaling  approximately  $640.  The
                  compensation  expense  related to the vesting of stock options
                  due to the  adoption of SFAS 123-R,  resulted in an expense to
                  the Company totaling  approximately  $53 during the year ended
                  December 31, 2006.

                  At December  31,  2006,  the  Company  had 30,000  outstanding
                  options at an exercise price of $1.50 and 338,835  outstanding
                  options at an exercise  price of $1.66.  During the year ended
                  December 31, 2006,  53,333 stock  options that were not vested
                  as of  December  31,  2005  vested,  and 13,332 of these stock
                  options were exercised.  At December 31, 2006,  26,667 options
                  of the 338,835  outstanding  options exercisable at $1.66 have
                  not vested.

                                      F-20
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(8)      STOCKHOLDERS' EQUITY - CONT'D

         (A)      STOCK OPTION PLAN - CONT'D

                  At  December  31,  2006,  there  was   approximately   $13  of
                  unrecognized    compensation   costs   related   to   unvested
                  share-based compensation awards granted. That cost is expected
                  to be recognized over the next 1.7 years.

                  The  following  table  illustrates  the  effect on net  income
                  (loss) and  earnings  per share if the Company had applied the
                  fair value  recognition  provisions  of SFAS 123-R  during the
                  years  ended  December  31, 2005 and 2004  presented.  For the
                  purposes of this proforma disclosure, the value of the options
                  is estimated  using  Black-Scholes  option  pricing  model and
                  amortized to expense over the vesting  periods (in  thousands,
                  except per share data).

                                                              2005       2004
                                                            --------   --------
                  Net income (loss) - as reported           $  2,711   $ (1,280)
                  Stock option compensation, net of tax         (194)         -
                                                            --------   --------
                  Net income - pro forma                    $  2,517   $ (1,280)
                                                            ========   ========

                  Basic net income (loss) per share:
                  As reported                               $    .50   $   (.24)
                  Pro form                                  $    .50   $   (.24)

                  Diluted net income (loss) per share)
                  As reported                               $    .46   $   (.24)
                  Pro form                                  $    .46   $   (.24)

                                      F-21
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(8)      STOCKHOLDERS' EQUITY - CONT'D

         (A)      STOCK OPTION PLAN - CONT'D

Changes that  occurred in options  outstanding  during  2006,  2005 and 2004 are
summarized below:

<TABLE>
<CAPTION>
                                                   2006                   2005                   2004
                                                 Weighed                Weighed                Weighed
                                                 Average                Average                Average
                                     Number of   Exercise   Number of   Exercise   Number of   Exercise
                                      Shares      Price      Shares      Price      Shares      Price
                                     ---------   --------   ---------   --------   ---------   --------
<S>                                   <C>        <C>         <C>        <C>          <C>       <C>
Outstanding at beginning of year       656,667   $   1.65     576,667   $   1.50     576,667   $   1.50

Expired/ Canceled                            -                      -          -

Granted - August 2005                        -                 80,000   $   1.66           -

Modified - August 2005                       -               (526,667)     (1.50)          -

Modified - August 2005                       -                526,667   $   1.66           -

Exercised                             (287,832)  $   1.65           -                      -
                                     ---------   --------   ---------              ---------

Outstanding at end of year             368,835   $   1.65     656,667   $   1.65     576,667   $   1.50
                                     =========              =========              =========

Exercisable at end of year             342,168   $   1.65     576,667   $   1.65     576,667   $   1.50
                                     =========              =========              =========
</TABLE>

         The fair value of each option  grant is  estimated on the date of grant
         using  the  Black-Scholes   option-pricing  model  with  the  following
         weighted-average  assumptions used for 80,000 grants in 2005:  dividend
         yield of 0%; expected volatility of 64.12%;  risk-free interest rate of
         4.69%;  and expected lives of five years.  For the 526,667 options that
         were modified in 2005, an expected life of 2.5 years was used.

                                      F-22
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(8)      STOCKHOLDERS' EQUITY - CONT'D

         (A)      STOCK OPTION PLAN - CONT'D

                  Cash  proceeds,  tax benefits and  intrinsic  value related to
                  total stock  options  exercised  during the years end December
                  31, 2006, 2005 and 2004, respectively, are as follows:

<TABLE>
<CAPTION>
                                                                      2006      2005      2004
                                                                     -------   -------   -------
                  <S>                                                <C>       <C>       <C>
                  Proceeds from stock options exercised              $   475   $     -   $     -

                  Tax benefits related to stock options exercised    $   318   $     -   $     -

                  Intrinsic value of stock options exercised         $   636   $     -   $     -
</TABLE>

                  The following table summarizes information about stock options
                  outstanding at December 31, 2006:

                           Exercise Price    Shares    Contractual Life
                           --------------   --------   ----------------
                                $ 1.50        30,000       2.8 years
                                $ 1.66       272,167       3.9 years
                                $ 1.66        66,668       8.6 years

<TABLE>
<CAPTION>
                                                                    Term in
                                          Shares    Average Price    Years     Value
                                          -------   -------------   -------   -------
                  <S>                     <C>       <C>                <C>    <C>
                  Outstanding Options:    368,835   $        1.65      4.71   $ 2,121
                  Exercising Options      342,168   $        1.65      4.40   $ 1,967
</TABLE>

         (B)      DIVIDEND DISTRIBUTION

                  On May 8, 2006,  the Company's  Board of Directors  declared a
                  special  cash  dividend of $.06 per share to  shareholders  of
                  record  as of  May  24,  2006.  The  aggregate  amount  of the
                  dividend was $341 and such dividend was paid on June 15, 2006.

         (C)      PREFERRED STOCK

                  The  Company  is  authorized  to  issue  1,000,000  shares  of
                  preferred  stock.  As of  December  31,  2006,  no  shares  of
                  preferred stock have been issued by the Company.

                                      F-23
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(9)      EARNINGS (LOSS) PER SHARE

<TABLE>
<CAPTION>
                                                          2006           2005           2004
                                                      ------------   ------------   ------------
         <S>                                          <C>            <C>            <C>
         Net earnings (loss)                          $  2,765,000   $  2,711,000   $ (1,280,000)
                                                      ============   ============   ============

         Earnings (loss) per share - basic:
           Weighted average shares
            outstanding during the year                  5,667,090      5,470,311      5,470,311
                                                      ============   ============   ============

         Earnings (loss) per common share - basic     $        .49   $        .50   $       (.24)
                                                      ============   ============   ============

         Earnings (loss) per share - diluted:
           Weighted average shares
            outstanding during the year                  5,667,090      5,470,311      5,470,311

         Effect of stock option dilution                   126,682              -              -
                                                      ------------   ------------   ------------

         Total shares outstanding for
          purposes of calculating diluted
          earnings per share                             5,793,772      5,470,311      5,470,311
                                                      ============   ============   ============

         Earnings (loss) per common shares
          and common share equivalent -
          diluted                                     $        .48   $        .50   $       (.24)
                                                      ============   ============   ============
</TABLE>

(10)     ACCUMULATED OTHER COMPREHENSIVE INCOME

         At December 31, 2006 and 2005,  accumulated other comprehensive income,
         which  consists of net  unrealized  holding gains on available for sale
         securities, is as follows:

                                            2006      2005
                                            ----      ----
                  Beginning balance         $ 82      $ 61
                  Current period change       16        21
                                            ----      ----
                  Ending balance            $ 98      $ 82
                                            ====      ====

                                      F-24
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

(11)     COMMITMENTS AND CONTINGENCIES

         (A)      PERFORMANCE AND PAYMENT BONDS

                  The Company is contingently liable to a surety under a general
                  indemnity  agreement.  The  Company  agrees to  indemnify  the
                  surety  for any  payments  made on  contracts  of  suretyship,
                  guaranty  or  indemnity  as a result of the Company not having
                  the  financial  capacity  to  complete  projects.   Management
                  believes  the  likelihood  of the  surety  having to  complete
                  projects is remote.  The  contingent  liability is the cost of
                  completing  all bonded  projects,  subject to bidding by third
                  parties,  which  is  an  undeterminable   amount.   Management
                  believes that all contingent  liabilities will be satisfied by
                  performance on the specific bonded contracts involved.

         (B)      OPERATING LEASE

                  The  Company is  obligated  under a  non-cancelable  operating
                  lease, for office space with minimum future rental payments at
                  December 31, 2006 as follows:

                           YEAR ENDING
                           DECEMBER 31,
                           ------------
                               2007       $  195
                               2008          199
                               2009          100
                                          ------
                                          $  494
                                          ======

                                      F-25
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(11)     COMMITMENTS AND CONTINGENCIES - CONT'D

         (B)      OPERATING LEASE - CONT'D

                  Under  the  terms  of the  lease  agreement,  the  Company  is
                  obligated to pay monthly rental amounts of approximately  $16.
                  The Company has exercised  the first  five-year  option,  that
                  extended  the lease term  through  June 2004.  The Company has
                  exercised  two options,  each for a period of one year for the
                  periods July 2004 through June 2005 and July 2005 through June
                  2006.  The Company  also  exercised a  three-year  option that
                  extended the lease through 2009.

                  Rent expense for the years ended December 31, 2006, 2005 and
                  2004 amounted to approximately $191, $185, and $185,
                  respectively.

         (C)      OPERATING LEASE- RELATED PARTY

                  The  Company  had an  operating  lease  with a related  entity
                  controlled  by its  Chief  Executive  Officer  for  rental  of
                  office,  shop and warehouse  space,  which expired on December
                  31,   2002.   The   Company  is   renting   this  space  on  a
                  month-to-month basis at approximately $8.5 per month.

                  Rent expense,  for the years ended December 31, 2006, 2005 and
                  2004,  amounted to $103 to a related entity  controlled by the
                  Chief Executive Officer in each year.

         (D)      ENVIRONMENTAL REGULATION

                  The Company must comply with certain Federal,  state and local
                  regulations  involving  contract  compliance  as  well  as the
                  disposal of certain toxins. In management's opinion, there are
                  no environmental  contingencies or violations of environmental
                  laws or  regulations,  which  would  have a  material  adverse
                  impact  on the  results  of  operations  or on  the  Company's
                  financial condition.

                                      F-26
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(11)     COMMITMENTS AND CONTINGENCIES - CONT'D

         (E)      LEGAL

                  Other  Proposals  and Claims.  During the ordinary and routine
                  course of its work on construction  projects,  the Company may
                  incur  expenses for work outside the scope of its  contractual
                  obligations,  for which the owner or general contractor agrees
                  that the Company will be entitled to additional  compensation,
                  but  where  there  is  not  yet an  agreement  on  price.  The
                  Company's financial statements include the amounts the Company
                  believes  it  will  ultimately  receive  on  these  authorized
                  proposals.  Also during the course of its work on construction
                  projects,  the Company may incur expenses for work outside the
                  scope   of  its   contractual   obligations,   for   which  no
                  acknowledgment  of liability  exists from the owner or general
                  contractor for such additional  work. These claims may include
                  change  proposals  for extra work or requests for an equitable
                  adjustment to the Company's  contract  price due to unforeseen
                  disruptions  to  its  work.  In  accordance   with  accounting
                  principles  generally accepted in the United States of America
                  for the construction industry, until written acknowledgment of
                  the validity of the claims are received,  claim recoveries are
                  not recognized in the accompanying  financial  statements.  No
                  accruals  have  been  made  in the  accompanying  consolidated
                  financial  statements  related to these proposals for which no
                  acknowledgment of liability exists. While the Company has been
                  generally  successful  in obtaining a favorable  resolution of
                  such claims,  there is no  assurance  that the Company will be
                  successful in the future.

         (F)      EMPLOYMENT AGREEMENT

                  The Company's Chief Executive Officer has a written employment
                  agreement,  which  expires on  December  31, 2007 (See Note 17
                  (A)).  This agreement  provides a base annual  compensation of
                  $450  based  on  a  five-day  work  week,  medical  insurance,
                  disability  insurance  with  payments  equal  to 60%  of  base
                  compensation, a $1 million policy of life insurance payable as
                  directed  by him and a car with a  chauffeur.  His  estate  is
                  entitled  to two  months  pay in the  event of his  death.  In
                  addition,  for the period January 1, 2006 through December 31,
                  2007,  he will receive a bonus equal to 9.5% of the  Company's
                  adjusted annual operating  profits before taxes,  which are in
                  excess of $250. For the year ended December 31, 2006,  accrued
                  bonus  expense  related to this  agreement  was  approximately
                  $570.

                                      F-27
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(11)     COMMITMENTS AND CONTINGENCIES - CONT'D

         (G)      PURCHASE OBLIGATION

                  On May 4, 2006,  the Company  entered into an agreement with a
                  supplier  of  piping   materials,   whereby  the  Company  has
                  committed to purchase certain piping products normally used in
                  its operations, as well as fabrication services, at set prices
                  through  April 30,  2007.  This  agreement  does not cover all
                  types of materials the Company  utilizes on its projects.  The
                  Company has not been able to obtain  fixed  pricing on certain
                  materials,  such as  copper  tubing,  due to  current  pricing
                  volatility.   The  Company   does  not  believe  that  pricing
                  increases on items not covered by this purchase agreement will
                  have a material effect on the Company's results of operations.

(12)     CREDIT FACILITY

                  The  Company  has a line  of  credit  facility  from  Bank  of
                  America,  N.A. which provides  borrowings for working  capital
                  purposes up to $2,000. This facility expires on April 1, 2007,
                  is secured by the  Company's  assets and is  guaranteed by the
                  Company's subsidiary,  KSW Mechanical Services, Inc. (See Note
                  17(B)).

                  Advances  bear  interest,  based on the Company's  option,  at
                  either the bank's  prime  lending  rate plus one  percent  per
                  annum, or the London Interbank Offered  Rate("Libor") plus two
                  and one-half percent per annum.

(13)     CONCENTRATION RISKS

         (A)      LABOR CONCENTRATIONS

                  The Company's direct labor is supplied  primarily by one union
                  through a collective  bargaining  agreement,  which expires in
                  June  2008.   Although  the  Company's  past   experience  was
                  favorable with respect to resolving  conflicting  demands with
                  unions,  it is always possible that a protracted  conflict may
                  occur  which  will  impact  the  renewal  of  the   collective
                  bargaining agreements.

         (B)      CONTRACT REVENUE/SIGNIFICANT CUSTOMERS

                  Revenues   from   the   Company's   largest   customers   were
                  approximately 40%, 18%, 10% and 10% of its contract revenue in
                  2006,  31%, 11%,  11%, 11% and 10% of its contract  revenue in
                  2005 and 32%, 23% and 16% of its contract revenue in 2004.

                                      F-28
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(14)     RETIREMENT PLANS

         (A)      PROFIT-SHARING/401(k) PLAN

                  The Company  sponsors a  profit-sharing/401(k)  plan  covering
                  employees not covered under collective  bargaining  agreements
                  who meet the age and  length of  service  requirements  of the
                  plan. The Company may make discretionary  contributions to the
                  plan.  The  total of  employee  contributions  may not  exceed
                  Federal government limits. The Company expensed  approximately
                  $72, $70 and $60 as a 25% matching  contribution for the years
                  ended December 31, 2006, 2005 and 2004, respectively.

         (B)      MULTIEMPLOYER PENSION PLANS

                  Employees  of the  Company  who are  parties  to a  collective
                  bargaining  (union)  agreement  are  covered by union  pension
                  plans.  The  Company  makes   contributions  to  multiemployer
                  pension  plans that cover its various union  employees.  These
                  plans provide  benefits based on union  members'  earnings and
                  periods of coverage  under the respective  plans.  The Company
                  has  expensed  approximately  $2,524,  $1,207 and $972 for the
                  years ended  December 31, 2006,  2005 and 2004,  respectively,
                  related  to   multi-employer   pension  plans  for  its  union
                  employees.

(15)     BACKLOG

         At  December  31,  2006,  the  Company  had a backlog of  approximately
         $110,200.  Backlog represents the amount of revenue the Company expects
         to  realize  from work to be  performed  on  uncompleted  contracts  in
         progress at year-end and from contractual  agreements on work which has
         not commenced.

                                      F-29
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

(16)     SELECTED QUARTERLY DATA (UNAUDITED)

         The following is unaudited  selected quarterly data for the years ended
         December 31, 2006 and 2005:

                          Year ended December 31, 2006
                -------------------------------------------------
                  First        Second       Third        Fourth
                 quarter      Quarter      Quarter      Quarter      Total
                ----------   ----------   ----------   ----------   --------
Revenues        $   15,761   $   20,132   $   21,644   $   19,591   $ 77,128
Gross profit    $    2,105   $    2,503   $    2,440   $    2,925   $  9,973
Net income      $      346   $      618   $      785   $    1,016   $  2,765
Per share of
 common stock
 earnings
Basic           $      .06   $      .11   $      .14   $      .18   $    .49
Diluted         $      .06   $      .11   $      .13   $      .18   $    .48

Dividends       $        -   $      .06   $        -   $        -   $    .06
Stock prices:
High            $     4.06   $     6.12   $     4.60   $     7.40
Low             $     2.80   $     3.40   $     3.66   $     3.80


                          Year ended December 31, 2005
                -------------------------------------------------
                  First        Second       Third        Fourth
                 Quarter      Quarter      Quarter      Quarter      Total
                ----------   ----------   ----------   ----------   --------
Revenues        $    9,876   $   11,552   $   14,849   $   17,101   $ 53,378
Gross profit    $    1,143   $    1,128   $    1,516   $    2,694   $  6,481
Net income      $      155   $      298   $    1,262   $      996   $  2,711
Per share of
 common stock
 earnings
Basic           $      .03   $      .05   $      .23   $      .19   $    .50
Diluted         $      .03   $      .05   $      .23   $      .19   $    .50

Dividends       $        -   $        -   $        -   $        -   $      -
Stock prices:
High            $      .75   $     1.80   $     2.30   $     3.10
Low             $      .40   $      .66   $     1.60   $     2.06

                                      F-30
<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONCLUDED)
                  YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                        (in thousands, except share data)

                                   ----------

(17)     SUBSEQUENT EVENTS

         (A)      EMPLOYMENT AGREEMENT

                  On March 6, 2007,  the  Company's  Chief  Executive  Officer's
                  written  employment  agreement  was  extended,  under the same
                  terms and conditions, to December 31, 2009.

         (B)      CREDIT FACILITY

                  On March 8, 2007,  the Company  extended  the working  capital
                  credit facility with Bank of America,  N.A for a term expiring
                  March 30, 2008.

                                      F-31
<PAGE>

                                                                     SCHEDULE II

                                    KSW, INC.
                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
                                      000's

<TABLE>
<CAPTION>
                                                 Balance at   Charged to   Charged to                 Balance
                                                 Beginning    costs and      other                     at end
                                                 of period     expenses     accounts    Deductions   of period
                                                 ----------   ----------   ----------   ----------   ----------
<S>                                              <C>          <C>          <C>          <C>          <C>
Description

Year ended December 31, 2006
 allowance for doubtful accounts and returns     $      200   $        -   $        -   $      200   $        -
                                                 ==========   ==========   ==========   ==========   ==========

Year ended December 31, 2005
 allowance for doubtful accounts and returns     $      200   $        -   $        -   $        -   $      200
                                                 ==========   ==========   ==========   ==========   ==========

Year ended December 31, 2004
 allowance for doubtful accounts and returns     $      200   $        -   $        -   $        -   $      200
                                                 ==========   ==========   ==========   ==========   ==========

Year ended December 31, 2006
 deferred income tax valuation                   $        -   $        -   $        -   $        -   $        -
                                                 ==========   ==========   ==========   ==========   ==========

Year ended December 31, 2005
 deferred income tax valuation                   $    1,220   $        -   $        -   $    1,220   $        -
                                                 ==========   ==========   ==========   ==========   ==========

Year ended December 31, 2004
 deferred income tax valuation                   $      639   $      581   $        -   $        -   $    1,220
                                                 ==========   ==========   ==========   ==========   ==========
</TABLE>

                                      F-32
<PAGE>

                                    KSW, INC.
                                INDEX TO EXHIBITS

EXHIBIT NO.                              DESCRIPTION
-----------   ------------------------------------------------------------------
3.1           Amended  and  Restated  Articles  of  Incorporation  of KSW,  Inc.
              (incorporated  herein by reference to Exhibit 3.1 to the Company's
              Registration  Statement on Form S-8 (No.  333-217350),  filed with
              the Commission on February 13, 1997).

3.2           Amended and Restated By-Laws of KSW, Inc.  (incorporated herein by
              reference to Exhibit 3.2 to the Company's  Registration  Statement
              on Form  S-8  (No.  333-217350),  filed  with  the  Commission  on
              February 13, 1997).

10.1          Form of Modification of Lease Agreement dated as of May 1, 1998 by
              and between KSW, Inc, Irvjoy  Partners,  L.P. and I BLDG Co., Inc.
              (incorporated  herein by reference to Exhibit 2.1 to the Company's
              Annual Report on Form 10-K for the fiscal year ended  December 31,
              1998 (Commission File No. 001-32865), filed with the Commission on
              March 30, 1999).

10.2          1995  Stock  Option  Plan of KSW,  Inc.  (incorporated  herein  by
              reference to Exhibit 10.3 to the Company's  Registration Statement
              on Form  10  (Commission  File  No.  001-32865),  filed  with  the
              Commission on November 24, 1995).

10.3          Employment Agreement,  dated September 12, 2005 by and between the
              Company,   KSW   Mechanical   Services,   Inc.  and  Floyd  Warkol
              (incorporated   herein  by  reference  to  Exhibit  10.20  to  the
              Company's   Current  Report  on  Form  8-K  (Commission  File  No.
              001-32865), filed with the Commission on September 12, 2005.

10.4          Amendatory Employment Agreement, dated as of March 6, 2007, by and
              between the Company,  KSW  Mechanical  Services,  Inc.,  and Floyd
              Warkol.

10.5          Line of Credit  Agreement  Letter,  dated March 14, 2006,  between
              KSW, Inc. and Bank of America,  N.A. together with forms of a Line
              of Credit Note,  Rider to Line of Credit  Note, a pledge  security
              agreement  and  guaranty  (incorporated  herein  by  reference  to
              Exhibit 10.21 to the Company's  Annual Report on Form 10-K for the
              year ended  December 3, 2005,  filed with the  Commission on March
              16, 2006).

<PAGE>
                                    KSW, INC.
                                INDEX TO EXHIBITS

10.6          Line of Credit Agreement Letter, dated March 8, 2007, between KSW,
              Inc. and Bank of America, N.A.

11            Statement Regarding Computation of Net Earnings (Loss) Per Share.

21.1          List of Subsidiaries.

23.1          Consent of Marden, Harrison & Kreuter, CPAs, P.C.

31.1          Certification   of  Chief  Executive   Officer  required  by  Rule
              13a-14(a).

31.2          Certification   of  Chief  Financial   Officer  required  by  Rule
              13a-14(a).

32.1          Certification   of  Chief  Executive   Officer  required  by  Rule
              13a-14(b) and 18 U.S.C. Section 1350.

32.2          Certification   of  Chief  Financial   Officer  required  by  Rule
              13a-14(b) and 18 U.S.C. Section 1350.