**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549








**FORM
      10-KSB**





(Mark
      One)




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





For
      the
      fiscal year ended December 31, 2006


Commission
      File Number 0-2000





**Entrx
      Corporation**


(Exact
      name of registrant as specified in its charter)


**Delaware**
                
                **95-2368719**(State
                    or other jurisdiction of
                
                (I.R.S.
                    Employer ID No.)incorporation
                    or organization)


**800
                  Nicollet Mall, Suite 2690****Minneapolis,
                  Minnesota**
              
              **55402**(Address
                  of Principal Executive Office)
              
              (Zip
                  Code)




**Registrant's
      telephone number, including area code (612) 333-0614**





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


Title
                      of each class
                
                Name
                      of each exchangeon which
                    registered******None**
                
                **None**


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





**Common
      Stock -- $.10 Par Value**


**(Title
      of Class)**









Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (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 o





Check
      if
      there is no disclosure of delinquent filers in response to Items 405 of
      Regulation S-B in this form, and no disclosure will be contained, to the best
      of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of the Form 10-KSB or any amendment to
      this Form 10-KSB. o





Indicate
      by checkmark whether the registrant is a shell company (as defined by Rule
      12b-2
      of the Exchange Act). Yes o No x





The
      Company’s revenues from operations for the fiscal year ended December 31, 2006
      totaled $19,517,250.





The
      aggregate market value of the common stock held by nonaffiliates of the
      registrant as of March 6, 2007 was approximately $2,144,483 based on the average
      of the closing bid and asked price of the registrant’s common stock on such
      date. The number of shares outstanding of the registrant’s common stock, as of
      March 6, 2007 was 8,116,147.





Transitional
      Small Business Issuer Format (Check One):





Yes o No x












All
      statements, other than statements of historical fact, included in this Form
      10-KSB, including without limitation the statements under “Management’s
      Discussion and Analysis or Plan of Operation” and “Description of Business” are,
      or may be deemed to be, “forward-looking statements” within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
      Securities Exchange Act of 1934. Such forward-looking statements involve
      assumptions, known and unknown risks, uncertainties, and other factors which
      may
      cause the actual results, performance or achievements of Entrx Corporation
      (the
“Company”) to be materially different from any future results, performance or
      achievements expressed or implied by such forward-looking statements contained
      in this Form 10-KSB. Such potential risks and uncertainties include, without
      limitation; the outcome of existing litigation; competitive pricing and other
      pressures from other businesses in the Company’s markets; the accuracy of the
      Company’s estimate of future liability for asbestos-related injury claims; the
      adequacy of insurance, including the adequacy of insurance to cover current
      and
      future asbestos-related injury claims; the valuation of the Company’s
      investments; collectibility of a loan due from an affiliate of a principal
      shareholder; economic conditions generally and in the Company’s primary markets;
      availability of capital; the adequacy of the Company’s cash and cash
      equivalents; the cost of labor; the accuracy of the Company’s cost analysis for
      fixed price contracts; and other risk factors detailed herein and in other
      of
      the Company’s filings with the Securities and Exchange Commission. The
      forward-looking statements are made as of the date of this Form 10-KSB and
      the
      Company assumes no obligation to update the forward-looking statements or to
      update the reasons actual results could differ from those projected in such
      forward-looking statements. Therefore, readers are cautioned not to place undue
      reliance on these forward-looking statements.  You
      can
      identify these forward-looking statements by forward-looking words such as
      “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate,”
“continue,” and similar words.




**References
      to “we”, “us”, “our”, “the registrant”, “Entrx” and “the Company” in this annual
      report on Form 10KSB shall mean or refer to Entrx Corporation and its
      consolidated subsidiary, Metalclad Insulation Corporation, unless the context
      in
      which those words are used would indicate a different
      meaning.**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**General**





The
      Company, incorporated originally in 1947 as an Arizona corporation, was
      reincorporated in Delaware on November 24, 1993. In June 2002, the Company
      changed its name from Metalclad Corporation to Entrx Corporation. We conduct
      our
      business operations primarily through a wholly owned subsidiary, Metalclad
      Insulation Corporation, a California corporation.





For
      over
      30 years, the Company and its predecessors have been providing insulation and
      asbestos abatement services, primarily on the West Coast. We currently provide
      these services through Metalclad Insulation Corporation to a wide range of
      industrial, commercial and public agency clients.




Our
      principal executive offices are located at 800 Nicollet Mall, Suite 2690,
      Minneapolis, Minnesota 55402, and our telephone number is (612) 333-0614.
      Metalclad Insulation Corporation’s principal facilities are located at 1818 East
      Rosslynn, Fullerton, California 92831.





**Insulation
      Services**





***Background.*** Our
      insulation services include the installation of high- and low-temperature
      insulation on pipe, ducts, furnaces, boilers, and various other types of
      equipment. We also maintain and repair existing insulation systems, generally
      under one or multi-year maintenance contracts. Our customers include refineries,
      utilities, chemical plants, manufacturing facilities, commercial properties,
      office buildings and various governmental facilities. This may include complete
      removal of existing insulation during the repair operations. The removed
      insulation may or may not be asbestos containing. We also fabricate specialty
      items for the insulation industry, and occasionally sell insulation material
      and
      accessories to our customers. Metalclad Insulation Corporation is a licensed
      general contractor and typically provides project management, labor, tools,
      equipment and materials necessary to complete the installation.




1




We
      perform substantially all of the work required to complete most contracts,
      while
      generally subcontracting to others the scaffolding, painting and other trades
      not performed by Metalclad Insulation. In a typical insulation project, we
      obtain plans and specifications prepared by the owner of a facility or its
      agent. In projects where the customer is the owner of the facility, we may
      act
      as the general contractor. We may also work as a subcontractor for other general
      contractors. Projects for the installation of insulation in new construction
      may
      require one or more years to complete.





If
      a
      project involves the removal of asbestos containing materials, we first treat
      the material with water and a wetting agent to minimize fiber release. Dry
      removal is conducted in special cases where wetting is not feasible, provided
      Environmental Protection Agency ("EPA") approval is obtained. Our workers also
      remove asbestos laden pipe insulation by cutting the wrapping into sections
      in
      an enclosed containment area or utilizing special "glovebags" which provide
      containment around the section of pipe where the insulation is being removed.
      In
      some instances, the Company performs asbestos removal and provides related
      re-insulation contracting services, including insulation material sales; in
      other cases, the Company performs only asbestos removal services.





***Insulation
      Contracts.*** We
      normally enter into service contracts on either a “cost plus” or “fixed-price”
basis, either through competitive bids or direct negotiations.





Cost
      plus
      contracts, sometimes referred to as "time and materials" contracts, generally
      provide for reimbursement of our costs incurred on a particular project,
      including labor and materials, plus the payment of a fee normally equal to
      a
      percentage of these costs. These contracts generally provide for monthly
      payments covering both reimbursements for costs incurred to date and a portion
      of the fee based upon the amount of work performed and are customarily not
      subject to retention of fees or costs.





Fixed-price
      contracts generally require that we perform all work for an agreed upon price,
      often by a specified date. Such contracts usually provide for increases in
      the
      contract price if our construction costs increase due to changes in or delays
      of
      the project initiated or caused by the customer or owner. However, absent causes
      resulting in increases in contract prices, we take certain risks, including
      the
      risk that our costs associated with the project exceed the agreed upon price.
      Our failure to accurately predict the extent of the effort required and cost
      of
      labor on one insulation removal project commenced on April 18, 2005, resulted
      in
      a loss of $1,050,000 during 2005 and an additional loss of $566,000 in 2006.
      Under these fixed-price contracts we normally receive periodic payments based
      on
      the work performed to a particular date, less certain retentions. The amounts
      retained are held by the customer pending either satisfactory completion of
      our
      work or, in some cases, satisfactory completion of the entire
      project.





In
      accordance with industry practice, most of our contracts are subject to
      termination or modification by the customer, with provision for the recovery
      of
      costs incurred and the payment to us of a proportionate part of our fees, in
      the
      case of a cost-plus contract, and overhead and profit, in the case of a fixed
      price contract. Such termination or modification occurs in the regular course
      of
      our business due to changes in the work to be performed as determined by the
      customer throughout the term of a project. No single termination or modification
      has had or is expected to have a material adverse impact on our
      business.





***Operations
      and Employee Safety.*** All
      contract work is performed by trained personnel, and supervised by project
      managers trained and experienced in both construction and asbestos abatement.
      Each employee involved in asbestos abatement must complete a general training
      and safety program conducted by the Company or union affiliation. Training
      topics include approved work procedures, instruction on protective equipment
      and
      personal safety, dangers of asbestos, methods for controlling friable asbestos
      and asbestos transportation and handling procedures. In addition, all full-time
      employees engaged in asbestos abatement activities are required to attend a
      minimum four-day course approved by the EPA and the Occupational Safety and
      Health Administration ("OSHA"), and all supervisors of abatement projects are
      required to attend an eight-hour first aid/CPR/safety course and an eight-hour
      EPA/AHERA refresher course annually. At December 31, 2006, one of our full-time
      salaried employees and 21 hourly employees had been trained and certified as
      "competent individuals" under EPA regulations relating to the training of
      asbestos abatement workers. All employees are issued detailed training
      materials. We typically conduct a job safety analysis in the job bidding
      stage.




2




We
      require the use of protective equipment on all projects, and sponsor periodic
      medical examinations of all of our hourly field employees. During removal
      procedures, asbestos containing material is generally treated to minimize fiber
      release, and filtration devices are used to reduce contamination levels. Air
      monitoring to determine asbestos fiber contamination levels is conducted on
      all
      abatement projects involving the removal of friable asbestos. We have a
      comprehensive policy and procedure manual that covers all activities of an
      asbestos abatement project, and the specific responsibilities and implementation
      of procedures and policies to be followed on each project. The manual is
      reviewed periodically by management and updated to insure compliance with
      federal, state, and local regulations, to include information from in-house
      project review findings, and to include updated information regarding industry
      practices. To separate our responsibilities and limit our liability, we utilize
      unaffiliated third party laboratories for asbestos sampling analysis, and
      licensed independent waste haulers for the transportation and disposal of
      asbestos waste.





***Materials
      and Supplies.*** We
      purchase our insulating and asbestos abatement materials and supplies used
      in
      our insulation services from a number of national manufacturers, and we are
      not
      dependent on any one source.





**Marketing
      and Sales**





***Insulation
      Contracting Services.*** We
      currently obtain most of our insulation contracting business from existing
      customers, and through referrals by customers, engineers, architects, and
      construction firms. Additional business is obtained by referrals obtained
      through labor, industry and trade association affiliations.





Projects
      are often awarded through competitive bidding, although major companies
      frequently rely on selected bidders chosen by them based on a variety of
      criteria such as adequate capitalization, bonding capability, insurance carried,
      and experience. We are frequently invited to bid on projects, and obtain a
      significant amount of our contracts through the competitive bidding process.





Our
      marketing and sales effort emphasizes our experience, reputation for timely
      performance, and knowledge of the insulation and asbestos abatement industry.
      We
      are a member of the Western Insulation Contractors Association and various
      local
      business associations.





***Curtom-Metalclad
      Joint Venture.*** In 1989,
      Metalclad Insulation Corporation entered into a joint venture with a minority
      service firm, known as Curtom Building & Development Corporation (“Curtom
      Building”), which was designated as qualifying for preferential contract bidding
      because of minority status, by Metropolitan Transportation Authority, and until
      September 2005, by Supplier Clearinghouse. Metalclad Insulation Corporation
      owns
      a 49% interest in the joint venture. The joint venture, known as
      "Curtom-Metalclad," submits bids for insulation and asbestos abatement services.
      When contracts are obtained by the joint venture, we perform the work specified
      in the contract as a subcontractor to the joint venture. The joint venture
      agreement, as amended, provides that Curtom-Metalclad will receive 2.5% of
      revenues obtained by Metalclad Insulation Corporation as a subcontractor, of
      which 80% will be distributed to Curtom Building and 20% will be retained by
      Curtom-Metalclad. We retain the remaining revenues. Sales for the year ended
      December 31, 2006 for Curtom-Metalclad projects were approximately $3,383,000
      or
      17.3% of our revenue, compared to $1,418,000 or 9.6% of revenue in 2005. While
      the revenues and gross profit from the subcontracts we perform for
      Curtom-Metalclad are significant to us, the joint venture of Curtom-Metalclad
      has no material assets, liabilities or earnings. The termination of the
      Curtom-Metalclad joint venture and the loss of revenues that joint venture
      generates, could have a material adverse affect on us. In accordance with FIN
      46
“Consolidation of Variable Interest Entities”, as amended by FIN 46R, we have
      consolidated Curtom-Metalclad since we have determined we are the primary
      beneficiary as defined by FIN 46R.





***Customers.*** Our
      customers are generally either industrial or commercial. The industrial
      customers are predominately public utilities (power, natural gas and water/water
      treatment), major oil companies for oil refineries and petrochemical plants,
      chemical and food processors, other heavy manufacturers, and
      engineering/construction companies. The commercial customers are primarily
      government agencies, schools, hospitals, commercial and light manufacturing
      companies, and the general or mechanical construction contractors. During 2006,
      JE Merit Constructors, Inc. accounted for 17.3% of our revenues and Southern
      California Edison Company through our Curtom-Metalclad joint venture accounted
      for 15.2% of our revenues. We cannot project whether a significant portion
      of
      our revenues will be derived from these customers in 2007. It is often the
      case
      in our business that a customer that represented over 10% of our revenues in
      one
      year would not represent over 10% of our revenues in the following year. (See
      Note 17 to the Consolidated Financial Statements.)




3




***Competition.*** **** Competition
      in the insulation contracting services business is intense and is expected
      to
      remain intense in the foreseeable future. Competition includes a few national
      and regional companies that provide integrated services, and many regional
      and
      local companies that provide insulation and asbestos abatement specialty
      contracting services similar to the Company. Many of the national and regional
      competitors providing integrated services are well established and have
      substantially greater marketing, financial, and technological resources than
      we
      do. The regional and local specialty contracting companies, which compete with
      us, either provide one service or they provide integrated services by
      subcontracting part of their services to other companies. We believe that the
      primary competitive factors for our services are price, technical performance
      and reliability. We obtain a significant number of our insulation service
      contracts through the competitive bidding process. We believe that our bids
      are
      generally competitively priced. Our policy is to bid all projects with the
      expectation of a reasonable gross profit.





***Backlog.*** Our
      backlog for insulation services at December 31, 2006 and December 31, 2005
      was
      approximately $11,305,000 and $10,120,000, respectively. Backlog is calculated
      in terms of estimated revenues on fixed-price and cost-plus projects in progress
      or for which contracts have been executed. Approximately 71% of our backlog
      is
      under cost-plus contracts. Our backlog as of any date is not necessarily
      indicative of future revenues. We estimate that our entire backlog as of
      December 31, 2006 will be completed during the next eighteen months.





**Insurance
      and Bonding** *.*





***General
      Liability.*** Our
      combined general liability and contractor pollution insurance policy provides
      base coverage of $1,000,000 per occurrence and excess liability coverage of
      $10,000,000.





***Performance
      Bonds*** . **** While
      our
      current insulation and asbestos abatement services customers generally do not
      require performance bonds, an increasing number of customers have requested
      such
      bonds. While the changes in the bonding industry have made it more difficult
      to
      obtain performance bonds, we believe that our current bonding arrangements
      are
      adequate for our anticipated future needs.





***Asbestos
      Insurance Coverage*** .
      Prior
      to 1975, we were engaged in the sale and installation of asbestos-related
      insulation materials, which has resulted in numerous claims of personal injury
      allegedly related to asbestos exposure. Many of these claims are now being
      brought by the children and close relatives of persons who have died, allegedly
      as a result of the direct or indirect exposure to asbestos. To date all of
      our
      asbestos-related injury claims have been paid and defended by our insurance
      carriers.





Based
      on
      the trend of reducing asbestos-related injury claims made against the Company
      over the past four years, we project that 924 asbestos-related injury claims
      will be made against the Company in the future, in addition to the 404 claims
      existing as of December 31, 2006, totaling 1,328 claims. Multiplying the average
      indemnity paid per resolved claim over the past six years of $19,131, times
      1,328, we project the probable future indemnity to be paid on those claims
      to be
      equal to approximately $25 million. In addition, multiplying an estimated cost
      (which cost is included within the limits of our insurance coverage) of defense
      per resolved claim of approximately $13,500 times 1,328, we project the probable
      future defense costs to equal approximately $18 million. See Item 3 - “Legal
      Proceedings - Asbestos-related Claims.”





There
      are
      numerous insurance carriers which have issued a number of policies to us over
      a
      period extending from approximately 1967 through approximately 1985 that still
      provide coverage for asbestos-related injury claims. After approximately 1985
      the policies were issued with provisions which purport to exclude coverage
      for
      asbestos related claims. The terms of our insurance policies are complex, and
      coverage for many types of claims is limited as to the nature of the claim
      and
      the amount of coverage available. It is clear, however, under California law,
      where the substantial majority of the asbestos-related injury claims are
      litigated, that all of those policies cover any asbestos-related injury
      occurring during the 1967 through 1985 period when these policies were in
      force.





We
      have
      engaged legal counsel to review all of our known insurance policies, and to
      provide us with the amount of coverage which such counsel believes to be
      probable under those policies for current and future asbestos-related injury
      claims against us. Such legal counsel has provided us with its opinion of the
      minimum probable coverage available to satisfy asbestos-related injury claims,
      which significantly exceeds our estimated $43,000,000 liability for such claims
      at December 31, 2006.




4




On
      February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
      Insurance Company of Omaha ("Central National") and Industrial Underwriters
      Insurance Company ("Industrial"), which are all related entities, filed a
      declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
      Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
      in the Superior Court of the State of California, County of Los Angeles. ACE,
      Central National and Industrial issued umbrella and excess policies to
      Metalclad, which has sought and obtained from the plaintiffs both defense and
      indemnity under these policies for the asbestos lawsuits brought against
      Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
      regarding a variety of coverage issues, but is centrally focused on issues
      involving whether historical and currently pending asbestos lawsuits brought
      against Metalclad are subject to either an "aggregate" limits of liability
      or
      separate "per occurrence" limits of liability. Whether any particular asbestos
      lawsuit is properly classified as being subject to an aggregate limit of
      liability depends upon whether or not the suit falls within the "products"
      or
      "completed operations" hazards found in most of the liability policies issued
      to
      Metalclad. Resolution of these classification issues will determine if, as
      ACE
      and Central National allege, their policies are nearing exhaustion of their
      aggregate limits and whether or not other Metalclad insurers who previously
      asserted they no longer owed any coverage obligations to Metalclad because
      of
      the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
      additional coverage obligations. The ACE Lawsuit also seeks to determine the
      effect of the settlement agreement between the Company and Allstate Insurance
      Company on the insurance obligations of various other insurers of Metalclad,
      and
      the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
      does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
      that we will incur attorneys fees and other associated litigation costs in
      defending the lawsuit and any counter claims made against us by any other
      insurers, and in prosecuting any claims we may seek to have adjudicated
      regarding our insurance coverage. In addition, the ACE Lawsuit may result in
      our
      incurring costs in connection with obligations we may have to indemnify Allstate
      under the Settlement Agreement. Allstate, in a cross-complaint filed against
      Metalclad Insulation Corporation in October, 2005, asked the court to determine
      the Company’s obligation to assume and pay for the defense of Allstate in the
      ACE Lawsuit under the Company’s indemnification obligations in the Settlement
      Agreement. The Company does not believe that it has any legal obligation to
      assume or pay for such defense.





In
      2003
      and 2004 the Judiciary Committee of the United States Senate considered
      legislation to create a privately funded, publicly administered fund to provide
      the necessary resources for an asbestos injury claims resolution program, and
      is
      commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
      approved by the Judiciary Committee, but the bill was rejected by the full
      Senate in February 2006, when a cloture motion on the bill was withdrawn. An
      amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
      May 2006, but has not been scheduled for a vote. A similar bill was introduced
      in the House (HR 1360) in March 2005, but was referred to a subcommittee in
      May
      2005. The latest draft of the “FAIR” Act calls for the fund to be funded
      partially by asbestos defendant companies, of which the Company is one, and
      partially by insurance companies. The bill could be voted on by the Senate
      or
      the House at any time in the future. The impact, if any, the “FAIR” Act will
      have on us if passed cannot be determined at this time although the latest
      draft
      of the legislation did not appear favorable to us.





***Insurance
      Policy Settlement*** .
      In June
      2004, Metalclad Insulation Corporation, our wholly owned subsidiary, and Entrx
      Corporation, entered into a Settlement Agreement and Full Policy Release (the
      “Agreement”) releasing Allstate Insurance Company from its policy obligations
      for a broad range of claims arising from injury or damage which may have
      occurred during the period March 15, 1980 to March 15, 1981, under an umbrella
      liability policy (the “Policy”). The Policy provided limits of $5,000,000 in the
      aggregate and per occurrence. Allstate claimed that liability under the Policy
      had not attached, and that regardless of that fact, an exclusion in the Policy
      barred coverage for virtually all claims of bodily injury from exposure to
      asbestos, which is of primary concern to Metalclad Insulation Corporation.
      Metalclad Insulation Corporation took the position that such asbestos coverage
      existed. The parties to the Agreement reached a compromise, whereby Metalclad
      Insulation Corporation received $2,500,000 in cash, and Metalclad Insulation
      Corporation and Entrx Corporation agreed to indemnify and hold harmless Allstate
      from all claims which could be alleged against the insurer respecting the
      policy, limited to $2,500,000 in amount. Based on past experience related to
      asbestos insurance coverage, we believe that the Agreement we entered into
      in
      June 2004, will result in a probable loss contingency for future insurance
      claims based on the indemnification provision in the Agreement. Although we
      are
      unable to estimate the exact amount of the loss, we believe at this time the
      reasonable estimate of the loss will not be less than $375,000 or more than
      $2,500,000 (the $2,500,000 represents the maximum loss we would have based
      on
      the indemnification provision in the Agreement). Based on the information
      available to us, no amount in this range appears at this time to be a better
      estimate than any other amount. The $375,000 estimated loss contingency noted
      in
      the above range represents 15% of the $2,500,000 we received and is based upon
      our attorney’s informal and general inquiries to an insurance company of the
      cost for us to purchase an insurance policy to cover the indemnification
      provision we entered into. We recorded a reserve of $375,000 at the time we
      entered into the Agreement and nothing has come to our attention that would
      require us to record a different estimate at December 31, 2006.




5




**Employees** .





As
      of
      December 31, 2006, we had two part-time salaried employees in our executive
      offices and 12 full-time salaried employees in our insulation business in
      California, for a total of 14 employees. These included three executive
      officers, project managers/estimators, purchasing, accounting, and office
      staff.





As
      of
      December 31, 2006, our subsidiary, Metalclad Insulation Corporation, employed
      approximately 115 hourly employees for insulation contracting services, nearly
      all of whom are members of the International Association of Heat and Frost
      Insulators and Asbestos Workers ("AFL-CIO") or Laborers Local Union 300, which
      makes the hourly employees available to us from time to time. Metalclad
      Insulation Corporation is a party to agreements with local chapters of various
      trade unions. The number of hourly employees employed by us fluctuates depending
      upon the number and size of projects that we have under construction at any
      particular time. It has been our experience that hourly employees are generally
      available for our projects, and we have continuously employed a number of hourly
      employees on various projects over an extended period of time. We consider
      our
      relations with our hourly employees and the unions representing them to be
      good,
      and have not experienced any recent work stoppages due to strikes by such
      employees. Additionally, the trade union agreements we are a party to include
      no
      strike, no work stoppage provisions. In August, 2004 a new “Basic Agreement” was
      signed with Local No. 5 of the International Association of Heat and Frost
      Insulators and Asbestos Workers that expires in September 2008. The “Basic
      Agreement” included a “Maintenance Agreement” as an addendum. Approximately 95%
      of our hourly employees are covered by the Local No. 5 agreement. An agreement
      with the Laborers Local 300 was signed in January 2004 and expired in December
      2006. A new agreement with the Laborers Local 300 was signed in January 2007
      and
      expires in December 2009. Approximately 5% of our hourly employees are covered
      by the Labors Local 300 agreement.





**Government
      Regulation**





***Insulation
      Services and Material Sales Regulation.*** As
      a
      general and insulation specialty contractor, we are subject to regulation
      requiring us to obtain licenses from several state and municipal agencies.
      Other
      than licensing, our industrial insulation services and material sales business
      is not subject to material or significant regulation.





***Asbestos
      Abatement Regulation.*** Asbestos
      abatement operations are subject to regulation by federal, state, and local
      governmental authorities, including OSHA and the EPA. In general, OSHA
      regulations set maximum asbestos fiber exposure levels applicable to employees,
      and the EPA regulations provide asbestos fiber emission control standards.
      The
      EPA requires use of accredited persons for both inspection and abatement. In
      addition, a number of states have promulgated regulations setting forth such
      requirements as registration or licensing of asbestos abatement contractors,
      training courses for workers, notification of intent to undertake abatement
      projects and various types of approvals from designated entities. Transportation
      and disposal activities are also regulated.





OSHA
      has
      promulgated regulations specifying airborne asbestos fiber exposure standards
      for asbestos workers, engineering and administrative controls, workplace
      practices, and medical surveillance and worker protection requirements. OSHA's
      construction standards require companies removing asbestos on construction
      sites
      to utilize specified control methods to limit employee exposure to airborne
      asbestos fibers, to conduct air monitoring, to provide decontamination units
      and
      to appropriately supervise operations. EPA regulations restrict the use of
      spray
      applied asbestos containing material (“ACM”) and asbestos insulation, establish
      procedures for handling ACM during demolition and renovations, and prohibit
      visible emissions during removal, transportation and disposal of
      ACM.





We
      believe that we are substantially in compliance with all regulations relating
      to
      our asbestos abatement operations, and currently have all material government
      permits, licenses, qualifications and approvals required for our
      operations.





6




**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**





Our
      executive offices are located in Minneapolis, Minnesota, which consists of
      approximately 2,400 square feet leased at a current rate of $2,000 per month,
      on
      a month-to-month basis.





Our
      wholly owned subsidiary, Metalclad Insulation Corporation, is housed in a
      facility in Fullerton, California. This facility consists of approximately
      27,100 square feet of office and warehouse space. The Company has leased this
      facility through December 31, 2011 at a monthly rate of $13,500 per month with
      yearly rent increases of approximately 3% per year. The lease contains an option
      for the Company to renew for an additional five years as defined in the
      agreement.





An
      inactive subsidiary of the Company, Ecosistemas del Potosi SA de CV, owns an
      approximately 92-hectare parcel (approximately 227 acres) of land in Santa
      Maria
      del Rio near San Luis Potosi, Mexico. We are presently attempting to dispose
      of
      this property. Such sale or disposition will not have a material effect on
      the
      Company as the land has a value of less than $15,000.





We
      believe that the properties currently owned and leased by us are adequate for
      our operations for the foreseeable future.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





**Asbestos-related
      Claims**





Prior
      to
      1975, we were engaged in the sale and installation of asbestos-related
      insulation materials, which has resulted in numerous claims of personal injury
      allegedly related to asbestos exposure. Many of these claims are now being
      brought by the children and close relatives of persons who have died, allegedly
      as a result of the direct or indirect exposure to asbestos. To date all of
      our
      asbestos-related injury claims have been paid and defended by our insurance
      carriers.




The
      number of asbestos-related cases which have been initiated naming us (primarily
      our subsidiary, Metalclad Insulation Corporation) as a defendant had increased
      from approximately 254 in 1999 to 527 in 2000 and 725 in 2001. The number of
      cases filed decreased after 2001 to 590 in 2002, to 351 in 2003, to 265 in
      2004
      and to 199 in 2005, but increased in 2006 to 232. At December 31, 2001, 2002,
      2003, 2004, 2005 and 2006, there were, respectively, approximately 1,009, 988,
      853, 710, 507 and 404 cases pending. Of the decrease from 710 cases pending
      at
      December 31, 2004 to 507 cases pending at December 31, 2005, were 80 cases
      which
      had been previously counted in error, so that the actual decrease for the year
      ended December 31, 2005 was 123 cases. These claims are currently defended
      and
      covered by insurance.





Set
      forth
      below is a table for the years ended December 31, 2002, 2003, 2004, 2005 and
      2006, which sets forth for each such period the approximate number of
      asbestos-related cases filed, the number of such cases resolved by dismissal
      or
      by trial, the number of such cases resolved by settlement, the total number
      of
      resolved cases, the number of filed cases pending at the end of such period,
      the
      total indemnity paid on all resolved cases, the average indemnity paid on all
      settled cases and the average indemnity paid on all resolved cases:




7




2002
            
            2003
            
            2004
            
            2005(2)
            
            2006New
                cases filed
            
            
            590
            
            
            351
            
            
            265
            
            
            199
            
            
            232Defense
                Judgments and dismissals
            
            
            382
            
            
            311
            
            
            311
            
            
            294
            
            
            253Settled
                cases
            
            
            229
            
            
            175
            
            
            97
            
            
            108
            
            
            82Total
                resolved cases(1)
            
            
            611
            
            
            486
            
            
            408
            
            
            402
            (2)
            
            335Pending
                cases(1)
            
            
            988
            
            
            853
            
            
            710
            
            
            507
            (3)
            
            404Total
                indemnity payments
            
            $
            9,244,000
            
            $
            10,618,700
            
            $
            6,366,750
            
            $
            8,513,750
            
            $
            4,858,750Average
                indemnity paid on settled cases
            
            $
            40,366
            
            $
            60,678
            
            $
            65,637
            
            $
            78,831
            
            $
            59,253Average
                indemnity paid on all resolved cases
            
            $
            15,129
            
            $
            21,849
            
            $
            15,605
            
            $
            21,178
            (2)
            $
            14,504





(1)
            Total
                resolved cases includes, and the number of pending cases excludes,
                cases
                which have been settled but which have not been closed for lack of
                final
                documentation or payment.




(2)
            The
                average indemnity paid on resolved cases does not include, and the
                number
                of pending cases includes, a jury award rendered on March 22, 2005 and
                a
                judgment on that award rendered on April 4, 2005, finding Metalclad
                Insulation Corporation liable for $1,117,000 in damages, which is
                covered
                by insurance. The judgment is being appealed by our
                insurer.




(3)
            Of
                the decrease from 710 cases pending at December 31, 2004 to 507 cases
                pending at December 31, 2005, were 80 cases which had been previously
                counted in error, so that the actual decrease over the year ended
                December
                31, 2005 was 123 cases.





The
      number of asbestos-related claims made against the Company since 2001, as well
      as the number of cases pending at the end of each of those years, has reflected
      a general downward trend from 2002 through 2006, with about a 15% increase
      in
      2006 over 2005. We believe that it is probable that this general trend will
      continue, although such continuance cannot be assured, particularly in view
      of
      the increase in the claims made in 2006 as compared to 2005. The average
      indemnity paid on all resolved claims has fluctuated over the past six-year
      period ended December 31, 2006 from a high of $26,520 in 2001, to a low of
      $14,504 in 2006, with an average indemnity payment of $19,131 over the same
      six-year period **.** We
      believe that the sympathies of juries, the aggressiveness of the plaintiffs’ bar
      and the declining base of potential defendants as the result of business
      failures, have tended to increase payments on resolved cases. This tendency,
      we
      believe, has been mitigated by the declining pool of claimants resulting from
      death, and the likelihood that the most meritorious claims have been ferreted
      out by plaintiffs’ attorneys and that the newer cases being brought are not as
      meritorious nor do they have as high a potential for damages as do cases which
      were brought earlier. We have no reason to believe, therefore, that the average
      future indemnity payments will increase materially in the future.





In
      addition, direct defense costs per resolved claim increased from $9,407 in
      2001
      to $13,320 in 2006. We believe that these defense costs increased as a result
      of
      a change in legal counsel in 2004, and the more aggressive defense posture
      taken
      by new legal counsel since that change. We do not believe that the defense
      costs
      will increase materially in the future, and are projecting those costs to be
      approximately $13,500 per claim.





Based
      on
      the trend of reducing asbestos-related injury claims made against the Company
      over the past four calendar years, we projected in our Form 10-KSB filed with
      the Securities and Exchange Commission for the year ended December 31, 2005
      that
      approximately 533 asbestos-related injury claims would be made against the
      Company after December 31, 2005. These claims, in addition to the 507 claims
      existing as of December 31, 2005, totaled 1,040 then current and future claims.
      Multiplying the average indemnity per resolved claim over the past five years
      of
      $20,056, times 1,040, we previously projected the probable future indemnity
      to
      be paid on those claims after December 31, 2005 to be equal to approximately
      $21
      million. In addition, multiplying an estimated cost of defense per resolved
      claim of approximately $13,500 times 1,040, we projected the probable future
      defense costs to equal approximately $14 million. Accordingly, our total
      estimated future asbestos-related liability at December 31, 2005 was $35
      million. These estimated liabilities are included as liabilities on our December
      31, 2005 balance sheet.




8




As
      of
      December 31, 2005, we projected that approximately 145 new asbestos-related
      claims would be commenced, and approximately 245 cases would be resolved, in
      2006, resulting in an estimated 407 cases pending at December 31, 2006. Since
      we
      projected that an aggregate of 533 new cases would be commenced after December
      31, 2005, and that 145 of these cases would be commenced in 2006, we estimated
      that an aggregate of 388 new cases would be commenced after December 31, 2006.
      Accordingly, the cases pending and projected to be commenced in the future
      at
      December 31, 2006, would be 795 cases. Multiplying 795 claims times the
      approximate average indemnity paid and defense costs incurred per resolved
      claim
      from 2002 through 2005 of $33,500, we had previously estimated our liability
      for
      current and future asbestos-related claims at December 31, 2006 to be
      approximately $27,000,000. This amounted to an $8,000,000 reduction from the
      $35,000,000 liability we estimated as of December 31, 2005, or a $2,000,000
      reduction per quarter.





As
      of
      June 30, 2006, we re-evaluated our estimates, based upon the fact that we
      previously estimated that there would be 145 asbestos-related claims made in
      2006, and that 123 claims had already been made in the first half of 2006 and
      that we previously estimated that 245 claims would be resolved in 2006, and
      that
      145 claims had already been resolved in the first six months of 2006. As of
      June
      30, 2006 we estimated that there would be 889 asbestos-related injury claims
      made against the Company after December 31, 2005. The 889, in addition to the
      507 claims existing as of December 31, 2005, totaled 1,396 current and future
      claims. There were 145 resolved claims in the first six months of 2006, which
      meant that as of June 30, 2006, the Company estimated that there were 1,251
      current and future claims. Multiplying the average indemnity per resolved claim
      over the past five and one half years of $19,300, times 1,251, we projected
      the
      probable future indemnity to be paid on those claims after June 30, 2006 to
      be
      equal to approximately $24 million. In addition, multiplying an estimated cost
      of defense per resolved claim of approximately $13,500 times 1,251, we projected
      the probable future defense costs to equal approximately $17 million.
      Accordingly, our total estimated future asbestos-related liability at June
      30,
      2006 was $41 million.





As
      of
      June 30, 2006, we projected that approximately 196 new asbestos-related claims
      would be commenced, and approximately 277 cases would be resolved, in 2006,
      resulting in an estimated 426 cases pending at December 31, 2006. Based upon
      these new estimates, we projected that an aggregate of 889 new cases would
      be
      commenced after December 31, 2005, and that 196 of these cases would be
      commenced in 2006, we estimated that an aggregate of 693 new cases would be
      commenced after December 31, 2006. Accordingly, the cases pending and projected
      to be commenced in the future at December 31, 2006, would be 1,119 cases.
      Multiplying 1,119 claims times the approximate average indemnity paid and
      defense costs incurred per resolved claim from 2002 through June 2006 of
      $32,800, we estimated our liability for current and future asbestos-related
      claims at December 31, 2006 to be approximately $37,000,000. This amounted
      to a
      $4,000,000 reduction from the $41,000,000 liability we estimated as of June
      30,
      2006, or a $2,000,000 reduction per quarter. Accordingly, we reduced our
      asbestos-related liability at the quarter ended September 30, 2006, by
      $2,000,000.





As
      of
      December 31, 2006, we again re-evaluated our estimates. We now estimate that
      there will be 924 asbestos-related injury claims made against the Company after
      December 31, 2006. The 924, in addition to the 404 claims existing as of
      December 31, 2006, totaled 1,328 current and future claims. Multiplying the
      average indemnity per resolved claim over the past six years of $19,131, times
      1,328, we projected the probable future indemnity to be paid on those claims
      after December 31, 2006 to be equal to approximately $25 million. In addition,
      multiplying an estimated cost of defense per resolved claim of approximately
      $13,500 times 1,328, we projected the probable future defense costs to equal
      approximately $18 million. Accordingly, our total estimated future
      asbestos-related liability at December 31, 2006 was $43 million.





We
      intend
      to re-evaluate our estimate of future liability for asbestos claims at the
      end
      of each fiscal year, or whenever actual results are materially different from
      our estimates, integrating our actual experience in that fiscal year with that
      of prior fiscal years since 2002. We estimate that the effects of economic
      inflation on either the average indemnity payment or the projected direct legal
      expenses will be approximately equal to a discount rate applied to our future
      liability based upon the time value of money. It is probable that we have
      adequate insurance to cover current and future asbestos-related claims, although
      such coverage cannot be assured.





Although
      defense costs are included in our insurance coverage, we expended $220,000,
      $174,000, $304,000, $188,000, and $215,000 in 2002, 2003, 2004, 2005 and 2006,
      respectively, to administer the asbestos claims. These amounts were primarily
      fees paid to attorneys to monitor the activities of the insurers, and their
      selected defense counsel, and to look after our rights under the various
      insurance policies.




9




On
      February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
      Insurance Company of Omaha ("Central National") and Industrial Underwriters
      Insurance Company ("Industrial"), which are all related entities, filed a
      declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
      Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
      in the Superior Court of the State of California, County of Los Angeles. ACE,
      Central National and Industrial issued umbrella and excess policies to
      Metalclad, which has sought and obtained from the plaintiffs both defense and
      indemnity under these policies for the asbestos lawsuits brought against
      Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
      regarding a variety of coverage issues, but is centrally focused on issues
      involving whether historical and currently pending asbestos lawsuits brought
      against Metalclad are subject to either an "aggregate" limits of liability
      or
      separate "per occurrence" limits of liability. Whether any particular asbestos
      lawsuit is properly classified as being subject to an aggregate limit of
      liability depends upon whether or not the suit falls within the "products"
      or
      "completed operations" hazards found in most of the liability policies issued
      to
      Metalclad. Resolution of these classification issues will determine if, as
      ACE
      and Central National allege, their policies are nearing exhaustion of their
      aggregate limits and whether or not other Metalclad insurers who previously
      asserted they no longer owed any coverage obligations to Metalclad because
      of
      the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
      additional coverage obligations. The ACE Lawsuit also seeks to determine the
      effect of the settlement agreement between the Company and Allstate Insurance
      Company on the insurance obligations of various other insurers of Metalclad,
      and
      the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
      does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
      that we will incur attorneys fees and other associated litigation costs in
      defending the lawsuit and any counter claims made against us by any other
      insurers, and in prosecuting any claims we may seek to have adjudicated
      regarding our insurance coverage. In addition, the ACE Lawsuit may result in
      our
      incurring costs in connection with obligations we may have to indemnify Allstate
      under the Settlement Agreement. Allstate, in a cross-complaint filed against
      Metalclad Insulation Corporation in October, 2005, asked the court to determine
      the Company’s obligation to assume and pay for the defense of Allstate in the
      ACE Lawsuit under the Company’s indemnification obligations in the Settlement
      Agreement. The Company does not believe that it has any legal obligation to
      assume or pay for such defense.





In
      2003
      and 2004 the Judiciary Committee of the United States Senate considered
      legislation to create a privately funded, publicly administered fund to provide
      the necessary resources for an asbestos injury claims resolution program, and
      is
      commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
      approved by the Judiciary Committee, but the bill was rejected by the full
      Senate in February 2006, when a cloture motion on the bill was withdrawn. An
      amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
      May 2006, but has not been scheduled for a vote. A similar bill was introduced
      in the House (HR 1360) in March 2005, but was referred to a subcommittee in
      May
      2005. The latest draft of the “FAIR” Act calls for the fund to be funded
      partially by asbestos defendant companies, of which the Company is one, and
      partially by insurance companies. The bill could be voted on by the Senate
      or
      the House at any time in the future. The impact, if any, the “FAIR” Act will
      have on us if passed cannot be determined at this time although the latest
      draft
      of the legislation did not appear favorable to us.





**Claim
      Against Former Employee, Etc.**





In
      October 1999, we completed the sale of our operating businesses and development
      project located in Aguascalientes, Mexico. That sale specifically excluded
      those
      Mexican assets involved in the Company’s NAFTA claim which was settled in 2001.
      Under the terms of the sale we received an initial cash payment of $125,000
      and
      recorded a receivable for $779,000. On November 13, 2000, the Company filed
      a
      complaint in the Superior Court of California against a former employee, the
      U.S. parent of the buyer and its representative for breach of contract, fraud,
      collusion and other causes of action in connection with this sale seeking
      damages in the form of a monetary award. An arbitration hearing was held in
      September, 2002 in Mexico City, as requested by one of the defendants. This
      arbitration hearing was solely to determine the validity of the assignment
      of
      the purchase and sale agreement by the buyer to a company formed by the former
      employee defendant. The Superior Court action against the U.S. parent was stayed
      pending the Mexican arbitration. On April 8, 2003, the arbitrator ruled that
      the
      assignment was inexistent, due to the absence of our consent. In June 2003,
      the
      Court of Appeal for the State of California ruled that the  U.S.
      parent was also entitled to compel a Mexican arbitration of the claims raised
      in
      our complaint. We are now prepared to pursue our claim in an arbitration
      proceeding for the aforementioned damages. No assurances can be given on the
      outcome.




10




In
      a
      related action, a default was entered against us in December, 2002, in favor
      of
      the same former employee referred to in the foregoing paragraph by the Mexican
      Federal Labor Arbitration Board, for an unspecified amount. The former employee
      was seeking in excess of $9,000,000 in damages as a result of his termination
      as
      an employee. The default was obtained without the proper notice being given
      to
      us, and was set aside in the quarter ended June 30, 2003. The Mexican Federal
      Labor Arbitration Board rendered a recommendation on December 13, 2004, to
      the
      effect that the former employee was entitled to an award of $350,000 from Entrx
      in connection with the termination of his employment. The award is in the form
      of a recommendation which has been affirmed by the Mexican Federal Court, but
      is
      only exercisable against assets of the Company located in Mexico. The Company
      has no material assets in Mexico. The award does not represent a collectible
      judgment against the Company in the United States. Since the Company has no
      material assets in Mexico, the likelihood of any liability based upon this
      award
      is remote, and we therefore believe that there is no potential liability to
      the
      Company at December 31, 2006 or 2005. The Company intends to continue to pursue
      its claims against the same employee for breach of contract, fraud, collusion
      and other causes of action in connection with the 1999 sale of one of the
      Company’s operating businesses in Mexico.





On
      May
      31, 2006, we entered into a Settlement Agreement with Ventana Global
      Environmental Organizational Partnership, L.P. and North America Environmental
      Fund, L.P. (collectively referred to as “Ventana”) whereby Ventana agreed to pay
      Entrx Corporation $1,250,000 in exchange for the dismissal with prejudice by
      Entrx Corporation of the law suit (the “Ventana Action”) filed by Entrx
      Corporation against Ventana and others in Orange County, California Superior
      Court in November 2000. Entrx Corporation and Ventana also entered into a mutual
      release of all claims each may have had against the other. In addition, Entrx
      Corporation released Carlos Alberto de Rivas Oest and Geologic de Mexico S.A.
      de
      C.V., which were parties related to Ventana, and against whom Entrx Corporation
      had claims pending in Mexico. The Settlement Agreement does not limit claims
      that Entrx had or currently has against Javier Guerra Cisneros and Promotora
      Industrial Galeana, S.A. de C.V., which Entrx Corporation continues to pursue
      in
      Mexico. Javier Guerra Cisneros and Promotora Industrial Galeana, S.A. de C.V.
      were involved with the transactions which were the subject of the Ventana
      Action. Entrx Corporation received approximately $925,000 net after payment
      of
      legal fees and expenses associated with the Ventana Action and the Settlement
      Agreement.





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





None





**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





Market
      for Common Stock





During
      the year ended December 31, 2004 and until February 15, 2005, our Common Stock
      was traded on The Nasdaq SmallCap Market under the symbol "ENTX." Since February
      16, 2005 our common stock has traded on the pink sheets under the symbol
      ENTX.PK. The following table sets forth, for the fiscal periods indicated,
      the
      high and low bid ** prices
      for the Common Stock as reported by Nasdaq or as quoted over-the-counter and
      recorded in the pink sheets. The bid prices represent prices between
      broker-dealers and don’t include retail mark-ups and mark-downs or any
      commissions to the dealer. These bid prices may not reflect actual
      transactions.





11




**Bid
                Price****High**
            
            **Low****Fiscal
                Year Ended December 31, 2005**Quarter
                Ended March 31, 2005
            
            $
            0.57
            
            $
            0.29Quarter
                Ended June 30, 2005
            
            
            0.31
            
            
            0.11Quarter
                Ended September 30, 2005
            
            
            0.31
            
            
            0.20Quarter
                Ended December 31, 2005
            
            
            0.25
            
            
            0.15**Fiscal
                Year Ended December 31, 2006**Quarter
                Ended March 31, 2006
            
            $
            0.24
            
            $
            0.13Quarter
                Ended June 30, 2006
            
            
            0.25
            
            
            0.15Quarter
                Ended September 30, 2006
            
            
            0.35
            
            
            0.18Quarter
                Ended December 31, 2006
            
            
            0.23
            
            
            0.11





As
      of
      March 6, 2007, the closing bid ** price
      for
      the common shares in the pink sheets was $0.35.





Shareholders
      of Record





As
      of
      March 6, 2007, the approximate number of record holders of our Common Stock
      was
      1,550.





Dividends





We
      have
      not paid any cash dividends on our Common Stock since our incorporation, and
      anticipate that, for the foreseeable future, earnings, if any, will continue
      to
      be retained for use in our business.





Unregistered
      Sales of Securities





The
      following table sets forth certain information regarding the sale of common
      stock by the Company during the calendar year 2006 in transactions which were
      not registered under the Securities Act of 1933 (the “Act”).





Date
                of Sale
            
            Number
                of Shares Sold
            
            Person(s)
                to Whom Sold
            
            Consideration
                Paid
            
            Exemption
                from Registration Relied Upon Under the Act(1)6/7/2006
            
            50,000
                Shares
            
            Members
                of the Board of Directors of Entrx Corporation (4 members) and Metalclad
                Insulation Corporation (1 member)
            
            Services
                as directors, valued at $0.16 per share
            
            Section
                4(2) of the Securities Act of 1933, as a transaction not involving
                a
                public offering.





(1)
            Each
                member of the Board of Directors of Entrx Corporation, the chief
                executive
                officer of Entrx and the Director of Metalclad Insulation Corporation
                are
                deemed to be “accredited investors” by reason of their offices.




**ITEM
      6.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**Summary** .





Our
      revenues increased from $14,711,000 in 2005 to $19,517,000 in 2006. Gross margin
      percentage increased from 10.3% in 2005 to 14.8% in 2006. Revenues increased
      primarily due to the Company obtaining new maintenance contracts, and hiring
      additional project managers which allows the Company to bid on more projects.
      The gross margin percentage increased for 2006 as compared with 2005 due to
      the
      Company recording an anticipated loss of $1,050,000 on a single project in 2005
      which negatively impacted the gross margin in 2005. The Company recorded a
      loss
      of only $566,000 on the same project in 2006. We anticipate that our revenues
      will continue to increase in 2007 due to the increase in our backlog at December
      31, 2006 as compared to December 31, 2005, and anticipate that gross margin
      percentages in 2007 will approximate those in 2006.




12




We
      had a
      net income of $2,052,000 in 2006 primarily due to the operating income at
      Metalclad Insulation Corporation, a $1,725,000 gain recorded on the sale of
      a
      building, land and building improvements and $1,025,000 of income related to
      the
      settlement of lawsuits. An additional allowance of $1,084,000 on a shareholder
      note receivable partially offset the net income. We had a net loss of $1,743,000
      in 2005 primarily due to the $1,050,000 loss recorded on a project and $409,000
      related to the impairment charge on an investment in a privately-held company.





In
      an
      effort to increase shareholder value and to diversify from our insulation
      services business, we have made equity investments in several companies that
      are
      not in the insulation services business and which we believed had the ability
      to
      provide acceptable return on our investments. We currently have investments
      in
      the common stock of Catalytic Solutions, Inc., and warrants for the purchase
      of
      common stock of Clearwire Corporation, which we value at $450,000 and $757,000,
      respectively. Both of these companies are in the early stages of their business
      development. Our investments represent less than 5% ownership in each company
      and represent approximately 2.3% and 2.7% of the Company’s total assets at
      December 31, 2006 and 2005, respectively. Catalytic Solutions, Inc. manufactures
      and delivers proprietary technology that improves the performance and reduces
      the cost of catalytic converters. Catalytic’s common stock is traded on the AIM
      market in London under the symbol “CTS”. Clearwire Corporation is a provider of
      non-line-of-sight plug-and-play broadband wireless access systems. Clearwire
      has
      recently filed an S-1 registration statement with the Securities and Exchange
      Commission for the sale of its common stock. The warrants are exercisable at
      $4.00 per share, or on a cashless basis, the Company can convert the warrants
      at
      the fair market value of the warrants into common stock at the $4.00 per share
      exercise price. Either or both of these investments could be impaired in the
      future. See “Liquidity and Capital Resources.” We also own 190,566 shares of the
      common stock of VioQuest Pharmaceuticals, Inc., the common stock of which is
      publicly traded on the NASD Bulletin Board under the symbol “VQPH”. Of the
      190,566 shares, 75,000 shares are subject to options exercisable by three
      current and former members of our Board of Directors at $1.25 per share.





In
      January of 2005, our operating subsidiary, Metalclad Insulation Corporation
      (“Metalclad”), renewed its $1,000,000 line of credit financing from the Far East
      National Bank, Newport Beach, California. The due date of the line of credit
      was
      May 1, 2006. We paid the full amount due on the line of credit when we sold
      our
      operating facilities in Anaheim, California, on April 20, 2006.





Our
      subsidiary, Metalclad Insulation Corporation, continues to be engaged in
      lawsuits involving asbestos-related injury or potential injury claims. The
      232
      claims made in 2006 were up from the 199 claims made in 2005. The average
      indemnity payment on all resolved during each of the past six years has
      fluctuated from a high of $26,520 in 2001, to a low of $14,504 in 2006. These
      claims are currently defended and covered by insurance. We had projected that
      our future liability for future asbestos related claims at December 31, 2005
      was
      $35,000,000. As the result of the increase in claims made in 2006, we adjusted
      our projections and have projected that our future liability for currently
      outstanding and estimated future asbestos-related claims was approximately
      $43,000,000 at December 31, 2006. We have determined that it is probable that
      we
      have sufficient insurance to provide coverage for both current and future
      projected asbestos-related injury claims. This determination assumes that the
      current six years trend of reducing asbestos-related injury claims will
      continue, despite the increase in claims made in 2006 and 2005, and that the
      average indemnity and direct legal costs of each resolved claim will not
      materially increase. The determination also assumes that the insurance companies
      live up to what we believe is their obligation to continue to cover our exposure
      with regards to these claims. Several affiliated insurance companies have
      brought a declaratory relief action against our subsidiary, Metalclad, as well
      as a number of other insurers, to resolve certain coverage issues. (See Item
      3,
“Legal Proceedings - Asbestos-related Claims”) In addition, we paid
      approximately $215,000 and $188,000 in 2006 and 2005, respectively, in legal
      fees to assess and monitor the asbestos-related claims, and to assess and
      monitor our insurance coverage and insurance company activities involving the
      defense and payment of these claims. We anticipate that this cost will
      continue.





**Results
      of Operations**





***General.*** Our
      revenues have been generated primarily from insulation services and sales of
      insulation products and related materials in the United States.




13




***Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005.***





***Revenue.*** Total
      revenues were $19,517,000 in 2006 as compared to $14,711,000 for 2005, an
      increase of 32.7%. The increase from 2006 to 2005 was primarily a result of
      the
      Company obtaining new maintenance contracts, and hiring additional project
      managers which allows the Company to bid on more projects in 2006 and which
      ultimately increased the number of jobs in which we were the winning
      bidder.





***Cost
      of Revenue and Gross Margin.*** Total
      cost of revenue for the year ended December 31, 2006 was $16,638,000 as compared
      to $13,199,000 for the year ended December 31, 2005, an increase of 26.1%.
      The
      gross margin as a percentage of revenue was approximately 14.8% for the year
      ended December 31, 2006 compared to 10.3% for the year ended December 31, 2005.
      The increase in the gross margin percentage during the year ended December
      31,
      2006 as compared with the year ended December 31, 2005 is primarily the result
      of the Company recording a charge of $1,050,000 related to an anticipated loss
      on a project during the year ended December 31, 2005 as compared with a charge
      of $566,000 related to additional losses on the same project during the year
      ended December 31, 2006. The increase in the cost of revenues for the year
      ended
      December 31, 2006 as compared to the year ended December 31, 2005 was primarily
      due to higher revenues as discussed above. ****





***Selling,
      General and Administrative Expenses.*** Selling,
      general and administrative expenses were $2,401,000 for the year ended December
      31, 2006 as compared to $2,425,000 for the year ended December 31, 2005, a
      decrease of .1% due primarily to a decreases in legal and insurance expenses,
      partially offset by an increase in compensation expense primarily related to
      performance bonuses.





***Other
      Operating Expense.*** For the
      year ended December 31, 2004, we established a reserve of $250,000 against
      the
      note receivable from Blake Capital Partners, LLC (“Blake”). The reserve was
      established based upon the Company’s estimate of the collectibility of the note
      receivable. The Company increased the reserve by $500,000, for a total reserve
      of $750,000, against the note receivable during the six months ended June 30,
      2006 based upon the Company’s estimate of the collectibility of the note
      receivable at that time. Blake Capital Partners, LLC was current in the payment
      of interest through the payment due March 1, 2006. The payment due September
      1,
      2006, however, was not made, and we have been informed by Mr. Mills, the
      principal of Blake Capital Partners and guarantor on the note, that no payment
      can be expected in the foreseeable future. As of December 31, 2006, as a result
      of the non-payment of interest and other information received from Mr. Mills,
      we
      have booked an additional reserve of $536,000 against the note receivable and
      wrote-off the interest receivable through June 30, 2006 of $48,000, bringing
      the
      net of the note receivable less the reserve down to $210,000, the approximate
      value of the collateral securing the Note. Blake is a limited liability company
      wholly-owned by Wayne W. Mills, the Company’s former (prior to October 15, 2004)
      President and Chief Executive Officer. The collateral on the note consists
      of
      500,000 shares of the Company’s common stock and 250,000 shares of the $0.01 par
      value common stock of VioQuest Pharmaceuticals, Inc. (OTC Bulletin Board: VQPH).
      (See “Liquidity and Capital Resources” under this Item 6 below).





***Interest
      Income and Expense.*** ** Interest
      expense for the year ended December 31, 2006 was $107,000 as compared with
      interest expense of $555,000 for the year ended December 31, 2005. The decrease
      in 2006 as compared to 2005 was primarily due to a decrease in the average
      balance due to the pay-off of debt after the sale of the Company’s California
      building, as well as no amortization of the original issue discount, of the
      note
      with Pandora Select Partners L.P. during the year ended December 31, 2006.
      The
      note with Pandora Select Partners L.P. was repaid in June 2006. During 2005
      the
      Company expensed the remaining $148,325 of original issue discount, the fair
      value of the warrant, and the beneficial conversion of the note payable into
      common stock related to a convertible note payable which the Company issued
      in
      December 2003 for $1,300,000. Interest income decreased from $132,000 in the
      year ended December 31, 2005 to $105,000 in the year ended December 31, 2006,
      primarily due to the Company not recording any interest income on the note
      receivable from Blake Capital Partners, LLC in the second half of 2006.





***Gain
      on Sale of Building, Land, and Building Improvements.*** Gain
      on
      sale of building, land and building improvements was $1,725,000 for the year
      ended December 31, 2006. This gain was related to the sale of the Company’s
      facilities in Anaheim, California that housed the Company’s insulation
      operations.




14




***Other
      Income and Expense.*** Other
      income for the year ended December 31, 2006 was $1,025,000. $100,000 of other
      income related to the settlement agreement with Meyers-Reynolds whereby
      Meyers-Reynolds agreed to pay Entrx Corporation $100,000 in exchange for the
      dismissal with prejudice by Entrx Corporation of the law suit filed by Entrx
      Corporation against Meyers-Reynolds. Also included in the $1,025,000 of other
      income for the year ended December 31, 2006 was $925,000 related to the
      settlement agreement with Ventana Global Environmental Organizational
      Partnership, L.P. and North America Environmental Fund, L.P. (collectively
      referred to as “Ventana”) whereby Ventana agreed to pay Entrx Corporation
      $1,250,000 in exchange for the dismissal with prejudice by Entrx Corporation
      of
      the law suit (the “Ventana Action”) filed by Entrx Corporation against Ventana
      and others in Orange County, California Superior Court in November 2000. Entrx
      Corporation received $925,000 net after payment of legal fees and expenses
      associated with the settlement.





In
      an
      effort to increase shareholder value and to diversify from our insulation
      services business, we have made equity investments in several companies that
      are
      not in the insulation services business and which we believed had the ability
      to
      provide acceptable return on our investments. For the year ended December 31,
      2006 we recognized an impairment charge of $91,000 related to our investment
      in
      VioQuest Pharmaceuticals, Inc. For the year ended December 31, 2005 we
      recognized an impairment charge of $409,000 related to our investment in
      Catalytic Solutions, Inc. The impairment charges were due to the decline in
      the
      fair value below the cost basis that was judged to be other than temporary.





***Net
      Income (Loss).*** We
      experienced net income of $2,052,000 (or net income of $0.26 per share) for
      the
      year ended December 31, 2006, as compared to a net loss of $1,743,000 (or a
      loss
      of $0.23 per share) for the comparable period ended December 31, 2005. The
      net
      income for the year ended December 31, 2006 was primarily due to the gain on
      the
      sale of our facilities in Anaheim, California, our settlement with Ventana
      Global Environmental Organizational Partnership, L.P. and North America
      Environmental Fund, L.P. and the improved operating results at Metalclad
      Insulation Corporation. The net loss of $1,743,000 for the year ended December
      2005 includes $1,050,000 related to an anticipated loss on a project and
      $409,000 related to an impairment charge on one of our investments in a
      privately-held company.




**Liquidity
      and Capital Resources**





As
      of
      December 31, 2006, we had $1,608,000 in cash and cash equivalents and $99,000
      in
      available-for-sale securities. The Company had working capital of $4,300,000
      as
      of December 31, 2006.





Due
      to
      the increase in real estate value in southern California and the resulting
      increase in the Company’s equity in its facility, and the Company’s need for
      cash, the Company signed an agreement in December 2005 to sell its facilities
      in
      Anaheim, California for $3,900,000. The sale of the building was completed
      in
      April 2006. At the time of sale, the cost basis of the building, land and
      building improvements was $2,080,082 and accumulated depreciation was $101,035.
      The Company leased the facilities back for eight months and recognized the
      gain
      on the sale during the three months ended June 30, 2006. The Company had a
      first
      mortgage on the building of $1,499,978, including accrued interest of $8,698,
      at
      the time of sale and a second mortgage on the building of $150,000 at the time
      of the sale. The mortgages were repaid upon the sale of the building. After
      repayment of the Company’s $1,000,000 line of credit and mortgages, we had
      approximately $960,000 in cash to be used as working capital.





In
      December 2003, we issued a $1,300,000, 10% convertible promissory note to
      Pandora Select Partners L.P. The note was payable interest only through April
      15, 2004, and thereafter was payable in equal monthly installments over the
      next
      33 months. The balance outstanding on the note at December 31, 2005 was
      $554,969. In June 2006, the Company repaid the remaining principal balance
      of
      $348,573 and accrued interest of $2,905 outstanding under the note.





On
      May
      31, 2006, Entrx Corporation entered into a Settlement Agreement with Ventana
      Global Environmental Organizational Partnership, L.P. and North America
      Environmental Fund, L.P. (collectively referred to as “Ventana”) whereby Ventana
      agreed to pay Entrx Corporation $1,250,000 in exchange for the dismissal with
      prejudice by Entrx Corporation of the law suit (the “Ventana Action”) filed by
      Entrx Corporation against Ventana and others in Orange County, California
      Superior Court in November 2000. Entrx Corporation and Ventana also entered
      into
      a mutual release of all claims each may have had against the other. In addition,
      Entrx Corporation released Carlos Alberto de Rivas Oest and Geologic de Mexico
      S.A. de C.V., which were parties related to Ventana, and against whom Entrx
      Corporation had claims pending in Mexico. The Settlement Agreement does not
      limit claims that Entrx had or currently has against Javier Guerra Cisneros
      and
      Promotora Industrial Galeana, S.A. de C.V., which Entrx Corporation continues
      to
      pursue in Mexico. Javier Guerra Cisneros and Promotora Industrial Galeana,
      S.A.
      de C.V. were involved with the transactions which were the subject of the
      Ventana Action. Entrx Corporation received approximately $925,000 net after
      payment of legal fees and expenses associated with the Ventana Action and the
      Settlement Agreement.




15




Cash
      provided by continuing operations was $446,000 for 2006, compared with cash
      used
      by continuing operations of $950,000 in 2005. For the year ended December 31,
      2006 the positive cash flow from operations was primarily the result of our
      net
      income, a decrease in inventories, a decrease in other receivables and a gain
      on
      the settlement of the Ventana action **.** These
      sources of cash were partially offset by an increase in accounts receivable.
      For
      the year ended December 31, 2005 the negative cash flow from operations was
      primarily the result of funding our operating loss, an increase in accounts
      receivable and an increase in other receivables. The increase in other
      receivables is primarily related to cash held by our bonding company as security
      for completion bonds on some of our projects. The uses of cash were also
      partially offset by a decrease in costs and estimated earnings in excess of
      billings on uncompleted contracts, and increases in billings in excess of costs
      and estimated earnings on uncompleted contracts and accounts payable and accrued
      expenses.





Net
      investing activities provided $3,566,000 of cash in the year ended December
      31,
      2006, and used $181,000 of cash in 2005. Additions to property and equipment
      used $171,000 and $194,000 in 2006 and 2005, respectively, primarily for our
      subsidiary, Metalclad Insulation Corporation. During the year ended December
      31,
      2006, cash of $3,738,000 was provided by proceeds from sales of assets,
      primarily related to the sale of the Company’s facilities in Anaheim,
      California. During the year ended December 31, 2005, cash of $13,000 was
      provided by proceeds from sales of assets.





Cash
      used
      by financing activities totaled $2,819,000 in 2006 compared with cash used
      by
      financing activities of $812,000 in 2005. During the year ended December 31,
      2006, cash was used to repay the note payable to bank, the mortgage payable
      on
      the building we sold and the Company’s note to Pandora Select Partners L.P.
      Long-term borrowings provided $114,000 and $73,000 of cash in 2006 and 2005,
      respectively, and payments on long-term borrowings used $102,000 and $147,000
      of
      cash in 2006 and 2005, respectively. Payments on the convertible note payable
      used $555,000 of cash in 2006, and $462,000 of cash in 2005.





In
      2001,
      $1,255,000 was loaned to an affiliate of Wayne W. Mills, Blake Capital Partners,
      LLC (“Blake”) under a note (“Note”) secured by 500,000 shares of the Company’s
      common stock and any dividends received on those shares. At the time the loan
      was made, Mr. Mills was a principal shareholder of the Company, and was
      subsequently elected as the Company’s President and Chief Executive Officer. In
      November 2003, the Board of Directors of the Company negotiated an amendment
      to
      the security agreement (the “Amended and Restated Security Agreement”) which it
      believed to be beneficial to the Company. The Note as amended (the “New Note”)
      is in the principal amount of $1,496,370, and now provides for an October 31,
      2007 due date, with interest at 2% over the prime rate established by Wells
      Fargo Bank, NA in Minneapolis, Minnesota, adjusted on March 1 and September
      1 of
      each year, instead of the 12% rate established in the Note. Interest only is
      payable commencing March 1, 2004, and at the end of each six-month period
      thereafter. The New Note is with full recourse to Blake Capital Partners, which
      has minimal assets, other than 500,000 common shares of the Company’s common
      stock and 250,000 shares of VioQuest Pharmaceuticals, Inc., all of which are
      being held by the Company as collateral for the New Note. The Amended and
      Restated Security Agreement, unlike the original Security Agreement, does not
      require us, or permit Blake Capital Partners or Mr. Mills, to cancel the shares
      of the Company’s common stock held as collateral as full payment of the loan, or
      require us to apply the value of those cancelled shares at $2.50 per share
      against the principal balance of the amounts due. In addition, Mr. Mills has
      personally guaranteed the repayment of the New Note.





Other
      financial obligations of Mr. Mills have materially impaired his ability to
      fulfill his obligations as a guarantor of the New Note. For the year ended
      December 31, 2004, we established a reserve of $250,000 against the Note. The
      reserve was established based upon the Company’s estimate of the collectibility
      of the note receivable. The Company increased the reserve by $500,000, for
      a
      total reserve of $750,000, against the note receivable during the six months
      ended June 30, 2006 based upon the Company’s estimate of the collectibility of
      the note receivable at that time. Blake was current in the payment of interest
      through the payment due March 1, 2006. The payment due September 1, 2006,
      however, was not made, and we have been informed by Mr. Mills that no payment
      can be expected in the foreseeable future. As of December 31, 2006, as a result
      of the non-payment of interest and other information received from Mr. Mills,
      we
      have booked an additional reserve of $536,000 against the note receivable and
      wrote-off the interest receivable through June 30, 2006 of $48,000, bringing
      the
      net of the note receivable less the reserve down to $210,000, the approximate
      value of the collateral securing the Note. We are in the process of foreclosing
      on and cancelling the 500,000 shares of the Company’s common stock, and
      exploring our opportunities to obtain proceeds from the value of the VioQuest
      Pharmaceuticals, Inc. common stock.




16




Prior
      to
      1975, we were engaged in the sale and installation of asbestos-related
      insulation materials, which has resulted in numerous claims of personal injury
      allegedly related to asbestos exposure. Many of these claims are now being
      brought by the children and close relatives of persons who have died, allegedly
      as a result of the direct or indirect exposure to asbestos. To date, all of
      the
      asbestos-related injury claims have been defended and paid by our insurance
      carriers.




The
      number of asbestos-related cases which have been initiated naming us (primarily
      our subsidiary, Metalclad Insulation Corporation) as a defendant had increased
      from approximately 254 in 1999 to 527 in 2000 and 725 in 2001. The number of
      cases filed decreased after 2001 to 590 in 2002, to 351 in 2003, to 265 in
      2004
      and to 199 in 2005. The number of cases filed increased to 232 in 2006. At
      December 31, 2001, 2002, 2003, 2004, 2005 and 2006, there were, respectively,
      approximately 1,009, 988, 853, 710, 507 and 404 cases pending. Of the decrease
      from 710 cases pending at December 31, 2004 to 507 cases pending at December
      31,
      2005, were 80 cases which had been previously counted in error, so that the
      actual decrease for the year ended December 31, 2005 was 123 cases.





Set
      forth
      below is a table for the years ended December 31, 2002, 2003, 2004, 2005 and
      2006, which sets forth for each such period the approximate number of
      asbestos-related cases filed, the number of such cases resolved by dismissal
      or
      by trial, the number of such cases resolved by settlement, the total number
      of
      resolved cases, the number of filed cases pending at the end of such period,
      the
      total indemnity paid on all resolved cases, the average indemnity paid on all
      settled cases and the average indemnity paid on all resolved
      cases:





2002
            
            2003
            
            2004
            
            2005(2)
            
            2006New
                cases filed
            
            
            590
            
            
            351
            
            
            265
            
            
            199
            
            
            232Defense
                Judgments and dismissals
            
            
            382
            
            
            311
            
            
            311
            
            
            294
            
            
            253Settled
                cases
            
            
            229
            
            
            175
            
            
            97
            
            
            108
            
            
            82Total
                resolved cases(1)
            
            
            611
            
            
            486
            
            
            408
            
            
            402(2
            )
            
            335Pending
                cases(1)
            
            
            988
            
            
            853
            
            
            710
            
            
            507(3
            )
            
            404Total
                indemnity payments
            
            $
            9,244,000
            
            $
            10,618,700
            
            $
            6,366,750
            
            $
            8,513,750
            
            $
            4,858,750Average
                indemnity paid on settled cases
            
            $
            40,366
            
            $
            60,678
            
            $
            65,637
            
            $
            78,831
            
            $
            59,253Average
                indemnity paid on all resolved cases
            
            $
            15,129
            
            $
            21,849
            
            $
            15,605
            
            $
            21,178(2
            )
            $
            14,504





(1)
            Total
                resolved cases includes, and the number of pending cases excludes,
                cases
                which have been settled but which have not been closed for lack of
                final
                documentation or payment.




(2)
            The
                average indemnity paid on resolved cases does not include, and the
                number
                of pending cases includes, a jury award rendered on March 22, 2005
                and a
                judgment on that award rendered on April 4, 2005, finding Metalclad
                Insulation Corporation liable for $1,117,000 in damages, which is
                covered
                by insurance. The judgment is being appealed by our
                insurer.




(3)
            Of
                the decrease from 710 cases pending at December 31, 2004 to 507 cases
                pending at December 31, 2005, were 80 cases which had been previously
                counted in error, so that the actual decrease over the year ended
                December
                31, 2005 was 123 cases.





The
      number of asbestos-related claims made against the Company since 2001, as well
      as the number of cases pending at the end of each of those years, has reflected
      a general downward trend from 2002 through 2006, with about a 15% increase
      in
      2006 over 2005. We believe that it is probable that this general trend will
      continue, although such continuance cannot be assured, particularly in view
      of
      the increase in the claims made in 2006 as compared to 2005. The average
      indemnity paid on all resolved claims has fluctuated over the past six-year
      period ended December 31, 2006 from a high of $26,520 in 2001, to a low of
      $14,504 in 2006, with an average indemnity payment of $19,131 over the same
      six-year period. We believe that the sympathies of juries, the aggressiveness
      of
      the plaintiffs’ bar and the declining base of potential defendants as the result
      of business failures, have tended to increase payments on resolved cases. This
      tendency, we believe, has been mitigated by the declining pool of claimants
      resulting from death, and the likelihood that the most meritorious claims have
      been ferreted out by plaintiffs’ attorneys and that the newer cases being
      brought are not as meritorious nor do they have as high a potential for damages
      as do cases which were brought earlier. We have no reason to believe, therefore,
      that the average future indemnity payments will increase materially in the
      future.




17




In
      addition, direct defense costs per resolved claim have increased from $9,407
      in
      2001 to $13,320 in 2006. We believe that these defense costs increased as a
      result of a change in legal counsel in 2004, and the more aggressive defense
      posture taken by new legal counsel since that change. We do not believe that
      the
      defense costs will increase materially in the future, and are projecting those
      costs to be approximately $13,500 per claim.





Based
      on
      the trend of reducing asbestos-related injury claims made against the Company
      over the past four calendar years, we projected in our Form 10-KSB filed with
      the Securities and Exchange Commission for the year ended December 31, 2005
      that
      approximately 533 asbestos-related injury claims would be made against the
      Company after December 31, 2005. These claims, in addition to the 507 claims
      existing as of December 31, 2005, totaled 1,040 then current and future claims.
      Multiplying the average indemnity per resolved claim over the past five years
      of
      $20,056, times 1,040, we previously projected the probable future indemnity
      to
      be paid on those claims after December 31, 2005 to be equal to approximately
      $21
      million. In addition, multiplying an estimated cost of defense per resolved
      claim of approximately $13,500 times 1,040, we projected the probable future
      defense costs to equal approximately $14 million. Accordingly, our total
      estimated future asbestos-related liability at December 31, 2005 was $35
      million. These estimated liabilities are included as liabilities on our December
      31, 2005 balance sheet.





As
      of
      December 31, 2005, we projected that approximately 145 new asbestos-related
      claims would be commenced, and approximately 245 cases would be resolved, in
      2006, resulting in an estimated 407 cases pending at December 31, 2006. Since
      we
      projected that an aggregate of 533 new cases would be commenced after December
      31, 2005, and that 145 of these cases would be commenced in 2006, we estimated
      that an aggregate of 388 new cases would be commenced after December 31, 2006.
      Accordingly, the cases pending and projected to be commenced in the future
      at
      December 31, 2006, would be 795 cases. Multiplying 795 claims times the
      approximate average indemnity paid and defense costs incurred per resolved
      claim
      from 2002 through 2005 of $33,500, we had previously estimated our liability
      for
      current and future asbestos-related claims at December 31, 2006 to be
      approximately $27,000,000. This amounted to an $8,000,000 reduction from the
      $35,000,000 liability we estimated as of December 31, 2005, or a $2,000,000
      reduction per quarter.





As
      of
      June 30, 2006, we re-evaluated our estimates, based upon the fact that we
      previously estimated that there would be 145 asbestos-related claims made in
      2006, and that 123 claims had already been made in the first half of 2006 and
      that we previously estimated that 245 claims would be resolved in 2006, and
      that
      145 claims had already been resolved in the first six months of 2006. As of
      June
      30, 2006 we estimated that there would be 889 asbestos-related injury claims
      made against the Company after December 31, 2005. The 889, in addition to the
      507 claims existing as of December 31, 2005, totaled 1,396 current and future
      claims. There were 145 resolved claims in the first six months of 2006, which
      meant that as of June 30, 2006, the Company estimated that there were 1,251
      current and future claims. Multiplying the average indemnity per resolved claim
      over the past five and one half years of $19,300, times 1,251, we projected
      the
      probable future indemnity to be paid on those claims after June 30, 2006 to
      be
      equal to approximately $24 million. In addition, multiplying an estimated cost
      of defense per resolved claim of approximately $13,500 times 1,251, we projected
      the probable future defense costs to equal approximately $17 million.
      Accordingly, our total estimated future asbestos-related liability at June
      30,
      2006 was $41 million.





As
      of
      June 30, 2006, we projected that approximately 196 new asbestos-related claims
      would be commenced, and approximately 277 cases would be resolved, in 2006,
      resulting in an estimated 426 cases pending at December 31, 2006. Based upon
      these new estimates, we projected that an aggregate of 889 new cases would
      be
      commenced after December 31, 2005, and that 196 of these cases would be
      commenced in 2006, we estimated that an aggregate of 693 new cases would be
      commenced after December 31, 2006. Accordingly, the cases pending and projected
      to be commenced in the future at December 31, 2006, would be 1,119 cases.
      Multiplying 1,119 claims times the approximate average indemnity paid and
      defense costs incurred per resolved claim from 2002 through June 2006 of
      $32,800, we estimated our liability for current and future asbestos-related
      claims at December 31, 2006 to be approximately $37,000,000. This amounted
      to a
      $4,000,000 reduction from the $41,000,000 liability we estimated as of June
      30,
      2006, or a $2,000,000 reduction per quarter. Accordingly, we reduced our
      asbestos-related liability at the quarter ended September 30, 2006, by
      $2,000,000.




18




As
      of
      December 31, 2006, we again re-evaluated our estimates. We now estimate that
      there will be 924 asbestos-related injury claims made against the Company after
      December 31, 2006. The 924, in addition to the 404 claims existing as of
      December 31, 2006, totaled 1,328 current and future claims. Multiplying the
      average indemnity per resolved claim over the past six years of $19,131, times
      1,328, we projected the probable future indemnity to be paid on those claims
      after December 31, 2006 to be equal to approximately $25 million. In addition,
      multiplying an estimated cost of defense per resolved claim of approximately
      $13,500 times 1,328, we projected the probable future defense costs to equal
      approximately $18 million. Accordingly, our total estimated future
      asbestos-related liability at December 31, 2006 was $43 million.





We
      intend
      to re-evaluate our estimate of future liability for asbestos claims at the
      end
      of each fiscal year, or whenever actual results are materially different from
      our estimates, integrating our actual experience in that fiscal year with that
      of prior fiscal years since 2002. We estimate that the effects of economic
      inflation on either the average indemnity payment or the projected direct legal
      expenses will be approximately equal to a discount rate applied to our future
      liability based upon the time value of money. It is probable that we have
      adequate insurance to cover current and future asbestos-related claims, although
      such coverage cannot be assured.





Although
      defense costs are included in our insurance coverage, we expended $220,000,
      $174,000, $304,000, $188,000, and $215,000 in 2002, 2003, 2004, 2005 and 2006,
      respectively, to administer the asbestos claims. These amounts were primarily
      fees paid to attorneys to monitor the activities of the insurers, and their
      selected defense counsel, and to look after our rights under the various
      insurance policies.





There
      are
      numerous insurance carriers which have issued a number of policies to us over
      a
      period extending from approximately 1967 through approximately 1985 that still
      provide coverage for asbestos-related injury claims. After approximately 1985
      the policies were issued with provisions which purport to exclude coverage
      for
      asbestos related claims. The terms of our insurance policies are complex, and
      coverage for many types of claims is limited as to the nature of the claim
      and
      the amount of coverage available. It is clear, however, under California law,
      where the substantial majority of the asbestos-related injury claims are
      litigated, that all of those policies cover any asbestos-related injury
      occurring during the 1967 through 1985 period when these policies were in
      force.





We
      have
      engaged legal counsel to review all of our known insurance policies, and to
      provide us with the amount of coverage which such counsel believes to be
      probable under those policies for current and future asbestos-related injury
      claims against us. Such legal counsel has provided us with its opinion of the
      minimum probable insurance coverage available to satisfy asbestos-related injury
      claims, which significantly exceeds our estimated $43 million future liability
      for such claims as of December 31, 2006. Accordingly, we have included
      $43,000,000 and $35,000,000 of such insurance coverage receivable as an asset
      on
      our 2006 and 2005 balance sheets, respectively.





On
      February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
      Insurance Company of Omaha ("Central National") and Industrial Underwriters
      Insurance Company ("Industrial"), which are all related entities, filed a
      declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
      Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
      in the Superior Court of the State of California, County of Los Angeles. ACE,
      Central National and Industrial issued umbrella and excess policies to
      Metalclad, which has sought and obtained from the plaintiffs both defense and
      indemnity under these policies for the asbestos lawsuits brought against
      Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
      regarding a variety of coverage issues, but is centrally focused on issues
      involving whether historical and currently pending asbestos lawsuits brought
      against Metalclad are subject to either an "aggregate" limits of liability or
      separate "per occurrence" limits of liability. Whether any particular asbestos
      lawsuit is properly classified as being subject to an aggregate limit of
      liability depends upon whether or not the suit falls within the "products"
      or
      "completed operations" hazards found in most of the liability policies issued
      to
      Metalclad. Resolution of these classification issues will determine if, as
      ACE
      and Central National allege, their policies are nearing exhaustion of their
      aggregate limits and whether or not other Metalclad insurers who previously
      asserted they no longer owed any coverage obligations to Metalclad because
      of
      the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
      additional coverage obligations. The ACE Lawsuit also seeks to determine the
      effect of the settlement agreement between the Company and Allstate Insurance
      Company on the insurance obligations of various other insurers of Metalclad,
      and
      the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
      does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
      that we will incur attorneys fees and other associated litigation costs in
      defending the lawsuit and any counter claims made against us by any other
      insurers, and in prosecuting any claims we may seek to have adjudicated
      regarding our insurance coverage. In addition, the ACE Lawsuit may result in
      our
      incurring costs in connection with obligations we may have to indemnify Allstate
      under the Settlement Agreement. Allstate, in a cross-complaint filed against
      Metalclad Insulation Corporation in October, 2005, asked the court to determine
      the Company’s obligation to assume and pay for the defense of Allstate in the
      ACE Lawsuit under the Company’s indemnification obligations in the Settlement
      Agreement. The Company does not believe that it has any legal obligation to
      assume or pay for such defense.




19




In
      2003
      and 2004 the Judiciary Committee of the United States Senate considered
      legislation to create a privately funded, publicly administered fund to provide
      the necessary resources for an asbestos injury claims resolution program, and
      is
      commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
      approved by the Judiciary Committee, but the bill was rejected by the full
      Senate in February 2006, when a cloture motion on the bill was withdrawn. An
      amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
      May 2006, but has not been scheduled for a vote. A similar bill was introduced
      in the House (HR 1360) in March 2005, but was referred to a subcommittee in
      May
      2005. The latest draft of the “FAIR” Act calls for the fund to be funded
      partially by asbestos defendant companies, of which the Company is one, and
      partially by insurance companies. The bill could be voted on by the Senate
      or
      the House at any time in the future. The impact, if any, the “FAIR” Act will
      have on us if passed cannot be determined at this time although the latest
      draft
      of the legislation did not appear favorable to us.





The
      following summarizes our contractual obligations at December 31, 2006. The
      long-term debt consists of various notes payable to a finance company for
      vehicles used in the ordinary course of the Company’s insulation business (See
      Note 11).





Total
            
            1
                Year or Less
            
            1-3
                Years
            
            4-5
                Years
            
            Over
                5 YearsLong-term
                debt
            
            $
            157,089
            
            $
            89,327
            
            $
            67,762
            
            $
            -
            
            $
            -Non-cancelable
                leases
            
            
            860,052
            
            
            162,000
            
            
            515,736
            
            
            182,316
            
            
            -Estimated
                interest payments
            
            
            3,908
            
            
            3,145
            
            
            763
            
            
            -
            
            
            -Total
            
            $
            1,021,049
            
            $
            254,472
            
            $
            584,261
            
            $
            182,316
            
            $
            -





During
      2006 and 2005, we did not pay or declare any cash dividends and do not intend
      to
      pay any cash dividends in the near future.





The
      Company projects that cash flow generated through the operations of its
      subsidiary, Metalclad Insulation Corporation, and the Company’s cash balance at
      December 31, 2006, will be sufficient to meet the Company’s cash requirements
      for at least the next twelve months.





**Impact
      of Inflation**





We
      reflect price escalations in our quotations to our insulation customers and
      in
      the estimation of costs for materials and labor. For construction contracts
      based on a cost-plus or time-and-materials basis, the effect of inflation on
      us
      is negligible. For projects on a fixed-price basis, the effect of inflation
      may
      result in reduced profit margin or a loss as a result of higher costs to us
      as
      the contracts are completed; however, the majority of our contracts are
      completed within 12 months of their commencement and we believe that the impact
      of inflation on such contracts is insignificant.





**Significant
      Accounting Policies**





Our
      critical accounting policies are those both having the most impact to the
      reporting of our financial condition and results, and requiring significant
      judgments and estimates. Our critical accounting policies include those related
      to (a) revenue recognition, (b) investments in unconsolidated affiliates, (c)
      allowances for uncollectible notes and accounts receivable, (d) judgments and
      estimates used in determining the need for an accrual, and the amount, of our
      asbestos liability, and (e) evaluation and estimates of our probable insurance
      coverage for asbestos-related claims. Revenue recognition for fixed price
      insulation installation and asbestos abatement contracts are accounted for
      by
      the percentage-of-completion method, wherein costs and estimated earnings are
      included in revenues as the work is performed. If a loss on a fixed price
      contract is indicated, the entire amount of the estimated loss is accrued when
      known. Revenue recognition on time and material contracts is recognized based
      upon the amount of work performed. We have made investments in privately-held
      companies, which can still be considered to be in the startup or development
      stages. The investments at less than 20% of ownership are initially recorded
      at
      cost and the carrying value is evaluated quarterly. We monitor these investments
      for impairment and make appropriate reductions in carrying values if we
      determine an impairment charge is required based primarily on the financial
      condition and near-term prospects of these companies. These investments are
      inherently risky, as the markets for the technologies or products these
      companies are developing are typically in the early stages and may never
      materialize. Notes and accounts receivable are reduced by an allowance for
      amounts that may become uncollectible in the future. The estimated allowance
      for
      uncollectible amounts is based primarily on our evaluation of the financial
      condition of the noteholder or customer. Future changes in the financial
      condition of a note payee or customer may require an adjustment to the allowance
      for uncollectible notes and accounts receivable. We have estimated the probable
      amount of future claims related to our asbestos liability and the probable
      amount of insurance coverage related to those claims. We offset proceeds
      received from our insurance carriers resulting from claims of personal injury
      allegedly related to asbestos exposure against the payment issued to the
      plaintiff. The cash from the insurance company goes directly to the plaintiff,
      so we never have access to this cash. We never have control over any of the
      funds the insurance company issues to the plaintiff. Once a claim is settled,
      payment of the claim is normally made by the insurance carrier or carriers
      within 30 to 60 days. Changes in any of the judgments and estimates could have
      a
      material impact on our financial condition and results.




20




**New
      Accounting Pronouncements**





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), *Accounting
      for Uncertainty in Income Taxes,* an
      interpretation of FASB Statement No. 109, to address the noncomparability in
      reporting tax assets and liabilities resulting from a lack of specific guidance
      in SFAS No. 109, *Accounting
      for Income Taxes,* on the
      uncertainty in income taxes recognized in an enterprise’s financial statements.
      Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold
      and
      (b) a measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return,
      and
      provides related guidance on derecognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition. The Company
      does not expect the adoption of FIN No. 48 to have a material effect on its
      consolidated financial statements.





In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement
      applies to all voluntary changes in accounting principle, and changes the
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 was effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. The statement
      does not change the transition provisions of any existing accounting
      pronouncements, including those that are in a transition phase as of the
      effective date of this statement. The adoption of SFAS No. 154 did not have
      a
      material effect on the Company’s consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”, an amendment of SFAS No. 115. The
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. SFAS No. 159 is effective for fiscal years
      beginning after November 15, 2007 but allows for early adoption. The Company
      is
      currently evaluation the effect of adopting SFAS No. 159 but does not believe
      the impact will have a material effect on the Company’s consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157 (SFAS No. 157), *Fair
      Value Measurements,* to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry price).




21




SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity's own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, *Disclosures about Fair Value of Financial Instruments,* where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No. 133 , *Accounting for Derivative Instruments and Hedging Activities,* at
      initial recognition and in all subsequent periods.





SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application.





The
      Company is currently evaluating
      the effect of adopting SFAS No. 157 on its consolidated financial
      statements.





In
      September 2006, the FASB has issued SFAS No.
      158
      (SFAS No. 158), *Employers' Accounting for Defined Benefit Pension and Other Postretirement
      Plans,* to
      require an employer to fully recognize the obligations associated with
      single-employer defined benefit pension, retiree healthcare, and other
      postretirement plans in their financial statements. Previous standards required
      an employer to disclose the complete funded status of its plan only in the
      notes
      to the financial statements. Moreover, because those standards allowed an
      employer to delay recognition of certain changes in plan assets and obligations
      that affected the costs of providing benefits, employers reported an asset
      or
      liability that almost always differed from the plan's funded status. Under
      SFAS
      No. 158, a defined benefit postretirement plan sponsor that is a public or
      private company or a nongovernmental not-for-profit organization must (a)
      recognize in its statement of financial position an asset for a plan's
      overfunded status or a liability for the plan's underfunded status, (b) measure
      the plan's assets and its obligations that determine its funded status as of
      the
      end of the employer's fiscal year (with limited exceptions), and (c) recognize,
      as a component of other comprehensive income, the changes in the funded status
      of the plan that arise during the year but are not recognized as components
      of
      net periodic benefit cost pursuant to SFAS No. 87, *Employers' Accounting for Pensions,* or SFAS
      No. 106, *Employers' Accounting for Postretirement Benefits Other Than
      Pensions.* SFAS No.
      158 also requires an employer to disclose in the notes to financial statements
      additional information on how delayed recognition of certain changes in the
      funded status of a defined benefit postretirement plan affects net periodic
      benefit cost for the next fiscal year.  SFAS No. 158 is effective for
      fiscal years ending after December 15, 2006. The Company does not expect the
      adoption of SFAS No. 158 to have a material effect on its consolidated financial
      statements.


22




**Item
      7. FINANCIAL STATEMENTS**





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Shareholders, Audit Committee and Board of Directors


Entrx
      Corporation and subsidiaries


Minneapolis,
      Minnesota





We
      have
      audited the accompanying consolidated balance sheets of Entrx Corporation and
      subsidiaries as of December 31, 2006 and 2005, and the related consolidated
      statements of operations, shareholders' equity and cash flows for the years
      then
      ended. 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. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      its internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company's internal control
      over financial reporting. Accordingly, we express no such opinion. 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 financial position of Entrx Corporation and
      subsidiaries as of December 31, 2006 and 2005 and the results of their
      operations and their cash flows for the years then ended, in conformity with
      U.S. generally accepted accounting principles.




/s/
      Virchow, Krause & Company, LLP





Minneapolis,
      Minnesota


March
      19,
      2007




23




**ENTRX
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**




December
                31,
              2006
            
            December
                31,
              2005**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,607,580
            
            $
            413,395Available-for-sale
                securities
            
            
            99,094
            
            
            142,925Accounts
                receivable, less allowance for doubtful accounts of $15,000 and $11,000
                as
                of December 31, 2006 and December 31, 2005, respectively
            
            
            4,052,823
            
            
            2,916,505Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            364,981
            
            
            193,231Inventories
            
            
            27,763
            
            
            135,391Prepaid
                expenses and other current assets
            
            
            191,309
            
            
            243,364Insurance
                claims receivable
            
            
            8,000,000
            
            
            8,000,000Shareholder
                note receivable, net of allowance of $1,286,000 as of December 31,
                2006
            
            
            210,000
            
            
            -Other
                receivables
            
            
            374,175
            
            
            540,136Total
                current assets
            
            
            14,927,725
            
            
            12,584,947Property,
                plant and equipment, net
            
            
            331,041
            
            
            363,910Asset
                held for sale, net
            
            
            -
            
            
            1,979,047Investments
                in unconsolidated affiliates
            
            
            1,206,889
            
            
            1,206,889Shareholder
                note receivable, net of allowance of $250,000 as of December 31,
                2005
            
            
            -
            
            
            1,246,370Insurance
                claims receivable
            
            
            35,000,000
            
            
            27,000,000Other
                assets
            
            
            201,560
            
            
            75,596$
            51,667,215
            
            $
            44,456,759**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Current
                liabilities:Note
                payable to bank
            
            $
            -
            
            $
            775,000Current
                portion of note payable
            
            
            -
            
            
            510,121Current
                portion of long-term debt
            
            
            89,327
            
            
            85,875Current
                portion of mortgage payable
            
            
            -
            
            
            39,946Accounts
                payable
            
            
            946,417
            
            
            746,057Accrued
                expenses
            
            
            1,486,082
            
            
            1,694,607Reserve
                for asbestos liability claims
            
            
            8,000,000
            
            
            8,000,000Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            106,353
            
            
            176,641Total
                current liabilities
            
            
            10,628,179
            
            
            12,028,247Long-term
                debt, less current portion
            
            
            67,762
            
            
            59,294Note
                payable, less current portion
            
            
            -
            
            
            44,848Reserve
                for asbestos liability claims
            
            
            35,000,000
            
            
            27,000,000Mortgage
                payable, less current portion
            
            
            -
            
            
            1,460,732Total
                liabilities
            
            
            45,695,941
            
            
            40,593,121Commitments
                and contingenciesShareholders’
                equity:Preferred
                stock, par value $1; 5,000,000 shares authorized; none
                issued
            
            
            -
            
            
            -Common
                stock, par value $0.10; 80,000,000 shares authorized; 8,455,947 and
                8,001,147 issued and outstanding, respectively, at December 31, 2006
                and
                8,405,947 and 7,951,147 issued and outstanding, respectively, at
                December
                31, 2005
            
            
            845,595
            
            
            840,595Additional
                paid-in capital
            
            
            70,260,746
            
            
            70,257,746Less
                treasury stock at cost, 454,800 shares at both December 31, 2006
                and
                December 31, 2005
            
            
            (380,765
            )
            
            (380,765
            )Accumulated
                deficit
            
            
            (64,754,302
            )
            
            (66,806,297
            )Accumulated
                other comprehensive loss
            
            
            -
            
            
            (47,641
            )Total
                shareholders’ equity
            
            
            5,971,274
            
            
            3,863,638$
            51,667,215
            
            $
            44,456,759





See
      Notes
      to Consolidated Financial Statements


24


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
      (LOSS)**




Year
                Ended December 31,2006
            
            2005Contract
                revenues
            
            $
            19,517,250
            
            $
            14,711,095Contract
                costs and expenses
            
            
            16,638,105
            
            
            13,199,468Gross
                margin
            
            
            2,879,145
            
            
            1,511,627Operating
                expenses:Selling,
                general and administrative
            
            
            2,400,799
            
            
            2,424,764Change
                in allowance on shareholder note receivable
            
            
            1,083,885
            
            
            -Gain
                on disposal of property, plant and equipment
            
            
            (1,294
            )
            
            (1,816
            )Total
                operating expenses
            
            
            3,483,390
            
            
            2,422,948Operating
                loss
            
            
            (604,245
            )
            
            (911,321
            )Interest
                income
            
            
            104,882
            
            
            132,187Interest
                expense
            
            
            (107,150
            )
            
            (554,581
            )Gain
                on sale of building, land and building improvements
            
            
            1,724,980
            
            
            -Other
                income - settlements
            
            
            1,025,000
            
            
            -Impairment
                charge on available-for-sale securities
            
            
            (91,472
            )
            
            -Impairment
                charge on investment in privately-held company
            
            
            -
            
            
            (409,000
            )Net
                income (loss)
            
            
            2,051,995
            
            
            (1,742,715
            )Other
                comprehensive lossUnrealized
                losses on available-for-sale securities
            
            
            -
            
            
            (9,528
            )Comprehensive
                income (loss)
            
            $
            2,051,995
            
            $
            (1,752,243
            )Weighted
                average number of common shares — basic
            
            
            7,979,640
            
            
            7,683,202Weighted
                average number of common shares — diluted
            
            
            7,979,640
            
            
            7,683,202Basic
                net income (loss) per common share
            
            $
            0.26
            
            $
            (0.23
            )Diluted
                net income (loss) per common share
            
            $
            0.26
            
            $
            (0.23
            )





See
      Notes
      to Consolidated Financial Statements


25


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**





Years
      Ended December 31, 2006 and 2005





Common
                Stock
            
            Additional
              Paid-in
            
            Treasury
                Stock
            
            Accumulated
            
            Accumulated
              Other
              Comprehensive
            
            Total
                Shareholders’Shares
            
            Amounts
            
            Capital
            
            Shares
            
            Amounts
            
            Deficit
            
            Income
                (loss)
            
            EquityBalance
                at December 31, 2004
            
            
            7,651,147
            
            $
            810,595
            
            $
            70,263,161
            
            
            454,800
            
            $
            (380,765
            )
            $
            (65,063,582
            )
            $
            (38,113
            )
            $
            5,591,296Unrealized
                loss on available-for-sale securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,528
            )
            
            (9,528
            )Stock
                warrants issued related to note payable
            
            
            -
            
            
            -
            
            
            24,585
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            24,585Common
                stock issued in exchange for warrants
            
            
            300,000
            
            
            30,000
            
            
            (30,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,742,715
            )
            
            -
            
            
            (1,742,715
            )Balance
                at December 31, 2005
            
            
            7,951,147
            
            
            840,595
            
            
            70,257,746
            
            
            454,800
            
            
            (380,765
            )
            
            (66,806,297
            )
            
            (47,641
            )
            $
            3,863,638Reclassification
                adjustment for losses recognized in net income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            47,641
            
            
            47,641Common
                stock issued in exchange for services
            
            
            50,000
            
            
            5,000
            
            
            3,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,000Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,051,995
            
            
            -
            
            
            2,051,995Balance
                at December 31, 2006
            
            
            8,001,147
            
            $
            845,595
            
            $
            70,260,746
            
            
            454,800
            
            $
            (380,765
            )
            $
            (64,754,302
            )
            $
            -
            
            $
            5,971,274




See
      Notes
      to Consolidated Financial Statements


26


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Year
                Ended December 31,2006
            
            2005Cash
                flows from operating activities:Net
                income (loss)
            
            $
            2,051,995
            
            $
            (1,742,715
            )Adjustments
                to reconcile net income (loss) to net cash provided by (usedin)
                operating activities:Depreciation
                and amortization
            
            
            171,768
            
            
            202,308Gain
                on disposal of property, plant and equipment
            
            
            (1,726,274
            )
            
            (1,816
            )Impairment
                charge on investments
            
            
            91,472
            
            
            409,000Change
                in allowance for doubtful accounts
            
            
            4,388
            
            
            (39,388
            )Allowance
                on shareholder note receivable
            
            
            1,036,370
            
            
            -Net
                interest income recorded on shareholder note receivable
            
            
            42,513
            
            
            (10,001
            )Common
                stock issued for services
            
            
            8,000
            
            
            -Amortization
                of original issue discount
            
            
            -
            
            
            260,525Issuance
                of stock warrants related to note payable
            
            
            -
            
            
            24,585Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (1,140,706
            )
            
            (863,775
            )Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            (171,750
            )
            
            111,826Inventories
            
            
            107,628
            
            
            (26,976
            )Prepaid
                expenses and other current assets
            
            
            52,055
            
            
            (69,616
            )Other
                receivables
            
            
            123,448
            
            
            (215,758
            )Other
                assets
            
            
            (125,964
            )
            
            (1,485
            )Accounts
                payable and accrued expenses
            
            
            (8,165
            )
            
            876,041Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            (70,288
            )
            
            137,184Net
                cash provided by (used in) operating activities
            
            
            446,490
            
            
            (950,061
            )Cash
                flows from investing activities:Capital
                expenditures
            
            
            (171,199
            )
            
            (194,037
            )Proceeds
                from sale of property, plant and equipment, net of
                expenses
            
            
            3,737,621
            
            
            12,766Net
                cash provided by (used in) investing activities
            
            
            3,566,422
            
            
            (181,271
            )Cash
                flows from financing activities:Proceeds
                from long-term debt
            
            
            114,178
            
            
            73,176Payments
                on note payable to bank
            
            
            (775,000
            )
            
            (225,000
            )Payments
                on long-term debt
            
            
            (102,258
            )
            
            (147,132
            )Payments
                on note payable and convertible note payable
            
            
            (554,969
            )
            
            (461,767
            )Payments
                on mortgage payable
            
            
            (1,500,678
            )
            
            (39,803
            )Payments
                on capital lease obligation
            
            
            -
            
            
            (11,955
            )Net
                cash used in financing activities
            
            
            (2,818,727
            )
            
            (812,481
            )Increase
                (decrease) in cash and cash equivalents
            
            
            1,194,185
            
            
            (1,943,813
            )Cash
                and cash equivalents at beginning of year
            
            
            413,395
            
            
            2,357,208Cash
                and cash equivalents at end of year
            
            $
            1,607,580
            
            $
            413,395




See
      Notes
      to Consolidated Financial Statements


27


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2006 AND 2005**





**NOTE
      1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
      POLICIES**





**Description
      of Business**





Entrx
      Corporation (the “Company”) is engaged in insulation services, including
      asbestos abatement and material sales, to customers primarily in California
      (the
“Insulation Business”).





**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of the Company, its
      wholly-owned and majority-owned subsidiaries, and the accounts of
      Curtom-Metalclad pursuant to Financial Accounting Standards Board (FASB)
      Interpretation 46R, “Consolidation of Variable Interest Entities” (see Note 2).
      Significant intercompany accounts and transactions have been eliminated in
      consolidation.





**Cash
      and Cash Equivalents**





The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents. The carrying amount approximates
      fair value because of the short maturity of those instruments. The Company
      deposits its cash in high credit quality financial institutions. The balances,
      at times, may exceed federally insured limits.





**Investments**





Investments
      held by the Company are classified as available-for-sale securities.
      Available-for-sale securities are reported at fair value with all unrealized
      gains or losses included in other comprehensive income. The fair value of the
      securities was determined by quoted market prices of the underlying security.
      For purposes of determining gross realized gains, the cost of available-for-sale
      securities is based on specific identification.





Aggregate
                fairvalue
            
            Gross
                unrealizedgains
            
            Gross
                unrealizedlosses
            
            CostAvailable
                for sale securities - December 31, 2006
            
            $
            99,094
            
            $
            -
            
            $
            -
            
            $
            99,094Available
                for sale securities - December 31, 2005
            
            $
            142,925
            
            $
            -
            
            $
            (47,641
            )
            $
            190,566




The
      Company's net unrealized holding loss was $0 and $9,528 for the years ended
      December 31, 2006 and 2005, respectively.





On
      an
      ongoing basis, the Company evaluates its investments in available-for-sale
      securities to determine if a decline in fair value is other-than-temporary.
      When
      a decline in fair value is determined to be other-than-temporary, an impairment
      charge is recorded and a new cost basis in the investment is established. The
      Company reviewed the stock price history of the investment and noted that for
      only approximately 8.4% of the trading days in 2006, the investment’s stock
      price was greater than or equal to the Company’s cost basis in the investment.
      The Company has determined that the impairment was considered
      other-than-temporary at December 31, 2006 and recorded an impairment charge
      of
      $91,472.




28




The
      Company also has minority investments in privately held companies. These
      investments are included in investments in unconsolidated affiliates on the
      Consolidated Balance Sheets and are carried at cost unless the fair value of
      the
      investment below the cost basis is judged to be other-than-temporary. The
      Company monitors these investments for impairment and makes appropriate
      reductions in carrying values. (See Note 5)





**Accounts
      Receivable**





The
      Company reviews customers’ credit history before extending unsecured credit and
      establishes an allowance for doubtful accounts based upon factors surrounding
      the credit risk of specific customers and other information. Invoices are
      generally issued with Net 30 day terms. Accounts receivable over 30 days are
      considered past due. The Company does not accrue interest on past due accounts
      receivable. Accounts receivable are uncollateralized customer obligations
      resulting from the performance of construction contracts and time and material
      projects. Balances are based on terms of the contract or invoice amount. The
      Company follows the practice of filing liens on construction projects where
      collection problems are anticipated. The liens serve as collateral on the
      associated receivable. Receivables are written-off only after all collection
      attempts have failed and are based on individual credit evaluation and specific
      circumstances of the customer.





**Financial
      Instruments**





The
      carrying amounts for all financial instruments approximate fair value. The
      carrying amounts for cash and cash equivalents, accounts receivable, accounts
      payable and accrued expenses approximate fair value because of the short
      maturity of these instruments. The fair value of long-term debt, note payable
      to
      bank, convertible note payable, mortgage payable and capital lease obligation
      approximates the carrying amounts based upon the Company's expected borrowing
      rate for debt with similar remaining maturities and comparable
      risk.





**Inventories**





Inventories,
      which consist principally of insulation products and related materials, are
      stated at the lower of cost (determined on the first-in, first-out method)
      or
      market.





**Depreciation
      and Amortization**





Property,
      plant and equipment are stated at cost. Depreciation and amortization is
      computed using the straight-line method over the estimated useful lives of
      related assets which range from three to five years for machinery and equipment
      and thirty years for the building and related improvements. Maintenance, repairs
      and minor renewals are expensed when incurred.





**Advertising
      Costs**





Advertising
      costs are expensed as incurred. Advertising costs totaled approximately $684
      and
      $850 for the years ended December 31, 2006 and 2005, respectively.





**Revenue
      Recognition**





Fixed
      price insulation installation and asbestos abatement contracts are accounted
      for
      by the percentage-of-completion method wherein costs and estimated earnings
      are
      included in revenues as the work is performed. If a loss on a fixed price
      contract is indicated, the entire amount of the estimated loss is accrued when
      known. The Company recorded anticipated losses of $1,112,000 on three projects
      in the year ended December 31, 2005 of which $466,002 of accrued expense related
      to anticipated losses was accrued at December 31, 2005. (See Note 8) The Company
      anticipates that due to cost overruns its expected costs to complete the project
      will exceed its revenue. Time and material contracts are accounted for under
      a
      cost plus fee basis. Retentions by customers under contract terms are due at
      contract completion. The Company did not have any claims revenue during the
      years ended December 31, 2006 and 2005.




29




The
      Company’s wholly-owned subsidiary, Metalclad Insulation Corporation, has both
      one and multi-year maintenance contracts. These contracts are billed monthly
      for
      the amount of work performed (time and materials with pre approval daily by
      the
      customer) and revenue is recognized accordingly. Metalclad Insulation
      Corporation does not require a large prepayment related to these maintenance
      contracts which would require a straight-line basis to recognize revenue. Entrx
      does recognize revenue in accordance with SAB 104 when it has met the criteria
      of 1) persuasive evidence of an arrangement exists; 2) delivery has occurred
      or
      services have been rendered; 3) price is fixed or determinable; 4)
      collectibility is reasonably assured.





**Income/Loss
      Per Share**





The
      Company computes income (loss) per share in accordance with Statement of
      Financial Accounting Standards (“SFAS”) 128, “Earnings Per Share”. This
      statement requires the presentation of both basic and diluted net income (loss)
      per share for financial statement purposes. Basic net income (loss) per share
      is
      computed by dividing the net income (loss) available to common shareholders
      by
      the weighted average number of common shares outstanding. Diluted net income
      (loss) per share includes the effect of the potential shares outstanding,
      including dilutive stock options, warrants and convertible debt using the
      treasury stock method. Options and warrants totaling 2,295,710 and 3,009,040
      were excluded from the computation of diluted earnings per share for the years
      ended December 31, 2006 and 2005, respectively, as their effect was
      antidilutive. Following is a reconciliation of basic and diluted net income
      (loss) per share:





2006
            
            2005Basic
                net income (loss) per common shareNet
                income (loss)
            
            $
            2,051,995
            
            $
            (1,742,715
            )Weighted
                average shares outstanding
            
            
            7,979,640
            
            
            7,683,202Basic
                net income (loss) per common share
            
            $
            0.26
            
            $
            (0.23
            )Diluted
                net income (loss) per common shareNet
                income (loss)
            
            $
            2,051,995
            
            $
            (1,742,715
            )Weighted
                average shares outstanding
            
            
            7,979,640
            
            
            7,683,202Effect
                of dilutive securities
            
            
            -
            
            
            -Weighted
                average shares outstanding
            
            
            7,979,640
            
            
            7,683,202Diluted
                net income (loss) per common share
            
            $
            0.26
            
            $
            (0.23
            )





**Legal
      Costs**





The
      Company expenses its legal costs as incurred.





**Stock-Based
      Compensation**





On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123 and
      supersedes APB Opinion No. 25. SFAS No. 123 (R) requires all share-based
      payments to employees, including grants of employee stock options, to be valued
      at fair value on the date of grant, and to be expensed over the applicable
      vesting period. Pro forma disclosure of the income statement effects of
      share-based payments is no longer an alternative. In addition, companies must
      also recognize compensation expense related to any awards that are not fully
      vested as of the effective date. Compensation expense for the unvested awards
      will be measured based on the fair value of the awards previously calculated
      in
      developing the pro forma disclosures in accordance with the provisions of SFAS
      No. 123. We implemented SFAS No. 123(R) on January 1, 2006 using the modified
      prospective method. SFAS 123(R) did not have an impact on the Company’s
      consolidated financial statements since all of the Company’s outstanding stock
      options were fully vested at December 31, 2005 and no additional options were
      granted through December 31, 2006.





In
      prior
      years, we applied the intrinsic-value method prescribed in Accounting Principles
      Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to
      account for the issuance of stock incentives to employees and directors. No
      compensation expense related to employees’ and directors’ stock incentives was
      recognized in the prior year consolidated financial statements, as all options
      granted under stock incentive plans had an exercise price equal to the market
      value of the underlying common stock on the date of grant. Had the Company
      applied the fair value recognition provisions of SFAS No. 123 “Accounting for
      Stock-Based Compensation,” to stock based employee compensation for periods
      prior to January, 2006, the Company’s net income (loss) would have changed to
      the pro forma amounts indicated below:




30




Year
                Ended
              December
                31, 2005Net
                loss as reported
            
            $
            (1,742,715
            )Add:
                Stock-based employee compensation included in reported net income
                (loss),
                net of related tax effects
            
            
            -Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (95,818
            )Net
                loss pro forma
            
            $
            (1,838,533
            )Basic
                and diluted net loss per share as reported
            
            $
            (0.23
            )Stock-based
                compensation expense
            
            
            (0.01
            )Basic
                and diluted net loss per share pro forma
            
            $
            (0.24
            )





The
      following significant assumptions were utilized to calculate the fair value
      information presented utilizing the Black-Scholes pricing
      model:




Year
                Ended December 31,2006
            
            2005Risk
                free interest rate
            
            
            N/A
            
            
            2.77
            %Expected
                life
            
            
            N/A
            
            
            3.00
                yearsExpected
                volatility
            
            
            N/A
            
            
            153
            %Expected
                dividends
            
            
            N/A
            
            
            -Weighted
                average fair valueof
                options granted
            
            
            N/A
            
            $
            0.43





**Concentration
      of Credit Risk**





Financial
      instruments that potentially subject the Company to credit risk consist
      principally of cash and contract receivables. Contract receivables are
      concentrated primarily with utility companies located in Southern California.
      Historically, the Company’s credit losses have been insignificant.





**Income
      Taxes**





Deferred
      taxes are provided using the asset and liability method whereby deferred tax
      assets are recognized for deductible temporary differences and operating loss
      and tax credit carry forwards and deferred tax liabilities are recognized for
      taxable temporary differences. Temporary differences are the differences between
      the reported amounts of assets and liabilities and their tax bases. Deferred
      tax
      assets are reduced by a valuation allowance when, in the opinion of management,
      it is more likely than not that some portion or all of the tax assets will
      not
      be realized. Deferred tax assets and liabilities are adjusted for the effects
      of
      changes in tax laws and rates on the date of enactment.





**Comprehensive
      Income**





SFAS
      130,
“Reporting Comprehensive Income” establishes rules for the reporting of
      comprehensive income (loss) and its components. Comprehensive income (loss)
      consists of net income (loss), and unrealized gains (losses) on
      available-for-sale securities. During the years ended December 31, 2006 and
      2005, the Company recorded other comprehensive loss of $0 and $9,528,
      respectively, for unrealized losses on available-for-sale securities (net of
      reclassification adjustment of $47,641 for the year ended December 31, 2006).
      Since the Company has various net operating loss carry forwards, the amounts
      related to other comprehensive income (loss) for all periods presented are
      shown
      without any income tax provision or benefit.




31




**New
      Accounting Pronouncements**





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), *Accounting
      for Uncertainty in Income Taxes,* an
      interpretation of FASB Statement No. 109, to address the noncomparability in
      reporting tax assets and liabilities resulting from a lack of specific guidance
      in SFAS No. 109, *Accounting
      for Income Taxes,* on the
      uncertainty in income taxes recognized in an enterprise’s financial statements.
      Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold
      and
      (b) a measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return,
      and
      provides related guidance on derecognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition. The Company
      does not expect the adoption of FIN No. 48 to have a material effect on its
      consolidated financial statements.





In
      June
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement
      applies to all voluntary changes in accounting principle, and changes the
      requirements for accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless it
      is
      impracticable. SFAS No. 154 was effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. The statement
      does not change the transition provisions of any existing accounting
      pronouncements, including those that are in a transition phase as of the
      effective date of this statement. The adoption of SFAS No. 154 did not have
      a
      material effect on the Company’s consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”, an amendment of SFAS No. 115. The
      statement permits entities to choose to measure many financial instruments
      and
      certain other items at fair value. SFAS No. 159 is effective for fiscal years
      beginning after November 15, 2007 but allows for early adoption. The Company
      is
      currently evaluation the effect of adopting SFAS No. 159 but does not believe
      the impact will have a material effect on the Company’s consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157 (SFAS No. 157), *Fair
      Value Measurements,* to
      eliminate the diversity in practice that exists due to the different definitions
      of fair value and the limited guidance for applying those definitions in GAAP
      that are dispersed among the many accounting pronouncements that require fair
      value measurements. SFAS No. 157 retains the exchange price notion in earlier
      definitions of fair value, but clarifies that the exchange price is the price
      in
      an orderly transaction between market participants to sell an asset or liability
      in the principal or most advantageous market for the asset or liability.
      Moreover, the SFAS states that the transaction is hypothetical at the
      measurement date, considered from the perspective of the market participant
      who
      holds the asset or liability. Consequently, fair value is defined as the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date (an
      exit
      price), as opposed to the price that would be paid to acquire the asset or
      received to assume the liability at the measurement date (an entry price).





SFAS
      No.
      157 also stipulates that, as a market-based measurement, fair value measurement
      should be determined based on the assumptions that market participants would
      use
      in pricing the asset or liability, and establishes a fair value hierarchy that
      distinguishes between (a) market participant assumptions developed based on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (b) the reporting entity's own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs). Finally, SFAS No. 157 expands disclosures
      about the use of fair value to measure assets and liabilities in interim and
      annual periods subsequent to initial recognition. Entities are encouraged to
      combine the fair value information disclosed under SFAS No. 157 with the fair
      value information disclosed under other accounting pronouncements, including
      SFAS No. 107, *Disclosures about Fair Value of Financial Instruments,* where
      practicable. The guidance in this Statement applies for derivatives and other
      financial instruments measured at fair value under SFAS No. 133 , *Accounting for Derivative Instruments and Hedging Activities,* at
      initial recognition and in all subsequent periods.




32




SFAS
      No.
      157 is effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years, although
      earlier application is encouraged. Additionally, prospective application of
      the
      provisions of SFAS No. 157 is required as of the beginning of the fiscal year
      in
      which it is initially applied, except when certain circumstances require
      retrospective application.





The
      Company is currently evaluating
      the effect of adopting SFAS No. 157 on its consolidated financial
      statements.





In
      September 2006, the FASB has issued SFAS No.
      158
      (SFAS No. 158), *Employers' Accounting for Defined Benefit Pension and Other Postretirement
      Plans,* to
      require an employer to fully recognize the obligations associated with
      single-employer defined benefit pension, retiree healthcare, and other
      postretirement plans in their financial statements. Previous standards required
      an employer to disclose the complete funded status of its plan only in the
      notes
      to the financial statements. Moreover, because those standards allowed an
      employer to delay recognition of certain changes in plan assets and obligations
      that affected the costs of providing benefits, employers reported an asset
      or
      liability that almost always differed from the plan's funded status. Under
      SFAS
      No. 158, a defined benefit postretirement plan sponsor that is a public or
      private company or a nongovernmental not-for-profit organization must (a)
      recognize in its statement of financial position an asset for a plan's
      overfunded status or a liability for the plan's underfunded status, (b) measure
      the plan's assets and its obligations that determine its funded status as of
      the
      end of the employer's fiscal year (with limited exceptions), and (c) recognize,
      as a component of other comprehensive income, the changes in the funded status
      of the plan that arise during the year but are not recognized as components
      of
      net periodic benefit cost pursuant to SFAS No. 87, *Employers' Accounting for Pensions,* or SFAS
      No. 106, *Employers' Accounting for Postretirement Benefits Other Than
      Pensions.* SFAS No.
      158 also requires an employer to disclose in the notes to financial statements
      additional information on how delayed recognition of certain changes in the
      funded status of a defined benefit postretirement plan affects net periodic
      benefit cost for the next fiscal year.  SFAS No. 158 is effective for
      fiscal years ending after December 15, 2006. The Company does not expect the
      adoption of SFAS No. 158 to have a material effect on its consolidated financial
      statements.





**Use
      of Estimates**





The
      preparation of 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 financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





**Accounting
      for the Impairment of Long-Lived Assets**





The
      Company reviews long-lived assets for impairment whenever events or changes
      in
      business circumstances indicate that the carrying amount of an asset may not
      be
      fully recoverable. An impairment loss would be recognized when the estimated
      future cash flows from the use of the asset are less than the carrying amount
      of
      that asset.





**NOTE
      2 - CURTOM-METALCLAD**





In
      1989,
      the Company entered into a joint venture with a minority service firm
      ("Curtom-Metalclad") to perform industrial insulation and industrial asbestos
      abatement services similar to those performed by the Company. When contracts
      are
      obtained by the joint venture, the Company performs the work specified in the
      contract as a subcontractor to the joint venture. The joint venture agreement
      provides that Curtom-Metalclad receives approximately 2.5% of contract revenues.





In
      January 2003, FASB issued FASB Interpretation 46, “Consolidation of Variable
      Interest Entities, and an Interpretation of ARB No. 51” (FIN 46). In December
      2003, the FASB modified FIN 46 to FIN 46R to make certain technical corrections
      and address certain implementation issues that had arisen. FIN 46R provides
      a
      new framework for identifying variable interest entities (VIEs) and determining
      when a company should include the assets, liabilities, noncontrolling interests
      and results of activities of a VIE in its consolidated financial
      statements.




33




In
      general, a VIE is a corporation, partnership, limited-liability corporation,
      trust, or any other legal structure used to conduct activities or hold assets
      that either (1) has an insufficient amount of equity to carry out its principal
      activities without additional subordinated financial support, (2) has a group
      of
      equity owners that are unable to make significant decisions about its
      activities, or (3) has a group of equity owners that do not have the obligation
      to absorb losses or the right to receive returns generated by its
      operations.





FIN
      46R
      requires a VIE to be consolidated if a party with an ownership, contractual
      or
      other financial interest in the VIE (a variable interest holder) is obligated
      to
      absorb a majority of the risk of loss from the VIE's activities, is entitled
      to
      receive a majority of the VIE's residual returns (if no party absorbs a majority
      of the VIE's losses), or both. A variable interest holder that consolidates
      the
      VIE is called the primary beneficiary. Upon consolidation, the primary
      beneficiary generally must initially record all of the VIE's assets, liabilities
      and noncontrolling interests at fair value and subsequently account for the
      VIE
      as if it were consolidated based on majority voting interest.





FIN
      46R
      also requires disclosures about VIEs that the variable interest holder is not
      required to consolidate but in which it has a significant variable interest.
      FIN
      46R was effective immediately for VIEs created after January 31, 2003. The
      provisions of FIN 46, as originally issued, were adopted as of January 1, 2002
      for the Company's interests in VIEs that are special purpose entities (SPEs).
      Curtom-Metalclad was deemed to be a SPE and, as such, the Company consolidated
      Curtom-Metalclad as of January 1, 2002 since the Company was deemed to be the
      primary beneficiary. The adoption of FIN 46R (for interests in SPEs, i.e.
      Curtom-Metalclad) on January 1, 2002 was immaterial since the Company performed
      100% of the work for Curtom-Metalclad and assets were less than $20,000. At
      December 31, 2006, Curtom-Metalclad had assets of $18,436 (all cash) and
      partners’ equity of $18,436. Curtom-Metalclad did not have any liabilities at
      December 31, 2006.





**NOTE
      3 - ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following at December 31:





2006
            
            2005BilledCompleted
                contracts
            
            $
            655,623
            
            $
            772,090Contracts
                in process
            
            
            703,850
            
            
            718,788Time
                and material work
            
            
            2,421,061
            
            
            1,174,994Material
                sales
            
            
            8,784
            
            
            38,908Unbilled
                retainage
            
            
            278,505
            
            
            222,3374,067,823
            
            
            2,927,117Less:
                Allowance for doubtful accounts
            
            
            (15,000
            )
            
            (10,612
            )$
            4,052,823
            
            $
            2,916,505




**NOTE
      4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS**





Costs
      and
      estimated earnings on uncompleted contracts consisted of the following at
      December 31:





2006
            
            2005Costs
                incurred on uncompleted contracts
            
            $
            9,963,088
            
            $
            7,157,528Estimated
                earnings (loss)
            
            
            (23,431
            )
            
            1,593,3359,939,657
            
            
            8,750,863Less
                billings to date
            
            
            (9,681,029
            )
            
            (8,734,273
            )$
            258,628
            
            $
            16,590





34




The
      above
      information is presented in the balance sheet as follows:





2006
            
            2005Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            $
            364,981
            
            $
            193,231Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            (106,353
            )
            
            (176,641
            )$
            258,628
            
            $
            16,590




**NOTE
      5 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES**





In
      November 2001, the Company purchased 56,338 shares of Series C Convertible
      Preferred Stock of Catalytic Solutions, Inc. (“Catalytic Solutions”) for
      $1,000,000. Catalytic Solutions is a privately held materials science technology
      company focused on applying its technology to improve the performance and reduce
      the cost of automotive catalytic converters. Each preferred share could have
      been converted into 1.13625 shares of common stock at any time by the Company,
      subject to customary adjustments for stock splits, stock combinations, stock
      dividends, reclassifications and the like. All preferred shares automatically
      converted into fully paid and nonassessable shares of common stock (1) if
      Catalytic Solutions closes a firmly underwritten public offering of shares
      of
      common stock with aggregate net proceeds of at least $20 million and a per
      share
      public offering price of at least 1.5 times the per share purchase price of
      the
      preferred shares or (2) upon the consent or agreement of the holders of a
      majority of the outstanding shares of Series C Preferred Stock. In December
      2005, the Company received information from Catalytic that Catalytic intended
      to
      do a $10,000,000 to $15,000,000 subordinated secured convertible promissory
      note
      financing (the “New Financing”) . The
      New
      Financing was done through a rights offering to current shareholders and
      included a “pay-to-play” provision. The pay-to-play provision required all
      preferred shareholders to participate in the New Financing on a pro-rata basis.
      If a preferred shareholder elected not to participate in the New Financing,
      that
      shareholder’s preferred shares were converted into common shares. The New
      Financing closed in January 2006 and the Company elected not to participate.
      The
      Company’s Series C Convertible Preferred Stock of Catalytic Solutions therefore
      were converted into common stock of Catalytic Solutions. In evaluating the
      carrying value of our investment in Catalytic Solutions we consider whether
      there has been an “impairment indicator” as discussed in Emerging Issues Task
      Force 03-1 and determined that there had been an impairment indicator during
      the
      year ended December 31, 2005. The Company determined there had been an
      other-than-temporary decline in the fair value of its investment below the
      cost
      and recorded an impairment charge of $409,000 during the year ended December
      31,
      2005.





In
      October 2006, Catalytic effected a 1:6 stock split. After taking into account
      a
      previous anti-dilution adjustment the Company received on its Catalytic
      investment, the Company now owns 384,084 shares of Catalytic’s common stock. In
      November 2006, Catalytic completed a financing event that involved raising
      approximately $30.2 million by issuing new shares of their common stock at
      a
      price per share of approximately $2.35 per share. In addition, they have
      successfully applied for the admission of all of their outstanding shares of
      stock to the AIM market in London, England. The Company has determined that
      the
      AIM market is not of the breadth and scope of the United States markets and
      therefore a fair market value for the investment is not readily determinable
      as
      required by FAS 115. Due to the lack of a readily determinable fair market
      value, the Company has continued to carry the investment as an investment in
      an
      unconsolidated affiliate. In evaluating the carrying value of our investment
      in
      Catalytic we consider whether there has been an “impairment indicator” as
      discussed in Emerging Issues Task Force 03-1. We determined that there had
      not
      been an impairment indicator during the years ended December 31, 2006 and
      2005.





In
      March
      2003, the Company converted approximately $1,757,000 of advances made to Zamba
      Corporation into 415,340 shares of NextNet Wireless, Inc. (“NextNet”) Series A
      Preferred Stock owned by Zamba. NextNet is a privately held provider of
      non-line-of-sight plug-and-play broadband wireless access systems. Each
      preferred share was convertible into three shares of NextNet common stock.
      In
      March 2004, NextNet merged with Clearwire Corporation
      (“Clearwire”).





Under
      the
      terms of the merger, the Company received warrants to purchase 289,825 shares
      of
      the class A common stock of Clearwire in exchange for the 415,340 shares of
      Series A Preferred Stock that it owned of NextNet. The warrants the Company
      received from Clearwire have an exercise price of $4.00 per share, are
      immediately exercisable and have a term which terminates after the earlier
      of
      six years or upon the occurrence of certain events which gives the holders
      of
      the warrant liquidity with respect to the underlying common stock. Based upon
      the foregoing, the Company determined that there had been an
      other-than-temporary decline
      in the fair value of its investment below the cost and recorded an impairment
      charge of $1,000,000 for the year ended December 31, 2003. The Company valued
      the warrants received using the Black-Scholes pricing model using 113% as the
      volatility, 1.24% as the risk free interest rate, an expected life of six years,
      $3.28 as the stock price and no expected dividends. The Company has not
      obtained, and will not obtain, an independent appraisal of the value of the
      warrants. In
      evaluating the carrying value of our investment in Clearwire we consider whether
      there has been an “impairment indicator” as discussed in Emerging Issues Task
      Force 03-1. We determined that there had not been an impairment indicator during
      the years ended December 31, 2006 and 2005. In December 2006, Clearwire filed
      an
      S-1 registration statement with the Securities and Exchange
      Commission.




35






The
      Company’s investments in unconsolidated affiliates consisted of the
      following:





December
                31,2006
            
            2005Clearwire
                Corporation
            
            $
            756,889
            
            $
            756,889Catalytic
                Solutions, Inc.
            
            
            450,000
            
            
            450,000$
            1,206,889
            
            $
            1,206,889




**NOTE
      6 - PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consist of the following:





December
                31,2006
            
            2005Machinery
                and equipment
            
            $
            515,170
            
            $
            525,841Leasehold
                improvements
            
            
            32,092
            
            
            -Automotive
                equipment
            
            
            498,414
            
            
            499,8531,045,676
            
            
            1,025,694Less
                accumulated depreciation
              and
                amortization
            
            
            (714,635
            )
            
            (661,784
            )$
            331,041
            
            $
            363,910





Depreciation
      and amortization expense for the years ended December 31, 2006 and 2005 was
      $171,768 and $202,308, respectively.





**NOTE
      7 - ASSETS HELD FOR SALE**





Due
      to
      the increase in real estate value in southern California and the resulting
      increase in the Company’s equity in its facility and the Company’s then need for
      cash, the Company signed an agreement in December 2005 to sell its facilities
      in
      Anaheim, California for $3,900,000. The sale of the building was completed
      in
      April 2006. At the time of the sale the cost basis of the building, land and
      building improvements was $2,080,000 and accumulated depreciation was $101,000.
      The Company recorded a gain on the sale of $1,725,000 in the three months ended
      June 30, 2006. The Company leased the facilities back for eight months. The
      Company had a mortgage on the building of $1,500,000, including accrued interest
      of $9,000 at the time of sale and a second mortgage on the building of $150,000
      at the time of the sale. The mortgages were repaid upon the sale of the
      building. In accordance with Statement
      of Financial Accounting Standards (SFAS)
      144 “Accounting for the Impairment or Disposal of Long-lived Assets,” the
      Company classified the building and land as assets held for sale on the balance
      sheet as of December 31, 2005.




36




**NOTE
      8 - ACCRUED EXPENSES**





Accrued
      expenses consist of the following:





December
                31,2006
            
            2005Accrued
                interest
            
            $
            -
            
            $
            3,344Wages,
                bonuses and taxes
            
            
            374,449
            
            
            135,858Union
                dues
            
            
            261,022
            
            
            197,972Accounting
                and legal fees
            
            
            31,877
            
            
            85,000Insurance
            
            
            158,094
            
            
            256,084Insurance
                settlement reserve
            
            
            375,000
            
            
            375,000Accrued
                loss on projects
            
            
            -
            
            
            466,002Inventory
                purchases
            
            
            55,133
            
            
            -Other
            
            
            230,507
            
            
            175,347$
            1,486,082
            
            $
            1,694,607




**NOTE
      9 - NOTE PAYABLE**





In
      December 2003, the Company issued a $1,300,000, 10% convertible promissory
      note
      (effective interest rate of 39.3%). The note required interest only payments
      through April 15, 2004, and thereafter was payable in equal monthly installments
      over the next 33 months. The note was convertible by the noteholder into common
      stock of the Company at $1.35 per share, and allowed the Company, subject to
      certain conditions and limitations, to make monthly installment payments with
      its common stock at a price per share approximating the then market value.
      In
      connection with the financing the Company paid a 3% origination fee, issued
      a
      five year warrant for the purchase of 400,000 shares of the Company’s common
      stock at $1.50 per share, and granted the noteholder a security interest in
      249,200 shares of NextNet Wireless, Inc. Series A Preferred Stock (which have
      been converted into 173,892 warrants to purchase Clearwire class A common
      stock), and 33,800 shares of Catalytic Solutions, Inc. Series C Preferred Stock,
      owned by the Company. The proceeds of $1,300,000 were allocated between the
      note, and the fair value of the warrants based on using the Black Scholes
      pricing model. The resulting original issue discount, the fair value of the
      warrants, and the beneficial conversion of the note payable into common stock
      as
      defined in EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
      Instruments", was being amortized over the life of the note using the
      straight-line method, which approximates the interest method. In addition,
      we
      entered into a registration rights agreement whereby the Company agreed to
      file
      a registration statement with the U.S. Securities and Exchange Commission,
      covering the issuance or resale of the shares of the Company’s common stock
      which may be issued in connection with the note and warrants issued to the
      noteholder. The Company failed to have the registration effective by June 1,
      2004 and was issuing the noteholder warrants on a monthly basis as a penalty.
      During the year ended December 31, 2005, the Company issued 133,467 fully-vested
      four-year warrants with an exercise price of $1.44. These warrants were valued
      at $24,585 using the Black-Scholes pricing model and expensed on the
      consolidated statement of operations. The note, the warrant and the registration
      rights agreement had cross default provisions. The note was personally
      guaranteed by Wayne Mills, the Company’s former President and Chief Executive
      Officer. In November 2005 the Company and the noteholder reached an agreement
      whereby the Company agreed to issue the noteholder 300,000 shares of the
      Company’s common stock in exchange for all of the warrants issued to the
      noteholder and an amendment to the note which eliminated the right of the
      noteholder to convert the note into the Company’s common stock. Under that
      agreement the right of the Company to pay any amount due under the note by
      issuance of the Company’s common stock was eliminated and the registration
      rights agreement was also cancelled. The 300,000 shares of common stock issued
      to the noteholder had a value of $54,900 based upon the average price of the
      stock for the five days preceding and the five days following the date of the
      agreement. As a result of the cancellation of the warrants and the conversion
      provision, the Company expensed the remaining $148,325 of original issue
      discount, the fair value of the warrant, and the beneficial conversion of the
      note payable into common since this value exceeded the value of the 300,000
      shares of common stock issued to the noteholder. In June 2006 the Company repaid
      the remaining principal balance of $348,573 and accrued interest of $2,905
      outstanding under the note.




37




**NOTE
      10 - NOTE PAYABLE TO BANK**





On
      January 27, 2005, we renewed our line of credit with Far East National Bank.
      The
      renewed line of credit was for up to $1,000,000, subject to 80% of eligible
      accounts receivable as defined in the loan agreement, and bore interest at
      a
      floating rate based upon the bank’s prime rate plus 1.5% (8.75% at December 31,
      2005). The line of credit was collateralized by certain assets of the Company
      and personally guaranteed by the Company’s former President and Chief Executive
      Officer, Wayne Mills. The new line of credit agreement with Far East National
      Bank originally matured on October 28, 2005, but in October 2005 the maturity
      date was extended to January 1, 2006 and further extended to May 1, 2006. At
      December 31, 2005, $775,000 was outstanding on the credit agreement with
      available borrowings of $225,000. The debt was paid off on April 20, 2006;
      therefore no additional waivers were obtained





**NOTE
      11 - LONG-TERM DEBT**





Long-term
      debt consists of various notes payable to finance companies for vehicles used
      in
      the ordinary course of the Company’s insulation business. The notes are
      collateralized by the vehicles and bear interest at rates ranging from 0% to
      8.99% for periods of 36 to 60 months with the last payment due in 2009.
      Principal maturities over the next five years are as follows:





Year
                ending
              December
                31,2007
            
            $
            89,3272008
            
            
            47,7122009
            
            
            20,050Totals
            
            
            157,089Less
                current portion
            
            
            (89,327
            )Long-term
                portion
            
            $
            67,762




**NOTE
      12 - MORTGAGE PAYABLE**





In
      November 2003, the Company’s subsidiary, Metalclad Insulation Corporation,
      refinanced the facilities in Anaheim, California housing the industrial
      insulation services operations. Metalclad Insulation Corporation obtained a
      $1,596,000 mortgage on the building from Far East National Bank, Los Angeles,
      California that matured in October 2008 and bore interest at a floating rate
      based upon the bank’s prime rate plus 1% (5.00% on the date of the loan). On
      December 31, 2005 the interest rate was 8.25%. The mortgage was guaranteed
      by
      the Company’s former President and Chief Executive Officer, Wayne Mills. At
      December 31, 2005, the remaining balance on the mortgage was $1,500,678 and
      was
      paid off on April 20, 2006. The mortgage was collateralized by the building
      (See
      Note 7). The line of credit agreement and the mortgage with Far East included
      cross default provisions.





**NOTE
      13 - CAPITAL LEASE OBLIGATION**





During
      the year ended December 31, 2003, the
      Company entered into a lease agreement for the use of equipment. The lease
      agreement expired and was paid in full in July, 2005. The lease was recorded
      as
      a capital lease obligation and bore interest at 13.3 %.
      The
      obligation was collateralized by the property under lease. The total cost of
      the
      leased equipment was $35,288 and accumulated amortization on the leased
      equipment was $17,056 at December 31, 2005.





38




**NOTE
      14 - INCOME TAXES**





The
      major
      deferred tax items are as follows:





December
                31,2006
            
            2005Assets:Allowances
                established against realization of certain assets
            
            $
            1,280,000
            
            $
            1,271,000Net
                operating loss carryforwards
            
            
            12,527,000
            
            
            13,347,000Liabilities:Accrued
                liabilities and other
            
            
            (20,000
            )
            
            (32,000
            )13,787,000
            
            
            14,586,000Valuation
                allowance
            
            
            (13,787,000
            )
            
            (14,586,000
            )$
            -
            
            $
            -





The
      change in valuation allowance was $(799,000) and $1,074,000 for the years ended
      December 31, 2006 and 2005, respectively.





Income
      tax computed at the U.S. federal statutory rate reconciled to the effective
      tax
      rate is as follows for the years ended December 31:





2006
            
            2005Federal
                statutory tax rate benefits
            
            
            (35.0
            %)
            
            (35.0
            %)State
                tax, net of federal benefit
            
            
            (5.0
            %)
            
            (5.0
            %)Change
                in valuation allowance
            
            
            40.9
            %
            
            39.0
            %Permanent
                differences
            
            
            (0.9
            )%
            
            1.0
            %Effective
                tax rate
            
            
            0.0
            %
            
            0.0
            %




At
      December 31, 2006, the Company has available for U.S. federal income tax
      purposes net operating loss carry-forwards of approximately $31,300,000. These
      carryforwards expire in the years 2010 through 2025. The ultimate utilization
      of
      the net operating loss carryforwards may be limited in the future due to changes
      in the ownership of the Company. This limitation, if applicable, has not been
      determined by the Company.





The
      realization of the Company’s deferred tax assets is dependent upon the Company’s
      ability to generate taxable income in the future. The Company has recorded
      a
      100% valuation allowance against all of the deferred tax assets due to the
      uncertainty regarding their realizability.





**NOTE
      15 - SHAREHOLDERS’ EQUITY**





**Stock
      Options**





On
      August
      18, 1992, the Company adopted an omnibus stock option plan (the “1992 Plan”)
      which authorized options to acquire 160,000 shares of the Company’s common
      stock. At December 31, 2006, there were options outstanding under the 1992
      Plan
      for 1,500 shares, and no shares available for grant. These options will expire
      10 years from the date of grant. Under the terms of the plan, the Board of
      Directors may grant options and other stock-based awards to key employees to
      purchase shares of the Company’s common stock. The options are exercisable at
      such times, in installments or otherwise, as the Board of Directors may
      determine.





On
      March
      24, 1993, the Company adopted an omnibus stock option plan (the “1993 Plan”)
      which authorized options to acquire 100,000 shares of the Company’s common
      stock. The terms of the 1993 Plan are the same as the 1992 Plan. At December
      31,
      2006, there were options outstanding under the 1993 Plan for 5,310 shares,
      and
      no shares available for grant. These options expire 10 years from the date
      of
      the grant. Under the terms of the plan, the Board of Directors had the authority
      to grant options and other stock-based awards to key employees to purchase
      shares of the Company’s common stock. The options were exercisable at such
      times, in installments or otherwise, as the Board of Directors
      determined.




39





On
      May
      15, 1997, the Company adopted an omnibus stock option plan (the “1997 Plan”)
      which authorized options to acquire 600,000 shares of the Company’s common
      stock. At December 31, 2006, there were 450,000 options outstanding under this
      plan and 150,000 options available for grant. These options expire 10 years
      from
      the date of the grant. Under the terms of the plan, the Board of Directors
      may
      grant options and other stock-based awards to key employees to purchase shares
      of the Company’s common stock. The options are exercisable at such times, in
      installments or otherwise, as the Board of Directors may determine.





On
      November 20, 2001, the Company adopted an omnibus stock option plan (the “2000
      Plan”) which authorized options to acquire 2,000,000 shares of the Company’s
      stock. At December 31, 2006, there were options outstanding under the 2000
      Plan
      for 1,672,900 shares and 323,600 shares available for grant. These options
      expire 10 years from date of grant. The terms of the 2000 Plan are the same
      as
      the 1997 Plan. Under the terms of the plan, the stock option committee may
      grant
      options and other stock-based awards to key employees and members of the board
      of directors to purchase shares of the Company’s common stock. The options are
      exercisable at such times, in installments or otherwise, as the stock option
      committee may determine.





At
      December 31, 2005, there were options that were granted outside of the stock
      option plans, outstanding to acquire 66,000 shares of the Company’s
      stock.





On
      October 25, 2005, the Company fully vested all currently outstanding stock
      options. There were 174,500 shares of the Company’s common stock which were
      unvested at the time. All options vested had exercise prices greater than the
      fair market value of the Company’s common stock on October 25, 2005. The purpose
      of the accelerated vesting was to enable the Company to avoid recognizing in
      its
      statement of operations non-cash compensation expense associated with these
      options in future periods as the exercise prices were significantly higher
      than
      the current fair value. As defined in Financial Accounting Standards Board
      Interpretation (FIN) No.44, "Accounting for Certain Transactions Involving
      Stock
      Compensation", it was determined that there would be no compensation expense
      as
      a result of the acceleration of the vesting of the outstanding
      options.





The
      following is a summary of options granted:




Year
                Ended December 31,2006
            
            2005Shares
            
            Weighted
                Average Exercise Price
            
            Shares
            
            Weighted
                Average Exercise PriceOptions
                outstanding at beginning of the year
            
            
            2,234,040
            
            $
            3.09
            
            
            2,382,570
            
            $
            4.13Granted
            
            
            -
            
            
            -
            
            
            55,000
            
            
            0.55Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Canceled
            
            
            (38,330
            )
            
            30.55
            
            
            (203,530
            )
            
            14.56Options
                outstanding at end of the year
            
            
            2,195,710
            
            $
            2.61
            
            
            2,234,040
            
            $
            3.09Options
                Exercisable
            
            
            2,195,710
            
            $
            2.61
            
            
            2,234,040
            
            $
            3.09




There
      is
      no intrinsic value at December 31, 2006 for outstanding or exercisable
      options.





40




Options
                Outstanding
            
            Options
                ExercisableRange
                of exercise prices
            
            Number
                outstanding
              as
                of 12/31/06
            
            Weighted
                average remaining contractual life in years
            
            Weighted
                average
              exercise
                price
            
            Number
                exercisable as of 12/31/06
            
            Weighted
                average
              exercise
                price$0.50
            
            
            250,000
            
            
            2.89
            
            $
            0.50
            
            
            250,000
            
            $
            0.50$0.55
                - $1.20
            
            
            209,500
            
            
            3.15
            
            $
            0.87
            
            
            209,500
            
            $
            0.87$2.00
            
            
            510,000
            
            
            4.44
            
            $
            2.00
            
            
            510,000
            
            $
            2.00$2.50
            
            
            283,400
            
            
            2.09
            
            $
            2.50
            
            
            283,400
            
            $
            2.50$3.00
            
            
            870,000
            
            
            3.39
            
            $
            3.00
            
            
            870,000
            
            $
            3.00$12.50
                - $15.00
            
            
            72,810
            
            
            1.05
            
            $
            14.93
            
            
            72,810
            
            $
            14.93$0.50
                - $15.00
            
            
            2,195,710
            
            
            3.31
            
            $
            2.61
            
            
            2,195,710
            
            $
            2.61




On
      November 7, 2002 the Company issued options to purchase a total of 75,000 shares
      of its available-for-sale securities holdings in Chiral Quest, Inc., now known
      as VioQuest Pharmaceuticals, Inc., to three members of the Company’s Board of
      Directors. The options vested as to 25% immediately and as to an additional
      25%
      on each of November 5, 2003, 2004 and 2005. Further, the options fully vest
      upon
      a “change of control” of Chiral Quest, Inc., which event occurred on February
      14, 2003. The options have an exercise price of $1.25 per share.





**Stock
      Purchase Warrants**





In
      connection with various debt offerings, stock placements and services provided,
      the Company has issued various stock purchase warrants. All such warrants were
      issued at prices which approximated or exceeded fair market value of the
      Company’s common stock at the date of grant and are exercisable at dates varying
      from immediately to five years. The Company issued five-year warrants to
      purchase 133,467 shares of the Company’s common stock to Pandora Select
      Partners, L.P. (“Pandora”) during the year ended December 31, 2005, and
      recognized $24,586 of expense related to the warrants. The warrants were issued
      to Pandora as a penalty for failing to have an agreed upon registration
      statement declared effect by June 1, 2004. In November 2005, the Company and
      Pandora reached an agreement whereby the Company issued Pandora 300,000 shares
      of the Company’s common stock in exchange for all of the warrants issued to
      Pandora (See Note 9). At December 31, 2006 and 2005, the weighted average
      exercise price for warrants outstanding was $0.63 and $1.39, respectively,
      expiring through July, 2009.





Summarized
      information for stock purchase warrants is as follows:





Number
                of Warrants
            
            Price
                per shareWarrants
                outstanding at December 31, 2004
            
            
            1,240,000
            
            $
            0.50
                - $1.50Issued
            
            
            133,467
            
            $
            1.44Expired
            
            
            (598,467
            )
            $
            1.44Warrants
                outstanding at December 31, 2005
            
            
            775,000
            
            $
            0.50
                - $1.50Cancelled
            
            
            (675,000
            )
            $
            1.50Warrants
                outstanding at December 31, 2006
            
            
            100,000
            
            $
            0.50
                - $0.75




**Common
      Stock**





During
      the year ended December 31, 2005, the Company agreed to issue 300,000 shares
      to
      Pandora in exchange for the warrants to purchase 598,467 shares of the Company’s
      common stock. The 300,000 shares of common stock issued to Pandora had a value
      of $54,900 based upon the average price of the stock for the five days preceding
      and the five days following the date of the agreement. As a result of the
      cancellation of the warrants and the conversion provision, the Company expensed
      the remaining $148,325 of original issue discount, the fair value of the
      warrant, and the beneficial conversion of the note payable into common stock
      in
      November 2005 since this value exceeded the value of the 300,000 shares of
      common stock issued to Pandora.




41





During
      the year ended December 31, 2006, the Company issued an aggregate of 50,000
      shares to four members of the Company’s board of directors and to the one member
      of Metalclad Insulation’s board of directors. The shares issued to the board
      members had a value of $8,000, based upon the market price at the date of
      issuance.





**NOTE
      16 - EMPLOYEE BENEFIT PLANS**





Effective
      January 1, 1990, the Company established a contributory profit sharing and
      thrift plan for all salaried employees. Discretionary matching contributions
      may
      be made by the Company based upon participant contributions, within limits
      provided for in the plan. No Company contributions were made in the years ended
      December 31, 2006 and 2005.





Additionally,
      the Company participates in several multi-employer plans, which provide defined
      benefits to union employees of its participating companies. The Company makes
      contributions determined in accordance with the provisions of negotiated labor
      contracts. Company contributions were $621,106 and $407,170 for the years ended
      December 31, 2006 and 2005, respectively.





**NOTE
      17 - SIGNIFICANT CUSTOMERS**





Sales
      for
      the year ended December 31, 2006 to Southern California Edison Company through
      our Curtom-Metalclad joint venture were approximately $2,967,000, representing
      15.2% of total revenues and to JE Merit Constructors, Inc. were approximately
      $3,367,000 representing 17.3% of total revenues. Accounts receivable from NRG
      was approximately $571,000 at December 31, 2006 and accounts receivable from
      JE
      Merit Constructors, Inc. was approximately $855,000.





Sales
      for
      the year ended December 31, 2005 to Calpine Construction Management Company,
      Inc. (“Calpine”) were approximately $1,978,000, representing 13.4% of total
      revenues and to JE Merit Constructors, Inc. were approximately $2,802,000
      representing 19.1% of total revenues. Accounts receivable from Cleveland
      Wrecking Company was approximately $444,000 at December 31, 2005 and accounts
      receivable from JE Merit Constructors, Inc. was approximately
      $495,000.





It
      is the
      nature of the Company’s business that a significant customer in one year may not
      be a significant customer in a succeeding year.





**NOTE
      18 - COMMITMENTS AND CONTINGENCIES**





**Collective
      Bargaining Agreements**





Approximately
      90% of the Company’s employees are covered under collective Bargaining
      Agreements. In August, 2004 a new “Basic Agreement” was signed with Local No. 5
      of the International Association of Heat and Frost Insulators and Asbestos
      Workers that expires in September 2008. The new “Basic Agreement” included a
“Maintenance Agreement” as an addendum. Approximately 95% of the Company’s
      hourly employees are covered by the Local No. 5 agreement. An agreement with
      the
      Laborers Local 300 was signed in January 2004 and expired in December 2006.
      A
      new agreement was signed in January 2007 and expires in December 2009.
      Approximately 5% of the Company’s hourly employees are covered by the Labors
      Local 300 agreement.





**Leases**





In
      February 2002, the headquarters of the Company was moved to Minneapolis,
      Minnesota. The Company is leasing the Minneapolis facility on a month-to-month
      basis.




42





Due
      to
      the sale of the Company’s facilities in Anaheim, California on April 20, 2006,
      the Company leased the facilities back for eight months at a market rate of
      $21,800 per month. In December 2006 our wholly owned subsidiary, Metalclad
      Insulation Corporation, executed a lease for a facility in Fullerton,
      California. The Company has leased this facility through December 31, 2011
      at a
      monthly rate of $13,500 per month with yearly rent increases of approximately
      3%
      per year. The lease contains an option to renew for an additional five years
      as
      defined in the agreement.





Total
      rent expense under operating leases was $221,329 and $34,887 for the years
      ended
      December 31, 2006 and 2005, respectively. The Company has future minimum
      non-cancelable lease commitments of $162,000, $166,860, $171,864, $177,012
      and
      $182,316 in 2007, 2008, 2009, 2010 and 2011, respectively.





**Litigation**





Prior
      to
      1975, we were engaged in the sale and installation of asbestos-related
      insulation materials, which has resulted in numerous claims of personal injury
      allegedly related to asbestos exposure. Many of these claims are now being
      brought by the children and close relatives of persons who have died, allegedly
      as a result of the direct or indirect exposure to asbestos. To date, all of
      the
      asbestos-related injury claims have been defended and paid by our insurance
      carriers.




The
      number of asbestos-related cases which have been initiated naming us (primarily
      our subsidiary, Metalclad Insulation Corporation) as a defendant had increased
      from approximately 254 in 1999 to 527 in 2000 and 725 in 2001. The number of
      cases filed decreased after 2001 to 590 in 2002, to 351 in 2003, to 265 in
      2004
      and to 199 in 2005. The number of cases filed increased to 232 in 2006. At
      December 31, 2001, 2002, 2003, 2004, 2005 and 2006, there were, respectively,
      approximately 1,009, 988, 853, 710, 507 and 404 cases pending. Of the decrease
      from 710 cases pending at December 31, 2004 to 507 cases pending at December
      31,
      2005, were 80 cases which had been previously counted in error, so that the
      actual decrease for the year ended December 31, 2005 was 123 cases.





Set
      forth
      below is a table for the years ended December 31, 2002, 2003, 2004, 2005 and
      2006, which sets forth for each such period the approximate number of
      asbestos-related cases filed, the number of such cases resolved by dismissal
      or
      by trial, the number of such cases resolved by settlement, the total number
      of
      resolved cases, the number of filed cases pending at the end of such period,
      the
      total indemnity paid on all resolved cases, the average indemnity paid on all
      settled cases and the average indemnity paid on all resolved
      cases:





2002
            
            2003
            
            2004
            
            2005(2)
            
            2006New
                cases filed
            
            
            590
            
            
            351
            
            
            265
            
            
            199
            
            
            232Defense
                Judgments and dismissals
            
            
            382
            
            
            311
            
            
            311
            
            
            294
            
            
            253Settled
                cases
            
            
            229
            
            
            175
            
            
            97
            
            
            108
            
            
            82Total
                resolved cases(1)
            
            
            611
            
            
            486
            
            
            408
            
            
            402
            (2)
            
            335Pending
                cases(1)
            
            
            988
            
            
            853
            
            
            710
            
            
            507
            (3)
            
            404Total
                indemnity payments
            
            $
            9,244,000
            
            $
            10,618,700
            
            $
            6,366,750
            
            $
            8,513,750
            
            $
            4,858,750Average
                indemnity paid on settled cases
            
            $
            40,366
            
            $
            60,678
            
            $
            65,637
            
            $
            78,831
            
            $
            59,253Average
                indemnity paid on all resolved cases
            
            $
            15,129
            
            $
            21,849
            
            $
            15,605
            
            $
            21,178
            (2)
            $
            14,504





(1) Total
      resolved cases includes, and the number of pending cases excludes, cases which
      have been settled but which have not been closed for lack of final documentation
      or payment.




43


(2) The
      average indemnity paid on resolved cases does not include, and the number of
      pending cases includes, a jury award rendered on March 22, 2005 and a judgment
      on that award rendered on April 4, 2005, finding Metalclad Insulation
      Corporation liable for $1,117,000 in damages, which is covered by insurance.
      The
      judgment is being appealed by our insurer.




(3) Of
      the
      decrease from 710 cases pending at December 31, 2004 to 507 cases pending at
      December 31, 2005, were 80 cases which had been previously counted in error,
      so
      that the actual decrease over the year ended December 31, 2005 was 123
      cases.





The
      number of asbestos-related claims made against the Company since 2001, as well
      as the number of cases pending at the end of each of those years, has reflected
      a general downward trend from 2002 through 2006, with about a 15% increase
      in
      2006 over 2005. We believe that it is probable that this general trend will
      continue, although such continuance cannot be assured, particularly in view
      of
      the increase in the claims made in 2006 as compared to 2005. The average
      indemnity paid on all resolved claims has fluctuated over the past six-year
      period ended December 31, 2006 from a high of $26,520 in 2001, to a low of
      $14,504 in 2006, with an average indemnity payment of $19,131 over the same
      six-year period. We believe that the sympathies of juries, the aggressiveness
      of
      the plaintiffs’ bar and the declining base of potential defendants as the result
      of business failures, have tended to increase payments on resolved cases. This
      tendency, we believe, has been mitigated by the declining pool of claimants
      resulting from death, and the likelihood that the most meritorious claims have
      been ferreted out by plaintiffs’ attorneys and that the newer cases being
      brought are not as meritorious nor do they have as high a potential for damages
      as do cases which were brought earlier. We have no reason to believe, therefore,
      that the average future indemnity payments will increase materially in the
      future.





In
      addition, direct defense costs per resolved claim have increased from $9,407
      in
      2001 to $13,320 in 2006. We believe that these defense costs increased as a
      result of a change in legal counsel in 2004, and the more aggressive defense
      posture taken by new legal counsel since that change. We do not believe that
      the
      defense costs will increase materially in the future, and are projecting those
      costs to be approximately $13,500 per claim.





Based
      on
      the trend of reducing asbestos-related injury claims made against the Company
      over the past four calendar years, we projected in our Form 10-KSB filed with
      the Securities and Exchange Commission for the year ended December 31, 2005
      that
      approximately 533 asbestos-related injury claims would be made against the
      Company after December 31, 2005. These claims, in addition to the 507 claims
      existing as of December 31, 2005, totaled 1,040 then current and future claims.
      Multiplying the average indemnity per resolved claim over the past five years
      of
      $20,056, times 1,040, we previously projected the probable future indemnity
      to
      be paid on those claims after December 31, 2005 to be equal to approximately
      $21
      million. In addition, multiplying an estimated cost of defense per resolved
      claim of approximately $13,500 times 1,040, we projected the probable future
      defense costs to equal approximately $14 million. Accordingly, our total
      estimated future asbestos-related liability at December 31, 2005 was $35
      million. These estimated liabilities are included as liabilities on our December
      31, 2005 balance sheet.





As
      of
      December 31, 2005, we projected that approximately 145 new asbestos-related
      claims would be commenced, and approximately 245 cases would be resolved, in
      2006, resulting in an estimated 407 cases pending at December 31, 2006. Since
      we
      projected that an aggregate of 533 new cases would be commenced after December
      31, 2005, and that 145 of these cases would be commenced in 2006, we estimated
      that an aggregate of 388 new cases would be commenced after December 31, 2006.
      Accordingly, the cases pending and projected to be commenced in the future
      at
      December 31, 2006, would be 795 cases. Multiplying 795 claims times the
      approximate average indemnity paid and defense costs incurred per resolved
      claim
      from 2002 through 2005 of $33,500, we had previously estimated our liability
      for
      current and future asbestos-related claims at December 31, 2006 to be
      approximately $27,000,000. This amounted to an $8,000,000 reduction from the
      $35,000,000 liability we estimated as of December 31, 2005, or a $2,000,000
      reduction per quarter.





As
      of
      June 30, 2006, we re-evaluated our estimates, based upon the fact that we
      previously estimated that there would be 145 asbestos-related claims made in
      2006, and that 123 claims had already been made in the first half of 2006 and
      that we previously estimated that 245 claims would be resolved in 2006, and
      that
      145 claims had already been resolved in the first six months of 2006. As of
      June
      30, 2006 we estimated that there would be 889 asbestos-related injury claims
      made against the Company after December 31, 2005. The 889, in addition to the
      507 claims existing as of December 31, 2005, totaled 1,396 current and future
      claims. There were 145 resolved claims in the first six months of 2006, which
      meant that as of June 30, 2006, the Company estimated that there were 1,251
      current and future claims. Multiplying the average indemnity per resolved claim
      over the past five and one half years of $19,300, times 1,251, we projected
      the
      probable future indemnity to be paid on those claims after June 30, 2006 to
      be
      equal to approximately $24 million. In addition, multiplying an estimated cost
      of defense per resolved claim of approximately $13,500 times 1,251, we projected
      the probable future defense costs to equal approximately $17 million.
      Accordingly, our total estimated future asbestos-related liability at June
      30,
      2006 was $41 million.




44





As
      of
      June 30, 2006, we projected that approximately 196 new asbestos-related claims
      would be commenced, and approximately 277 cases would be resolved, in 2006,
      resulting in an estimated 426 cases pending at December 31, 2006. Based upon
      these new estimates, we projected that an aggregate of 889 new cases would
      be
      commenced after December 31, 2005, and that 196 of these cases would be
      commenced in 2006, we estimated that an aggregate of 693 new cases would be
      commenced after December 31, 2006. Accordingly, the cases pending and projected
      to be commenced in the future at December 31, 2006, would be 1,119 cases.
      Multiplying 1,119 claims times the approximate average indemnity paid and
      defense costs incurred per resolved claim from 2002 through June 2006 of
      $32,800, we estimated our liability for current and future asbestos-related
      claims at December 31, 2006 to be approximately $37,000,000. This amounted
      to a
      $4,000,000 reduction from the $41,000,000 liability we estimated as of June
      30,
      2006, or a $2,000,000 reduction per quarter. Accordingly, we reduced our
      asbestos-related liability at the quarter ended September 30, 2006, by
      $2,000,000.





As
      of
      December 31, 2006, we again re-evaluated our estimates. We now estimate that
      there will be 924 asbestos-related injury claims made against the Company after
      December 31, 2006. The 924, in addition to the 404 claims existing as of
      December 31, 2006, totaled 1,328 current and future claims. Multiplying the
      average indemnity per resolved claim over the past six years of $19,131, times
      1,328, we projected the probable future indemnity to be paid on those claims
      after December 31, 2006 to be equal to approximately $25 million. In addition,
      multiplying an estimated cost of defense per resolved claim of approximately
      $13,500 times 1,328, we projected the probable future defense costs to equal
      approximately $18 million. Accordingly, our total estimated future
      asbestos-related liability at December 31, 2006 was $43 million.





We
      intend
      to re-evaluate our estimate of future liability for asbestos claims at the
      end
      of each fiscal year, or whenever actual results are materially different from
      our estimates, integrating our actual experience in that fiscal year with that
      of prior fiscal years since 2002. We estimate that the effects of economic
      inflation on either the average indemnity payment or the projected direct legal
      expenses will be approximately equal to a discount rate applied to our future
      liability based upon the time value of money. It is probable that we have
      adequate insurance to cover current and future asbestos-related claims, although
      such coverage cannot be assured.





Although
      defense costs are included in our insurance coverage, we expended $220,000,
      $174,000, $304,000, $188,000, and $215,000 in 2002, 2003, 2004, 2005 and 2006,
      respectively, to administer the asbestos claims. These amounts were primarily
      fees paid to attorneys to monitor the activities of the insurers, and their
      selected defense counsel, and to look after our rights under the various
      insurance policies.





There
      are
      numerous insurance carriers which have issued a number of policies to us over
      a
      period extending from approximately 1967 through approximately 1985 that still
      provide coverage for asbestos-related injury claims. After approximately 1985
      the policies were issued with provisions which purport to exclude coverage
      for
      asbestos related claims. The terms of our insurance policies are complex, and
      coverage for many types of claims is limited as to the nature of the claim
      and
      the amount of coverage available. It is clear, however, under California law,
      where the substantial majority of the asbestos-related injury claims are
      litigated, that all of those policies cover any asbestos-related injury
      occurring during the 1967 through 1985 period when these policies were in
      force.





We
      have
      engaged legal counsel to review all of our known insurance policies, and to
      provide us with the amount of coverage which such counsel believes to be
      probable under those policies for current and future asbestos-related injury
      claims against us. Such legal counsel has provided us with its opinion of the
      minimum probable insurance coverage available to satisfy asbestos-related injury
      claims, which significantly exceeds our estimated $43 million future liability
      for such claims as of December 31, 2006. Accordingly, we have included
      $43,000,000 and $35,000,000 of such insurance coverage receivable as an asset
      on
      our 2006 and 2005 balance sheets, respectively, off-setting our projected
      liability for current and future asbestos-related claims which is reflected
      as a
      liability on such balance sheets. The Company estimates that its liability
      for
      the next five years is approximately $27,000,000.




45





On
      February 23, 2005 ACE Property & Casualty Company ("ACE"), Central National
      Insurance Company of Omaha ("Central National") and Industrial Underwriters
      Insurance Company ("Industrial"), which are all related entities, filed a
      declaratory relief lawsuit (“the ACE Lawsuit”) against Metalclad Insulation
      Corporation (“Metalclad”) and a number of Metalclad's other liability insurers,
      in the Superior Court of the State of California, County of Los Angeles. ACE,
      Central National and Industrial issued umbrella and excess policies to
      Metalclad, which has sought and obtained from the plaintiffs both defense and
      indemnity under these policies for the asbestos lawsuits brought against
      Metalclad during the last four to five years. The ACE Lawsuit seeks declarations
      regarding a variety of coverage issues, but is centrally focused on issues
      involving whether historical and currently pending asbestos lawsuits brought
      against Metalclad are subject to either an "aggregate" limits of liability
      or
      separate "per occurrence" limits of liability. Whether any particular asbestos
      lawsuit is properly classified as being subject to an aggregate limit of
      liability depends upon whether or not the suit falls within the "products"
      or
      "completed operations" hazards found in most of the liability policies issued
      to
      Metalclad. Resolution of these classification issues will determine if, as
      ACE
      and Central National allege, their policies are nearing exhaustion of their
      aggregate limits and whether or not other Metalclad insurers who previously
      asserted they no longer owed any coverage obligations to Metalclad because
      of
      the claimed exhaustion of their aggregate limits, in fact, owe Metalclad
      additional coverage obligations. The ACE Lawsuit also seeks to determine the
      effect of the settlement agreement between the Company and Allstate Insurance
      Company on the insurance obligations of various other insurers of Metalclad,
      and
      the effect of the “asbestos exclusion” in the Allstate policy. The ACE Lawsuit
      does not seek any monetary recovery from Metalclad. Nonetheless, we anticipate
      that we will incur attorneys fees and other associated litigation costs in
      defending the lawsuit and any counter claims made against us by any other
      insurers, and in prosecuting any claims we may seek to have adjudicated
      regarding our insurance coverage. In addition, the ACE Lawsuit may result in
      our
      incurring costs in connection with obligations we may have to indemnify Allstate
      under the Settlement Agreement. Allstate, in a cross-complaint filed against
      Metalclad Insulation Corporation in October, 2005, asked the court to determine
      the Company’s obligation to assume and pay for the defense of Allstate in the
      ACE Lawsuit under the Company’s indemnification obligations in the Settlement
      Agreement. The Company does not believe that it has any legal obligation to
      assume or pay for such defense.





In
      2003
      and 2004 the Judiciary Committee of the United States Senate considered
      legislation to create a privately funded, publicly administered fund to provide
      the necessary resources for an asbestos injury claims resolution program, and
      is
      commonly referred to as the “FAIR” Act. In 2005, a draft of the “FAIR” Act was
      approved by the Judiciary Committee, but the bill was rejected by the full
      Senate in February 2006, when a cloture motion on the bill was withdrawn. An
      amended version of the 2006 “FAIR” Act (S 3274) was introduced in the Senate in
      May 2006, but has not been scheduled for a vote. A similar bill was introduced
      in the House (HR 1360) in March 2005, but was referred to a subcommittee in
      May
      2005. The latest draft of the “FAIR” Act calls for the fund to be funded
      partially by asbestos defendant companies, of which the Company is one, and
      partially by insurance companies. The bill could be voted on by the Senate
      or
      the House at any time in the future. The impact, if any, the “FAIR” Act will
      have on us if passed cannot be determined at this time although the latest
      draft
      of the legislation did not appear favorable to us.





In
      October 1999, we completed the sale of our operating businesses and development
      project located in Aguascalientes, Mexico. That sale specifically excluded
      those
      Mexican assets involved in the Company’s NAFTA claim which was settled in 2001.
      Under the terms of the sale we received an initial cash payment of $125,000
      and
      recorded a receivable for $779,000. On November 13, 2000, the Company filed
      a
      complaint in the Superior Court of California against a former employee, the
      U.S. parent of the buyer and its representative for breach of contract, fraud,
      collusion and other causes of action in connection with this sale seeking
      damages in the form of a monetary award. An arbitration hearing was held in
      September, 2002 in Mexico City, as requested by one of the defendants. This
      arbitration hearing was solely to determine the validity of the assignment
      of
      the purchase and sale agreement by the buyer to a company formed by the former
      employee defendant. The Superior Court action against the U.S. parent was stayed
      pending the Mexican arbitration. On April 8, 2003, the arbitrator ruled that
      the
      assignment was inexistent, due to the absence of our consent. In June 2003,
      the
      Court of Appeal for the State of California ruled that the  U.S.
      parent was also entitled to compel a Mexican arbitration of the claims raised
      in
      our complaint. We are now prepared to pursue our claim in an arbitration
      proceeding for the aforementioned damages. No assurances can be given on the
      outcome.




46





In
      a
      related action, a default was entered against us in December, 2002, in favor
      of
      the same former employee referred to in the foregoing paragraph by the Mexican
      Federal Labor Arbitration Board, for an unspecified amount. The former employee
      was seeking in excess of $9,000,000 in damages as a result of his termination
      as
      an employee. The default was obtained without the proper notice being given
      to
      us, and was set aside in the quarter ended June 30, 2003. The Mexican Federal
      Labor Arbitration Board rendered a recommendation on December 13, 2004, to
      the
      effect that the former employee was entitled to an award of $350,000 from Entrx
      in connection with the termination of his employment. The award is in the form
      of a recommendation which has been affirmed by the Mexican Federal Court, but
      is
      only exercisable against assets of the Company located in Mexico. The Company
      has no assets in Mexico. The award does not represent a collectible judgment
      against the Company in the United States. Since the Company has no assets in
      Mexico, the likelihood of any liability based upon this award is remote, and
      we
      therefore believe that there is no potential liability to the Company at June
      30, 2006 or December 31, 2005. The Company intends to continue to pursue its
      claims against the same employee for breach of contract, fraud, collusion and
      other causes of action in connection with the 1999 sale of one of the Company’s
      operating businesses in Mexico.





On
      May
      31, 2006, we entered into a Settlement Agreement with Ventana Global
      Environmental Organizational Partnership, L.P. and North America Environmental
      Fund, L.P. (collectively referred to as “Ventana”) whereby Ventana agreed to pay
      Entrx Corporation $1,250,000 in exchange for the dismissal with prejudice by
      Entrx Corporation of the law suit (the “Ventana Action”) filed by Entrx
      Corporation against Ventana and others in Orange County, California Superior
      Court in November 2000. Entrx Corporation and Ventana also entered into a mutual
      release of all claims each may have had against the other. In addition, Entrx
      Corporation released Carlos Alberto de Rivas Oest and Geologic de Mexico S.A.
      de
      C.V., which were parties related to Ventana, and against whom Entrx Corporation
      had claims pending in Mexico. The Settlement Agreement does not limit claims
      that Entrx had or currently has against Javier Guerra Cisneros and Promotora
      Industrial Galeana, S.A. de C.V., which Entrx Corporation continues to pursue
      in
      Mexico. Javier Guerra Cisneros and Promotora Industrial Galeana, S.A. de C.V.
      were involved with the transactions which were the subject of the Ventana
      Action. Entrx Corporation received approximately $925,000 net after payment
      of
      legal fees and expenses associated with the Ventana Action and the Settlement
      Agreement.





In
      August
      of 2001, Metalclad Insulation Corporation purchased a workers’ compensation
      policy from American Home Assurance Company (“American Home”), an American
      International Group (“AIG”) company, for the period of September 1, 2001 to
      September 1, 2002. The premium for the workers’ compensation policy was to be
      calculated retrospectively. The American Home policy required Metalclad to
      pay
      an initial estimated premium, but Metalclad’s premium is recalculated
      periodically, through March 1, 2006, based on actual workers’ compensation
      losses incurred. Metalclad also provided American Home with collateralized
      security for future premium adjustments in the form of a letter of credit and
      cash.





In
      November 2003, a dispute arose between Metalclad, on the one hand, and American
      Home and Metalclad’s insurance broker, Meyers-Reynolds & Associates, on the
      other hand regarding calculation of the first periodic premium adjustment.
      Specifically, American Home employed the use of a loss development factor and
      estimated payroll figure in its premium calculation which substantially
      increased the premium it charged Metalclad. As a result of that dispute, another
      AIG company, National Union Fire Insurance Company of Pittsburgh drew down
      on
      the above mentioned letter of credit. Metalclad believes that American Home’s
      calculations were inconsistent with the terms of the American Home policy and
      representations made by American Home and Meyers-Reynolds regarding how the
      premium would be calculated. Metalclad also believes that National Union was
      in
      breach of the American Home policy when it drew down on the letter of
      credit.





On
      February 27, 2004, we filed an action in Orange County Superior Court against
      American Home, National Union and Meyers-Reynolds for breach of contract, breach
      of the covenant of good faith and fair dealing, declaratory relief, reformation,
      injunctive relief, negligent and intentional misrepresentation and breach of
      fiduciary duty. During the three months ended March 31, 2005, the Company
      recorded an accrual of $75,000 related to this dispute. On May 2, 2005, we
      reached a settlement in principal with American Home and National Union which
      resulted in the payment by the Company to American Home of approximately $39,000
      in the three months ended December 31, 2005 and resulted in the Company paying
      an additional $45,000 in the three months ended June 30, 2006 which had been
      accrued at December 31, 2005. During the three months ended September 30, 2006
      the Company reached a settlement with Meyers-Reynolds which resulted in the
      payment to the Company by Meyers-Reynolds of $100,000.




47





**Insurance
      Settlement**





In
      June
      2004, Metalclad Insulation Corporation, our wholly owned subsidiary, and Entrx
      Corporation, entered into a Settlement Agreement and Full Policy Release (the
      “Agreement”) releasing Allstate Insurance Company from its policy obligations
      for a broad range of claims arising from injury or damage which may have
      occurred during the period March 15, 1980 to March 15, 1981, under an umbrella
      liability policy (the “Policy”). The Policy provided limits of $5,000,000 in the
      aggregate and per occurrence. Allstate claimed that liability under the Policy
      had not attached, and that regardless of that fact, an exclusion in the Policy
      barred coverage for virtually all claims of bodily injury from exposure to
      asbestos, which is of primary concern to Metalclad Insulation Corporation.
      Metalclad Insulation Corporation took the position that such asbestos coverage
      existed. The parties to the Agreement reached a compromise, whereby Metalclad
      Insulation Corporation received $2,500,000 in cash, and Metalclad Insulation
      Corporation and Entrx Corporation agreed to indemnify and hold harmless the
      insurer from all claims which could be alleged against the insurer respecting
      the policy, limited to $2,500,000 in amount. Based on past experience related
      to
      asbestos insurance coverage, we believe that the Agreement we entered into
      in
      June 2004, will result in a probable loss contingency for future insurance
      claims based on the indemnification provision in the Agreement. Although we
      are
      unable to estimate the exact amount of the loss, we believe at this time the
      reasonable estimate of the loss will not be less than $375,000 or more than
      $2,500,000 (the $2,500,000 represents the maximum loss we would have based
      on
      the indemnification provision in the Agreement). Based on the information
      available to us, no amount in this range appears at this time to be a better
      estimate than any other amount. The $375,000 estimated loss contingency noted
      in
      the above range represents 15% of the $2,500,000 we received and is based upon
      our attorney’s informal and general inquiries to an insurance company of the
      cost for us to purchase an insurance policy to cover the indemnification
      provision we entered into. We recorded a reserve of $375,000 at the time we
      entered into the Agreement and nothing has come to our attention that would
      require us to record a different estimate at December 31, 2005. The ACE Lawsuit
      may result in our incurring costs in connection with obligations we may have
      to
      indemnify Allstate under the Settlement Agreement. Allstate, in a
      cross-complaint filed against Metalclad Insulation Corporation in October,
      2005,
      asked the court to determine the Company’s obligation to assume and pay for the
      defense of Allstate in the ACE Lawsuit under the Company’s indemnification
      obligations in the Settlement Agreement. The Company is taking the position
      that
      it has no legal obligation to assume or pay for such defense.





**Other
      Matters**





The
      Company had under contract uncompleted work at bid prices totaling approximately
      $11,305,000 and $10,120,000 at December 31, 2006 and 2005, respectively.





**NOTE
      19 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH
      INVESTING**


**ACTIVITIES**





**Supplemental
      Disclosures of Cash Flow Information**





Cash
      paid
      for interest was $110,494 and $283,520 for the years ended December 31, 2006
      and
      2005, respectively.





**NOTE
      20 - RELATED PARTY TRANSACTIONS**





On
      December 10, 2001 the Company issued a $1,250,000, 6%, non-recourse secured
      note
      to Blake Capital Partners, LLC (“Blake”), an entity controlled 100% by Wayne
      Mills. On February 14, 2002 Mr. Mills became President and Chief Executive
      Officer and a member of the Company’s Board of Directors. The note was
      collateralized by 500,000 shares of the Company’s common stock and any dividends
      received on the 500,000 shares of the Company’s common stock (the “Collateral”),
      owned by Blake and Mr. Mills. The principal and interest was due June 10, 2002.
      Blake had the right to extend the maturity date of this note for a period of
      90
      days, and on June 10, 2002 exercised that right. During the 90-day extension
      period and beyond, simple interest was payable at 12% per annum. The note was
      not repaid on the extended due date of September 8, 2002. As of December 31,
      2002, the market value of the common stock held as Collateral was $863,000,
      $387,000 less than the face amount of the note. The Company recorded a $387,000
      allowance to record the face amount of the note at the value of the underlying
      Collateral on December 31, 2002.




48





Effective
      November 1, 2003, the promissory note (the “Note”) referred to above and the
      Security and Pledge Agreement (the “Security Agreement”) relating to the
      securities pledged as collateral for such loan were amended. The Note was
      previously due on September 8, 2002. At that time, $1,250,000 of principal
      and
      approximately $75,000 of interest were due under the Note. The Note (except
      for
      the interest) was without recourse to Blake, but was secured under the terms
      of
      the Security Agreement by 500,000 shares of the Company’s common stock, and
      250,000 shares of the common stock of VioQuest Pharmaceuticals, Inc., (OTCBB:
      VQPH), formerly Chiral Quest, Inc., owned by Blake and Mr. Mills. The common
      stock of VioQuest Pharmaceuticals, Inc. was spun out to the Company’s
      shareholders of record as of October 11, 2002, as a one-for-two stock dividend.
      Under the Security Agreement, the Company’s only recourse was to cancel the
      Company’s common stock held as collateral at $2.50 per share. In addition, Blake
      had the right to require the Company to cancel the shares of the Company’s
      common stock held as collateral, and apply the value of the Company’s common
      stock at $2.50 per share. Since the Security Agreement did not anticipate the
      situation where the Company spun off a subsidiary as a dividend, it was not
      clear under the Security Agreement as to how shares of VioQuest Pharmaceuticals,
      Inc. were to be treated.





The
      Board
      of Directors of the Company negotiated an amendment to the Security Agreement
      (the “Amended and Restated Security Agreement”) which it believed to be
      beneficial to the Company. The Note as amended (the “New Note”) is in the
      principal amount of $1,496,370, and now provides for an October 31, 2007 due
      date, with interest at 2% over the prime rate established by Wells Fargo Bank,
      NA in Minneapolis, Minnesota, adjusted on March 1 and September 1 of each year
      (8.5% at December 31, 2005), instead of the 12% rate established in the Note.
      Interest only is payable commencing March 1, 2004, and at the end of each
      six-month period thereafter. The New Note is with full recourse to Blake and
      the
      Amended and Restated Security Agreement does not require the Company, or permit
      Blake or Mr. Mills, to cancel the shares of the Company’s common stock and
      require the Company to apply the value of those cancelled shares at $2.50 per
      share, to be applied against the principal balance of the amounts due. In
      addition, Mr. Mills has personally guaranteed the repayment of the New Note.
      Other financial obligations of Mr. Mills, including his guarantees of
      approximately $2,276,000 of our debt (not including the New Note) as of December
      31, 2005, could impair his ability to fulfill his obligations as a guarantor
      of
      the New Note. Any amounts paid by Mr. Mills on his guarantees of our debt would
      reduce the obligations of Blake Capital Partners and Mr. Mills on the New Note
      by the same amount.





For
      the
      year ended December 31, 2004, we established a reserve of $250,000 against
      the
      Note. The reserve was established based upon the Company’s estimate of the
      collectibility of the note receivable. The Company increased the reserve by
      $500,000, for a total reserve of $750,000, against the note receivable during
      the six months ended June 30, 2006 based upon the Company’s estimate of the
      collectibility of the note receivable at that time. Blake was current in the
      payment of interest through the payment due March 1, 2006. The payment due
      September 1, 2006, however, was not made, and we have been informed by Mr.
      Mills
      that no payment can be expected in the foreseeable future. As of December 31,
      2006, as a result of the non-payment of interest and other information received
      from Mr. Mills, we have booked an additional reserve of $536,000 against the
      note receivable and wrote-off the interest receivable through June 30, 2006
      of
      $48,000, bringing the net of the note receivable less the reserve down to
      $210,000, the approximate value of the collateral securing the
      Note.





The
      closing per share purchase prices of the Company’s and VioQuest Pharmaceuticals,
      Inc., common stock on October 31, 2003, were $1.22 and $1.95, respectively,
      placing an aggregate market value on shares of the Company and VioQuest
      Pharmaceuticals, Inc. held as collateral on that date at $610,000 and $487,500,
      respectively. The closing per share market prices of the Company’s and VioQuest
      Pharmaceuticals, Inc.’s common stock on December 31, 2005, were $0.18 and $0.75,
      respectively, placing an aggregate market value on shares of the Company and
      VioQuest Pharmaceuticals, Inc. held as collateral on that date at $90,000 and
      $187,500, respectively. The closing per share market prices of the Company’s and
      VioQuest Pharmaceuticals, Inc.’s common stock on December 31, 2006, were $0.16
      and $0.52, respectively, placing an aggregate market value on shares of the
      Company and VioQuest Pharmaceuticals, Inc. held as collateral on that date
      at
      $80,000 and $130,000, respectively. The Company is in the process of foreclosing
      on and cancelling the 500,000 shares of the Company’s common stock, and are
      exploring our opportunities to obtain proceeds from the sale of the VioQuest
      Pharmaceuticals, Inc. common stock.




49





At
      December 31, 2006, the shareholder note receivable balance was $1,496,370 and
      $1,286,370 is reserved for a net note receivable of $210,000, the approximate
      value of the collateral securing the note.





An
      officer of the Company was employed by a corporation which received payments
      for
      rent and health insurance of $44,112 and $50,898 for the years ended December
      31, 2006 and 2005, respectively.





In
      order
      to fund operations of the Company until the sale of the Company’s facilities in
      Anaheim, California was completed, on February 9, 2006 the Company borrowed
      $150,000 from Peter Hauser, the Company’s Chairman and Chief Executive Officer.
      The promissory note evidencing the loan was due and payable 10 days following
      written demand and bore interest at 2% over the prime interest rate as published
      in the Wall Street Journal (9.5% at March 31, 2006). The loan was secured by
      a
      deed of trust on the Company’s facilities in Anaheim, California, housing the
      industrial insulation services operations of the Company’s subsidiary, Metalclad
      Insulation Corporation. The Company repaid the loan and accrued interest upon
      the sale of the Company’s facilities in April 2006.





50




**ITEM 8.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





None





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





We
      carried out an evaluation, with the participation of our chief executive and
      chief financial officers, of the effectiveness, as of December 31, 2006, of
      our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934). Based upon that evaluation, made at
      the
      end of the period, our chief executive officer and chief financial officer
      concluded that our
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission rules and forms,
      and
      such information is accumulated and communicated to management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure and that
      there has been no significant change in such internal control during our last
      fiscal quarter ended December 31, 2006, or other factors which could
      significantly affect such controls including any corrective actions with regard
      to significant deficiencies or material weaknesses, since our
      evaluation.





The
      Company has a limited number of employees and is not able to have proper
      segregation of duties based on the cost benefit of hiring additional employees
      solely to address the segregation of duties issue. We determined the risks
      associated with the lack of segregation of duties are insignificant based on
      the
      close involvement of management in day-to-day operations (i.e. tone at the
      top,
      corporate governance, officer oversight and involvement with daily activities,
      and other company level controls). The Company has limited resources available
      and the limited amount of transactions and activities allow for compensating
      controls.





In
      addition, our management with the participation of our principal executive
      officer and principal financial officer or persons performing similar functions
      has determined that no change in our internal control over financial reporting
      occurred during the fourth quarter of our fiscal year ended December 31, 2006
      that has materially affected, or is (as that term is defined in Rules
      13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) reasonably
      likely to materially affect, our internal control over financial
      reporting.




**ITEM
      8B.**  **OTHER
      INFORMATION**





None




51





**PART
      III**


**ITEM 9.**
              **DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION
                  16(a) OF THE EXCHANGE ACT**


**Directors**





The
      name,
      initial year of service as a director, age, and position or office of each
      member of our board of directors, is as follows:





**Name**
            
            **Director
                Since**
            
            **Age**
            
            **Position**Peter
                L. Hauser
            
            2004
            
            66
            
            President,
                Chief Executive Officer,
              Chairman
                of the Board and DirectorKenneth
                W. Brimmer(1)(2)(3)
            
            2002
            
            51
            
            DirectorJoseph
                M. Caldwell(4)(5)(6)
            
            2002
            
            39
            
            DirectorE.
                Thomas Welch(7)
            
            2004
            
            68
            
            Director





(1)
            Member
                of the Audit Committee since June
                2002.


(2)
            Member
                of the Compensation Committee and Nominating Committee since February
                2002.


(3)
            Member
                of the Stock Option Committee since September
                2002.


(4)
            Member
                of the Audit Committee and Stock Option Committee since March 2003.


(5)
            Member
                of the Nominating Committee since April
                2004.


(6)
            Member
                of the Compensation Committee since December
                2004.


(7)
            Member
                of the Audit, Compensation, Nominating and Stock Option Committees
                since
                December 2004.





The
      business experience, principal occupations and directorships in publicly-held
      companies of the members of our board of directors are set forth
      below.





*Peter
      L. Hauser* has been
      the president and chief executive officer of Entrx Corporation since October
      2004, and devotes approximately one-third of his working time to such office.
      Mr. Hauser is a founder, and has been the principal owner and chairman of the
      board of directors, of Health Care Financial Solutions, Inc., since March 2003.
      Health Care Financial Solutions, Inc., with its office in St. Paul, Minnesota,
      is engaged in the development and marketing of a health care claims
      administration software system for use by third-party health care plan
      administrators. Mr. Hauser was an account executive at Feltl & Company, a
      Minneapolis, Minnesota securities brokerage firm, from April 2003 until June
      2003. From 1977 through April 2003, Mr. Hauser was employed at Equity Securities
      Trading Co., Inc., a Minneapolis, Minnesota-based securities brokerage firm
      (now
      known as The Oak Ridge Financial Group, Inc.), where he acted as a vice
      president and a principal beginning in 1993. From 1993 until 2003, Mr. Hauser
      was a member of the board of directors of GelStat Corp. (OTCBB: GSAC.OB),
      (formerly called “Developed Technology Resources, Inc.”), which was previously
      engaged in various enterprises in the former Soviet Union, including the
      distribution of airport security equipment and the manufacture and distribution
      of dairy products and snack foods. By 2003, GelStat had disposed of all of
      its
      assets relating to its former Soviet Union enterprises, and began engaging
      in
      the domestic production and distribution of over-the-counter, non-prescription
      health care products.




52





*Kenneth
      W. Brimmer* has been
      the owner and chief manager of Brimmer Company, LLC, a private investment
      company, since December 2001. Mr. Brimmer has been the chief executive officer
      of STEN Corporation (Nasdaq-SC: STEN), since September 2003, and has served
      as a
      member of its board of directors since February 1998 and as chairman of its
      board of directors since March 2000. STEN Corporation, with offices in
      Minneapolis, Minnesota, provides contract manufacturing services and owns and
      operates drive-through restaurants under the name “Burger Time.” At the request
      of Entrx’s Board of Directors, Mr. Brimmer acted as the chief executive officer
      and chairman of the board of directors of VioQuest Pharmaceuticals, Inc.
      (formerly Surg II, Inc. and Chiral Quest, Inc.) (OTCBB: VQPH.OB), from May
      2002
      until February 2003. VioQuest Pharmaceuticals, Inc. was a 90%-owned Entrx
      subsidiary during that period, until October 2003. He continued to serve as
      a
      board member at VioQuest Pharmaceuticals, Inc. until December 2005. Mr. Brimmer
      was the chief executive officer and chief financial officer of Active IQ
      Technologies, Inc. from March 2000 until December 2001, and acted as chairman
      of
      its board of directors until June 2003. Active IQ Technologies, Inc. was engaged
      in providing accounting software services in Minnetonka, Minnesota, and is
      now
      in the precious metals exploration business under the name Wits Basin Precious
      Metals, Inc. (OTCBB: WITM.OB). Mr. Brimmer is also a member of the board of
      directors of Landings Restaurants (NYSE: LNY) and Hypertension Diagnostics
      (OTCBB: HDII.OB), and is chairman of the Board of Directors of Spectre Gaming,
      Inc. (OTCBB: SGMG).





*Joseph
      M. Caldwell* is a
      founder, and has been a member of the board of directors of Marix Technologies,
      Inc. since May 2000. From May 2000 through April 2002, and since February 2003,
      Mr. Caldwell was and has been the chief executive officer of Marix. Marix is
      a
      privately held company based in Minneapolis, Minnesota that develops and markets
      software designs to facilitate and control offsite access to software
      applications and access to information. Mr. Caldwell was the founder, and has
      been a member of the board of directors of US Internet Corporation, since March
      1995. From March 1995 to May 2000, and beginning again in April 2002, Mr.
      Caldwell was a chief executive officer of US Internet Corporation, which is
      a
      Minneapolis-based privately held Internet service provider, with service in
      over
      1,300 cities nationwide and over 110 cities internationally. In June 1998,
      he
      co-founded Net Lifestyles, Inc., and has served as co-chairman of the board
      of
      directors from June 1998 to the present. Net Lifestyles is a privately held
      direct sales company marketing websites, e-commerce solutions, and Internet
      access to individuals and small businesses.





*E.
      Thomas Welch* has
      been
      the president of BNC National Bank at its Minneapolis, Minnesota office, since
      April 2005. BNC National Bank, with corporate offices in Phoenix, Arizona,
      conducts banking business through 21 banks located in North Dakota, Minnesota
      and Arizona. Mr. Welch was a Managing Director of the U. S. Trust Company,
      at
      its Minneapolis, Minnesota office, from April 2001 until March 2005, where
      he
      was primarily responsible for financial, risk management, compliance and
      fiduciary matters. U.S. Trust Company was engaged nationally in the trust,
      asset
      management, investment and banking business. From 1984 until April 2001, Mr.
      Welch was employed by Resource Trust Company, in Minneapolis, Minnesota, where
      he acted as the president from 1988 to April 2001, in charge of private banking,
      trust investment and corporate matters. Resource Trust Company and its principal
      affiliated companies were acquired by U.S. Trust Company in April 2001. Mr.
      Welch has a Bachelor’s degree in accounting and a J.D. degree in
      law.





Each
      member of our Board of Directors was elected to serve until the next annual
      meeting of our shareholders.





**Meetings
      of Board of Directors**





During
      the year ended December 31, 2006, the Board of Directors held four meetings.
      Each member of the Board of Directors was present for all of the meetings,
      except for Joe Caldwell, who missed one meeting. The Board of Directors also
      acted by unanimous written consent on one occasion in 2006.





**Committees
      of Board of Directors**





***Audit
      Committee.*** The
      Audit
      Committee has the authority and responsibilities set forth in Entrx’s Audit
      Committee Charter (the “Charter”). The Charter was originally adopted in 2001
      and was amended in April 2004. Under the Charter, the Audit Committee has the
      authority and responsibility of (i) reviewing audited annual consolidated
      financial statements, and reports and consolidated financial statements
      submitted to any governmental body or disclosed to the public; (ii) consulting
      with Entrx’s independent auditors on various audit and financial personnel
      issues, including questions of independence, disagreement between the auditors
      and Entrx’s financial personnel, reviewing of internal financial controls; (iii)
      recommending to the Board of Directors the engagement of independent accountants
      to audit the consolidated financial statements of Entrx, and reviewing the
      performance of such accountants; (iv) reviewing and considering the
      appropriateness of accounting principles or practices applied to Entrx’s
      consolidated financial statements; and (v) reviewing Entrx’s financial personnel
      and organization. Kenneth W. Brimmer, a member of the Audit Committee, has
      been
      determined to be the audit committee financial expert. Each member of the Audit
      Committee is independent as that term is defined in Rule 4200 of the National
      Association of Securities Dealers, Inc. The Audit Committee held four meetings
      during the year ended December 31, 2006.




53





***Compensation
      Committee*** **.** The
      Compensation Committee, which consists solely of non-employee directors, has
      the
      obligation to adopt policies applicable to the establishment and the
      compensation of Entrx’s executive officers, and has authority to consider and
      recommend to the Board of Directors the salaries, bonuses, share options, and
      other forms of compensation of those executive officers. The Compensation
      Committee did not hold any meetings during the year ended December 31, 2006,
      and
      the compensation of the Company’s executive officers for 2006 was unchanged from
      2005.





***Nominating
      Committee*** **.** Entrx’s
      Nominating Committee was initially established by resolution of the Board of
      Directors in February 2002. The Board of Directors expanded and revised the
      duties of the Nominating Committee by resolutions adopted in April 2004. The
      Nominating Committee is charged with the responsibility to seek out and consider
      the qualifications of new candidates and incumbents for election as members
      of
      our Board of Directors, and to recommend to the Board of Directors those persons
      it believes would be suitable candidates for election or, in the case of a
      vacancy, appointment, as members of our Board of Directors. The full Board
      of
      Directors nominates persons to be members of the Board of Directors, after
      considering the recommendation of the Nominating Committee. The Nominating
      Committee has no charter, and did not meet during the year ended December 31,
      2006, as there was no meeting of the shareholders held in 2006.





We
      have
      found it to be difficult to find suitable candidates who would be willing to
      serve as a member of the Board of Directors of a small company such as ours.
      We
      are looking for candidates with a good business background, preferably with
      some
      experience in starting or growing, and running a business. We would also
      favorably entertain a candidate with a good financial background, either as
      a
      chief financial officer or chief executive officer of another company, or by
      reason of education and experience in accounting. We would exclude any candidate
      who had any criminal record, or a background which exhibited any illegal or
      unethical activities, or questionable business practices.





We
      have
      previously presented candidates for election who have had a prior personal
      relationship with our former president and chief executive officer, Wayne W.
      Mills. Our legal counsel introduced E. Thomas Welch to the Nominating Committee.
      We would entertain any suggestions from our stockholders as to suitable
      candidates. Shareholders are encouraged to send the resumes of persons they
      believe would be suitable candidates to Peter L. Hauser, Entrx Corporation,
      800
      Nicollet Mall, Suite 2690, Minneapolis, Minnesota 55402. Along with the resume
      of the proposed candidate, please have the candidate provide a written consent
      to serve as a member of our Board of Directors if so elected, or to acknowledge
      in writing that he or she would like to be considered for nomination.





Shareholders
      are encouraged to submit the names of proposed candidates at any time throughout
      the year.





***Stock
      Option Committee*** **.** Entrx’s
      Stock Option Committee was established by resolutions adopted by the Board
      of
      Directors in September 2002. The Stock Option Committee, which consists solely
      of independent members, has the authority to grant options to purchase common
      stock of Entrx to employees and members of the Board of Directors. In granting
      options to non-executive officer employees, the Stock Option Committee generally
      considers the recommendation of management. In the past, the Stock Option
      Committee has worked closely with, and considered the recommendations of, the
      Compensation Committee in cases involving the granting of stock options to
      executive officers of Entrx. The Stock Option Committee did not meet in the
      year
      ended December 31, 2006, and no stock options were granted.





54




**Information
      Concerning Non-Director Executive Officers**





The
      name,
      age, position or office, and business experience of each of our non-director
      executive officers is as follows:





Name
            
            Age
            
            PositionBrian
                D. Niebur
            
            43
            
            Treasurer
                and Chief Financial OfficerJohn
                J. Macias
            
            61
            
            President
                of Metalclad Insulation CorporationDavid
                R. Trueblood
            
            36
            
            President
                of Metalclad Insulation Corporation





*Brian
      D. Niebur* has been
      employed part time by Entrx as its treasurer and chief financial officer since
      February 2002. At the request of Entrx’s Board of Directors, from May 2002,
      until February 2003 Mr. Niebur served as chief financial officer and a member
      of
      the Board of Directors of Chiral Quest, Inc. (formerly Surg II, Inc.) (OTCBB:
      CQST). Chiral Quest, Inc. was a 90%-owned subsidiary of Entrx until Entrx’s
      shares of Chiral Quest, Inc. were spun out to Entrx’s shareholders in October
      2002. Mr. Niebur has a Bachelor of Arts degree in accounting and has passed
      all
      sections of the examination for certified public accountants. Since July 2000,
      Mr. Niebur has acted as a vice president and controller for Wyncrest Capital,
      Inc. in Minneapolis, Minnesota, a privately held venture capital firm. Mr.
      Niebur’s primary duties for Wyncrest Capital, Inc. have been to act as chief
      financial officer and a director for Spectre Gaming, Inc. (OTCBB: SGMG), in
      which Wyncrest Capital, Inc. has made an equity investment, from January 2003
      until November 2005. Spectre Gaming, Inc. is engaged in the business of
      developing and marketing electronic gaming systems for the Native American
      gaming market. Since January 2005, Mr. Niebur’s duties for Wyncrest Capital,
      Inc. have also included acting as Chief Financial Officer and Secretary of
      Ready
      Credit Corporation (Pink Sheets: RCTC). From August 1997 until July 2000, Mr.
      Niebur was the controller for Vital Images, Inc., a developer and marketer
      of
      medical visualization and analysis software, in Plymouth,
      Minnesota.





*John
      J. Macias* was
      elected as the President of Entrx’s wholly owned subsidiary, Metalclad
      Insulation Corporation, on April 14, 2004. Mr. Macias had been employed by
      Metalclad Insulation Corporation since February 1971, in various capacities.
      Immediately prior to his appointment as President, Mr. Macias supervised the
      labor on all projects to which Metalclad Insulation Corporation was engaged.
      A
      medical condition has forced us to replace Mr. Macias as President of Metalclad
      Insulation Corporation as of February 1, 2007.





*David
      R. Trueblood* was
      elected as the President of Entrx’s wholly owned subsidiary, Metalclad
      Insulation Corporation, on February 1, 2007, to replace Mr. Macias. Mr.
      Trueblood has been employed by Metalclad Insulation Corporation since November
      15, 1993, in various capacities. Immediately prior to his appointment as
      President, Mr. Trueblood served as Project Manager, bidding, securing, and
      managing many of the company’s most important projects.





Each
      officer of Entrx and Metalclad Insulation Corporation is elected to serve at
      the
      discretion of the Board of Directors of each corporation.





**Reporting
      Under Section 16(a) of the Securities Exchange Act of 1934**





Section
      16(a) of the Securities Exchange Act of 1934 requires executive officers and
      directors of Entrx, and persons who beneficially own more than 10 percent of
      Entrx's outstanding shares of Common Stock, to file initial reports of ownership
      and reports of changes in ownership of securities of Entrx with the Securities
      and Exchange Commission (“SEC”) and the NASDAQ Stock Market. Officers, directors
      and persons owning more than 10 percent of Entrx's outstanding Common Stock
      are
      required by SEC regulation to furnish Entrx with copies of all Section 16(a)
      forms filed. Based solely on a review of the copies of such reports and
      amendments thereto furnished to or obtained by Entrx or written representations
      that no other reports were required, Entrx believes that during the year ended
      December 31, 2006, all filing requirements applicable to its directors, officers
      or beneficial owners of more than 10 percent of Entrx's outstanding shares
      of
      Common Stock were complied with, except that Kenneth W. Brimmer, a director,
      filed a form 5 on June 8, 2006, to reflect and option for 10,000 shares of
      Common Stock granted to him on January 3, 2005, and Joseph M. Caldwell filed
      a
      form 5 on June 8, 2006 to reflect options for 10,000 shares of Common Stock
      granted to him on each of January 3, 2005 and May 10, 2004.




55





**Code
      of Ethics**





We
      have
      adopted a Code of Ethics which is intended to govern the conduct of our
      officers, directors and employees in order to promote honesty, integrity,
      loyalty and the accuracy of our financial statements. You may obtain a copy
      of
      the Code of Ethics without charge by writing us and requesting a copy,
      attention: Brian Niebur, 800 Nicollet Mall, Suite 2690, Minneapolis, Minnesota
      55402. You may also request a copy by calling us at (612)
      333-0614.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





**Summary
      Compensation Table**





The
      following table sets forth certain compensation information for: (i) each person
      who served as the chief executive officer of Entrx at any time during the year
      ended December 31, 2006, regardless of compensation level, and (ii) each of
      our
      other executive officers, other than the chief executive officer, serving as
      an
      executive officer at any time during 2006. The foregoing persons are
      collectively referred to in this Form 10-KSB as the “Named Executive Officers.”
Compensation information is shown for fiscal years 2006 and 2005.


Name/Principal
                  Position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                  Awards
                ($)
              
              Option
                Awards
                ($)
              
              Non-Equity
                  Incentive Plan Compensation
                ($)
              
              Nonqualified
                  Deferred Compensation Earnings
                ($)
              
              All
                  Other Compensation
                ($)
              
              Total
                ($)Peter
                  L. HauserPresident
                  and
              
              
              2006
              
              
              75,000
              
              
              —
              
              
              1,600
              (4)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              76,600Chief
                  Executive Officer
              
              
              2005
              
              
              75,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              75,000Brian
                  D. NieburTreasurer
                  and
              
              
              2006
              
              
              75,000
              
              
              
              (2)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              75,000Chief
                  Financial Officer
              
              
              2005
              
              
              75,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              75,000John
                  J. Macias(1)
              
              
              2006
              
              
              161,333
              
              
              
              (3)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              161,333President
                  of Metalclad Insulation Corporation
              
              
              2005
              
              
              160,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              160,000




There
      are
      no employment agreements between Entrx and any executive officer of Entrx or
      any
      subsidiary.





(1)
            On
                February 1, 2007, Mr. Macias was replaced by David R. Trueblood as
                the
                President of our wholly owned subsidiary, Metalclad Insulation
                Corporation, as the result of Mr. Macias’ current medical incapacity to
                fulfill his duties as President.


(2)
            Pursuant
                to a profit sharing plan established for Mr. Niebur, he earned a
                bonus
                based upon Metalclad’s net profit for 2006, equal to $15,310. The bonus
                was paid in 2007 and is not included in the table
                above.


(3)
            Pursuant
                to a profit sharing plan established for the employees of Entrx’s
                subsidiary, Metalclad Insulation Corporation, Mr. Macias earned a
                bonus
                based upon Metalclad’s net profits for 2006, equal to $37,717. The bonus
                was paid in 2007 and is not included in the table
                above.


(4)
            A
                10,000 share common stock award valued at $1,600 was granted to Mr.
                Hauser
                in 2006 for services as a member of the Board of Directors, and was
                included in the table above, rather than in the table headed “Director
                Compensation.”





56




**Outstanding
      Option Awards at Year End**





The
      following table provides certain information regarding unexercised options
      to
      purchase common stock, stock options that have not vested, and equity-incentive
      plan awards outstanding at December 31, 2006, for each Named Executive
      Officer.


**Outstanding
                  Equity Awards At Fiscal Year-End****Option
                  Awards**
              
              **Stock
                  Awards****Name**
              
              Number
                  of Securities Underlying Unexercised Options
                (#)
                Exercisable
              
              Number
                  of Securities Underlying Unexercised Options
                (#)
                Unexercisable
              
              Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options (#)
              
              Option
                  Exercise Price ($)
              
              Option
                  Expiration Date
              
              Number
                  of Shares or Units of Stock That Have Not Vested (#)
              
              Market
                  Value of Shares or Units of Stock That Have Not Vested ($)
              
              Equity
                  Incentive Plan Awards: Number of Unearned Shares, Units or Other
                  Rights
                  That Have Not Vested (#)
              
              Equity
                  Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                  Units or
                  Other Rights That Have Not Vested ($)Peter
                  L. Hauser(1)
              
              
              200,000
                10,000
              
              
              0
                0
              
              
              0
                0
              
              $
                $
              0.50
                0.55
              
              
              10/15/09
                12/31/09
              
              
              0
                0
              
              
              n/a
                n/a
              
              
              0
                0
              
              
              0
                0Brian
                  D. Niebur
              
              
              50,000
                20,000
              
              
              0
                0
              
              
              0
                0
              
              $
                $
              2.50
                0.65
              
              
              3/10/10
                3/04/09
              
              
              0
                0
              
              
              n/a
                n/a
              
              
              0
                0
              
              
              0
                0John
                  J. Macias
              
              
              14,000
                750
              
              
              0
                0
              
              
              0
                0
              
              $
                $
              1.20
                15.00
              
              
              9/23/09
                1/26/08
              
              
              0
                0
              
              
              n/a
                n/a
              
              
              0
                0
              
              
              0
                0




(1)
            Not
                included are 50,000 shares which Mr. Hauser may purchase under a
                warrant
                issued to Mr. Hauser in February 2003, before he became an employee,
                director or executive officer of Entrx. The warrant is exercisable
                through
                February 12, 2008 at $0.50 per
                share.





**Director
      Compensation**





The
      following table sets forth the compensation paid to our directors for our fiscal
      year ended December 31, 2006, excluding Entrx’s Chief Executive Officer Peter L.
      Hauser, whose compensation is set forth in the Summary Compensation Table for
      Named Executive Officer, set forth above.





**Director
                Compensation**Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards(1)
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Nonqualified
                Deferred Compensation Earnings
              ($)
            
            All
                Other Compensation ($)
            
            Total
              ($)Kenneth
                W. Brimmer(2)
            
            
            0
            
            
            1,600
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1,600Joseph
                M. Caldwell(2)
            
            
            0
            
            
            1,600
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1,600E.
                Thomas Welch(3)
            
            
            0
            
            
            1,600
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1,600





(1)
            On
                June 7, 2006, the Company issued each of its three independent directors
                10,000 shares of common stock. The stock was valued at $0.16 per
                share,
                the fair market value on June 7, 2006.


(2)
            At
                December 31, 2006, Messrs. Brimmer and Caldwell each had exercisable
                options to purchase 90,000 shares of our common stock: (i) 50,000
                shares
                at $2.50 per share, expiring on March 4, 2009 (with respect to Mr.
                Brimmer) and June 24, 2009 (with respect to Mr. Caldwell);
                (ii)10,000 shares at $1.03 per share, which expire on December 31, 2010;
                (iii)
                10,000 shares at $0.80 per share, which expire on December 31, 2009;
                (iv)
                10,000 shares at $0.50 per share, which expire on April 10, 2010;
                and (v)
                10,000 shares at $0.55 per share, which expire on December 31, 2009.


(3)
            At
                December 31, 2006, Mr. Welch had exercisable options to purchase
                25,000
                shares of our common stock at $0.55 per
                share.





57





**ITEM
              11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**





**Share
      Ownership of Officers and Directors**





The
      following table sets forth certain information as of March 15, 2007, with
      respect to the shares of common stock beneficially owned by: (i) each director;
      (ii) each executive officer; and (iii) all current executive officers
      (regardless of salary and bonus level) and directors as a group. The address
      for
      each shareholder is 800 Nicollet Mall, Suite 2690, Minneapolis, MN 55402, except
      for Mr. Trueblood whose address is 1818 East Rosslynn Avenue, Fullerton, CA
      92831. Unless otherwise indicated, the shareholders listed in the table below
      have sole voting and investment powers with respect to the shares
      indicated:





Name
                of Beneficial Owner
            
            Number
                of
              Common
                Shares
              Beneficially
              Owned
            
            Percentage
                of
              Outstanding
              Shares(8)Peter
                L. Hauser
            
            
            1,027,075
            (1)
            
            12.3
            %Kenneth
                W. Brimmer
            
            
            220,000
            (2)(3)
            
            2.7
            %Joseph
                M. Caldwell
            
            
            120,000
            (3)
            
            1.5
            %E.
                Thomas Welch
            
            
            55,000
            (4)
            
            *Brian
                D. Niebur
            
            
            80,000
            (5)
            
            1.0
            %David
                R. Trueblood
            
            
            7,900
            (6)
            
            *All
                executive officers and directors as a group (6 persons)
            
            
            1,509,975
            (7)
            
            17.4
            %





*
            Less
                than 1%





(1)
            Includes
                260,000 shares that Mr. Hauser may acquire upon the exercise of
                outstanding stock options and
                warrants.


(2)
            Includes
                15,000 shares which are owned by Mr. Brimmer's Individual Retirement
                Account, and 15,000 shares which are owned by the Individual Retirement
                Account of Mr. Brimmer's spouse, and to which he disclaims any beneficial
                interest.


(3)
            Includes
                90,000 shares that each of Messrs. Brimmer and Caldwell have the
                right to
                acquire upon the exercise of outstanding stock
                options.


(4)
            Includes
                25,000 shares that Mr. Welch may acquire upon the exercise of outstanding
                stock options.


(5)
            Includes
                70,000 shares which Mr. Niebur may acquire upon the exercise of
                outstanding stock options.


(6)
            Includes
                7,900 shares which Mr. Trueblood may acquire upon the exercise of
                outstanding stock options.


(7)
            Assumes
                that each shareholder listed exercised all options available to that
                person which would vest as of May 14,
                2007.


(8)
            The
                percentage of outstanding shares of common stock as shown in the
                table
                above is calculated on 8,116,147 shares outstanding, as of March
                15, 2007,
                plus it assumes in each case that the shareholder exercised all vested
                options available to that person as of May 14,
                2007.





58




**Share
      Ownership of Certain Beneficial Owners**





The
      following table sets forth the name, address, number of shares of Entrx's common
      stock beneficially owned, and the percentage of the outstanding shares of common
      stock such shares represent, of each person or group of persons, known by Entrx
      to beneficially own more than 5% of Entrx's outstanding common stock as of
      March
      15, 2007. Unless otherwise indicated, the shareholders listed in the table
      below
      have sole voting and investment powers with respect to the shares
      indicated:





Name
                and Address
              of
                Beneficial Owner
            
            Number
                of
              Common
                Shares
              Beneficially
              Owned
            
            Percentage
                of
              Outstanding
              Shares(6)Wayne
                W. Mills
              5020
                Blake Road
              Edina,
                MN 55436
            
            
            1,770,000(1)
            
            
            21.7
            %Peter
                L. Hauser
              16913
                Kings Court
              Lakeville,
                MN 55044
            
            
            1,027,075(2)
            
            
            12.3
            %Grant
                S. Kesler
              3739
                Brighton Point Drive
              Salt
                Lake City, UT 84121
            
            
            764,335(3)
            
            
            8.8
            %Anthony
                C. Dabbene
              26921
                Magnolia Court
              Laguna
                Hills, CA 92653
            
            
            487,200(4)
            
            
            5.7
            %George
                W. Holbrook, Jr.
              1157
                S.W. 30thStreet
              Suite
                E
              Box
                1938
              Palm
                City, FL 34991
            
            
            551,615(5)
            
            
            6.8
            %James
                R. McGoogan
              1157
                S.W. 30thStreet
              Suite
                E
              Box
                1938
              Palm
                City, FL 34991
            
            
            487,740(5)
            
            
            6.0
            %Bradley
                Resources Company
              1157
                S.W. 30thStreet
              Suite
                E
              Box
                1938
              Palm
                City, FL 34991
            
            
            476,255(5)
            
            
            5.8
            %





(1)
            Includes
                400,000 shares which are owned by Blake Capital Partners, LLC, which
                is
                owned by Mr. Mills, 400,000 shares which are owned by Mr. Mills Individual
                Retirement Account, 50,000 shares which Mr. Mills may purchase under
                currently exercisable options at prices ranging from $0.50 to $2.50
                per
                share, and 275,000 shares which are owned by Mr. Mills' spouse and
                to
                which Mr. Mills disclaims beneficial ownership. Mr. Mills has pledged
                500,000 shares to secure a loan from Entrx. (See “CERTAIN TRANSACTIONS —
                Loan to Affiliate of Wayne Mills”).


(2)
            Includes
                warrant to purchase 50,000 shares exercisable at $0.50 per share
                through
                February 12, 2008, 10,000 shares which Mr. Hauser may purchase under
                currently exercisable options at $0.55 per share and 200,000 shares
                which
                Mr. Hauser may purchase under currently exercisable options at $0.50
                per
                share.


(3)
            Includes
                620,000 shares which Mr. Kesler may purchase under currently exercisable
                options at prices ranging from $2.00 to $3.00 per
                share.


(4)
            Includes
                450,000 shares which Mr. Dabbene may purchase under currently exercisable
                options at prices ranging from $2.00 to $3.00 per
                share.




59


(5)
            As
                reported in a Form 13-G on January 7, 2005,Messrs.
                Holbrook and McGoogan own 75,360 and 11,485 shares, respectively,
                of our
                common stock and are both partners of Bradley Resources Company with
                shared voting and dispositive power with respect to the 476,255 shares
                owned by Bradley Resources Company. Included in the shares owned
                by Mr.
                Holbrook is a warrant to purchase 50,000 shares, and included in
                the
                shares owned by Bradley Resources Company is a warrant for the purchase
                of
                100,000 shares. Bradley Resources Company, Mr. Holbrook and Mr. McGoogan
                may be considered to be a “group” as defined under Rule 13d-5 of the
                Securities Exchange Act of 1934, with the power to vote and dispose
                of an
                aggregate of 563,100 shares of our common stock, or 6.9% of our common
                stock.


(6)
            The
                percentage of outstanding shares of common stock shown in the table
                above
                is calculated based upon 8,116,147 shares outstanding as of the close
                of
                business March 15, 2007, plus it assumes in each case that the shareholder
                exercised all options available to that person that would vest within
                60
                days thereafter.




**Equity
      Compensation Plan Information**





The
      following table sets forth as of December 31, 2006, the total number of shares
      of our common stock which may be issued upon the exercise of outstanding stock
      options and other rights under compensation plans approved by the shareholders,
      and under compensation plans not approved by the shareholders. The table also
      sets forth the weighted average purchase price per share of the shares subject
      to those options, and the number of shares available for future issuance under
      those plans.





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            
            
            2,129,710
            (1)
            $
            2.23
            
            
            477,100Equity
                compensation plans not approved by security holders
            
            
            166,000
            (2)
            $
            6.34
            
            
            NoneTotal
            
            
            2,295,710
            
            $
            2.52
            (3)
            
            477,100





(1)
            Options
                for 1,672,900 shares have been granted under Entrx’s 2000 Omnibus Stock
                Option and Incentive Plan (the “2000 Plan”) which was approved by Entrx’s
                shareholders. The remaining options for 456,810 shares were granted
                under
                similar plans which were previously adopted and approved by the
                shareholders, and which have been
                terminated.


(2)
            Options
                for 66,000 shares were granted at various times from January 1996
                through
                February 1998 to three employees. The options are exercisable at
                $15.00
                per share. Warrants for 100,000 shares have been issued from February
                2003
                through December 31, 2006, to two persons in connection with various
                financings, services and concessions. The warrants are exercisable
                at
                prices ranging from $0.50 to $0.75 per share, some of which are subject
                to
                price adjustments under the anti-dilution provisions of the
                warrants.


(3)
            The
                prices at which all options are exercisable range from $0.50 to $15.00
                per
                share.




**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





**Loan
      to Affiliate of Wayne Mills**





On
      December 10, 2001, Entrx loaned Blake Capital Partners, LLC (“Blake Capital”), a
      Minnesota limited liability company, $1,250,000 under a non-recourse secured
      note (the “Note”). Blake Capital is wholly owned by Wayne W. Mills who later
      became a director, President and Chief Executive Officer of Entrx on February
      13, 2002. The Note with interest at the rate of 6% per annum, was due June
      10,
      2002. Blake Capital had the right to extend the due date of the Note for up
      to
      90 days, and on June 10, 2002, exercised that right. During the 90-day extension
      period and beyond, the rate of interest increased to 12% per annum. The Note
      was
      not repaid on the extended due date of September 8, 2002.




60





As
      security for the loan, Mr. Mills pledged 500,000 shares of Entrx's common stock,
      under the terms of a pledge agreement (the “Pledge Agreement”) dated as of
      December 10, 2001. In October 2002, Entrx spun off shares of Chiral Quest,
      Inc.,
      now known as VioQuest Pharmaceuticals, Inc. (OTCBB: VQPH), common stock as
      a
      dividend to its shareholders, on the basis of one share of VioQuest
      Pharmaceuticals, Inc. (then Chiral Quest, Inc.) common stock for each two shares
      of Entrx common stock held as of October 11, 2002. Prior to the dividend,
      VioQuest Pharmaceuticals, Inc. was a 90% owned subsidiary of Entrx. As a result
      of the dividend, Mr. Mills received 250,000 shares of the common stock of
      VioQuest Pharmaceuticals, Inc., which were added to the 500,000 shares of
      Entrx’s common stock held as collateral for the loan.





The
      Pledge Agreement provided that Mr. Mills would retain voting power over the
      collateralized shares until such shares are either cancelled or sold to satisfy
      the loan under the terms of the Note and Pledge Agreement. To satisfy its
      obligations under the Note, all or a portion of the 500,000 shares of Entrx
      common stock, or 250,000 shares of VioQuest Pharmaceuticals, Inc. common stock,
      could have been sold at the direction of Blake Capital, in which case the
      proceeds of such sale would have been applied against the principal and interest
      due under the Note. The terms of the Note also provided that Blake Capital
      could
      request that the Entrx shares be cancelled, in which case they could have
      carried a value of $2.50 per share which would be applied against the amount
      due
      under the Note. If the Note was in default, Entrx could have cancelled the
      shares at a value of $2.50 per share, and apply the amount cancelled against
      the
      principal and interest due under the Note. Although the Pledge Agreement was
      not
      clear, Entrx took the position that the $2.50 value related to one share of
      Entrx common stock and one-half share of VioQuest Pharmaceuticals, Inc. common
      stock.





Since
      the
      Note was non-recourse to Blake Capital, neither Blake Capital nor Mr. Mills
      had
      any personal liability under the Note, except for the interest on the Note,
      and
      Entrx's only recourse for repayment of the Note was the 500,000 shares of Entrx
      common stock, and 250,000 shares of VioQuest Pharmaceuticals, Inc. common stock,
      pledged as security. The market value of the stock held as collateral never
      exceeded the principal balance of the Note since it became due.





**Modification
      of Loan to Affiliate of Wayne Mills**





The
      Sarbanes-Oxley Act of 2002 was adopted on August 1, 2002, while the loan to
      Blake Capital Partners, as discussed in the foregoing section entitled “Loan to
      Affiliate of Wayne W. Mills,” was outstanding. Under Section 402 of the
      Sarbanes-Oxley Act, it is unlawful for any company registered under Section
      12
      of the Securities Exchange Act of 1934 to make a personal loan to any directors
      or executive officers of that company. The provision also provides that a loan
      outstanding on the date of the enactment of Section 402 is not in violation
      of
      that provision, provided that there is no material modification to any terms
      of
      the loan after such enactment. The independent members of the Board of
      Directors, taking into consideration the purpose and policy of Section 402,
      have
      concluded that the prohibition against any modification to the loan to Mr.
      Mills
      would not be applicable where the modification was, in their reasonably
      exercised determination, on balance materially beneficial to Entrx.





Accordingly,
      for several months beginning in August 2003, the independent members of Entrx’s
      Board of Directors, constituting the Audit Committee, negotiated an amendment
      to
      the Note and Pledge Agreement with Blake Capital Partners and Mr. Mills, which
      culminated in the execution of an amendment to the Pledge Agreement (the
“Amended and Restated Pledge Agreement”) which they believed to be beneficial to
      the Entrx. The Note as amended (the “New Note”) is in the principal amount of
      $1,496,370, and now provides for an October 31, 2007 due date, with interest
      at
      2% over the prime rate established by Wells Fargo Bank, NA in Minneapolis,
      Minnesota, adjusted on March 1 and September 1 of each year, instead of the
      12%
      rate established in the Note. Interest only is payable commencing March 1,
      2004,
      and at the end of each six-month period thereafter. The New Note is now with
      full recourse to Blake, which has minimal assets, other than 500,000 common
      shares of the Company’s common stock and 250,000 shares of VioQuest
      Pharmaceuticals, Inc., all of which are being held by the Company as collateral
      for the New Note. The Amended and Restated Pledge Agreement does not require
      Entrx, nor permit Blake or Mr. Mills, to cancel the shares of Entrx’s common
      stock, and require Entrx to apply the value of those cancelled shares at $2.50
      per share, to be applied against the principal balance of the amounts due.
      In
      addition, Mr. Mills has personally guaranteed the repayment of the New Note.
      Other financial obligations of Mr. Mills have materially impaired his ability
      to
      fulfill his obligations as a guarantor of the New Note.




61





Blake
      Capital failed to pay the interest due under the New Note on September 1, 2006,
      and Mr. Mills has recently indicated to the Company that he is currently unable
      to fulfill his obligations under the guarantee of the New Note. Accordingly,
      on
      January 4, 2007, consistent with authority given by the Board of Directors,
      the
      Company gave notice to Blake and Mr. Mills that it was declaring the New Note
      to
      be in default, and intended to foreclose on the 500,000 shares of the Company
      held as collateral, by cancelling those shares. The Company expects such
      cancellation to occur in the first quarter of 2006, and to credit Blake with
      the
      fair market value of those shares as of the date of the cancellation. The
      Company has also permitted Mr. Mills to sell the 250,000 shares of VioQuest
      common stock held as collateral, and to apply the proceeds of such sale to
      the
      amount due under the New Note.




**ITEM
      13.**  **EXHIBITS**





(a)


The
      following exhibits are being filed with this Annual Report on Form 10-KSB and/or
      are incorporated by reference therein in accordance with the designated footnote
      references:





3.
            Restated
                and Amended Certificate of Incorporation and Bylaws of the Company,
                and
                all amendments thereto. (1)  3.2
            Amended and Restated Bylaws adopted February 14,
              2002.
              (2)  3.3
            Certificate of Amendment to Certificate of Incorporation
              effective June 25, 2002. (3)  4.1
            Form of Certificate for Common Stock.
              (4)  10.1
            Form of 1993 Omnibus Stock Option and Incentive
              Plan.
              (5)  10.2
            Form of 1996 Omnibus Stock Option and Incentive
              Plan.
              (6)




10.3
            Form
                of 2000 Omnibus Stock Option and Incentive Plan.
                (7)





10.4
            Curtom-Metalclad
                Partnership Agreement and Amendment.
                (8)





10.5
            Secured
                Promissory Note of Blake Capital Partners and Guarantee of Wayne
                W. Mills
                dated November 1, 2003. (9)





10.6
            Amended
                and Restated Security and Pledge Agreement between Blake Capital
                Partners,
                Wayne W. Mills, Entrx Corporation and the escrow agent, Bruce Haglund,
                dated November 1, 2003. (10)





10.7
            Pledge
                Agreement between the Company and Pandora Select Partners L.P. dated
                December 3, 2003. (11)





10.8
            Settlement
                Agreement and Full Policy Release between the Company and one of
                its
                insurers dated June 22, 2004. (12)





10.9
            Exchange
                Agreement between the Company and Pandora Select Partners, L.P. dated
                November 23, 2005. (13)





10.10
            Amended
                and Restated Promissory Note, dated January 16, 2006, issued by the
                Company to Pandora Select Partners, L.P. to replace secured Convertible
                Promissory Note. (14)





10.11
            Settlement
                Agreement between the Company and Ventana Global Environmental
                Organizational Partnership, L.P. and North America Environmental
                Fund,
                L.P. dated May 31, 2006. (15)





14.
            Code
                of Ethics (16)




62




21.
            List
                of Subsidiaries of the Registrant. (17)  31.1
            Rule
                13a-14(a) Certification of Chief Executive
                Officer.  31.2
            Rule
                13a-14(a) Certification of Chief Financial
                Officer.  32.
            Section 1350
              Certification.





(1)
            Filed
                with the Company’s Annual Report on Form 10-K for the year ended December
                31, 1997 and incorporated herein by this
                reference.


(2)
            Filed
                with the Company's Form 8-K on February 28, 2002 as Exhibit (v) and
                incorporated herein by this
                reference.


(3)
            Filed
                with the Company’s Annual Report on Form 10-K for the year ended December
                31, 2002 as Exhibit 3.2 and incorporated herein by this
                reference.


(4)
            Filed
                with the Company’s Annual Report on Form 10-K for the year ended December
                31, 2002 as Exhibit 4.1 and incorporated herein by this
                reference.


(5)
            Filed
                with the Company’s Transition Report on Form 10-K for the five months
                ended May 31, 1993 and incorporated herein by this
                reference.  (6)
            Filed with the Company’s Proxy Statement dated April 17,
              1997 and incorporated herein by this
              reference.


(7)
            Filed
                with the Company’s Proxy Statement dated October 20, 2000 and incorporated
                herein by this reference.


(8)
            Filed
                with the Company’s Annual Report on Form 10-K for the year ended December
                31, 2001 as Exhibit 10.20 and incorporated herein by this
                reference.


(9)
            Filed
                with the Company’s Quarterly Report on Form 10-Q for the period ended
                September 30, 2003 as Exhibit 10.2 and incorporated herein by this
                reference.


(10)
            Filed
                with the Company’s Quarterly Report on Form 10-Q for the period ended
                September 30, 2003 as Exhibit 10.3 and incorporated herein by this
                reference.


(11)
            Filed
                with the Company’s Annual Report on Form 10-K, for the year ended December
                31, 2003, on March 24, 2004 as exhibit 10.23 and incorporated herein
                by
                reference.


(12)
            Filed
                with the Company's Form 8-K on June 25, 2004 as Exhibit 10.1 and
                incorporated herein by this
                reference.


(13)
            Filed
                with the Company’s Annual Report on Form 10-K, for the year ended December
                31, 2005, on May 22, 2006 as exhibit 10.9 and incorporated herein
                by
                reference.


(14)
            Filed
                with the Company’s Annual Report on Form 10-K, for the year ended December
                31, 2005, on May 22, 2006 as exhibit 10.10 and incorporated herein
                by
                reference.


(15)
            Filed
                with the Company's Form 8-K on June 2, 2006 as Exhibit 1 and incorporated
                herein by this reference.


(16)
            Filed
                with the Company’s Annual Report on Form 10-K, for the year ended December
                31, 2003, on March 24, 2004 as exhibit 14 and incorporated herein
                by
                reference.


(17)
            Filed
                with the Company's Annual Report on Form 10-K, for the year ended
                December
                31, 2003, on March 24, 2004 as exhibit 21 and incorporated herein
                by
                reference.





63




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





**Auditors**





On
      April
      16, 2002, upon the recommendation and approval of the Audit Committee, Entrx
      engaged Virchow, Krause & Company, LLP (“Virchow Krause”), certified public
      accountants with an office in Minneapolis, Minnesota, to audit Entrx’s
      consolidated financial statements for 2002 and to perform other appropriate
      accounting services for Entrx as needed. Entrx had not previously engaged
      Virchow Krause on any matter. Virchow Krause was engaged directly by the Audit
      Committee to provide its services with respect to Entrx’s 2003, 2004, 2005 and
      2006 fiscal years.





**Audit
      Fees**





Virchow
      Krause billed Entrx $61,100 and $73,900 for the annual audit of Entrx’s
      consolidated financial statements, and the review of Entrx’s consolidated
      financial statements included in Entrx’s quarterly reports on Form 10Q filed
      with the Securities and Exchange Commission, for the 2005 and 2006 fiscal years,
      respectively.





**Audit-Related
      Fees**





Virchow
      Krause billed Entrx $6,385 and $12,050 for assurance and related services
      provided to Entrx that are not included under the caption “Audit Fee” above, and
      were reasonably related to the performance of its audit or review of Entrx’s
      financial statements for the 2005 and 2006 fiscal year, respectively. Such
      services were provided in connection with review of a Form S-2 registration
      statement filing in April, 2004 and responses to SEC comment letters directed
      to
      the Company in connection with such filing.





**Tax
      Fees**





Virchow
      Krause billed Entrx $14,325 and $13,610 for services in connection with tax
      compliance, tax advice and tax planning for the 2005 and 2006 fiscal years,
      respectively. The services billed for in 2005 and 2006 were in connection with
      the preparation of Entrx’s federal and state income tax returns.





**All
      Other Fees**





No
      such
      services were provided or billed in 2005 or 2006.





**Approval
      by Audit Committee**





According
      to Entrx’s Audit Committee charter, all services provided to Entrx by its
      independent auditors must be pre-approved by the Audit Committee. The Audit
      Committee pre-approved of the engagement of Virchow Krause related to (i) the
      audit of the consolidated financial statements of Entrx for 2005 and 2006,
      and
      to provide its report thereon, (ii) the preparation of our 2005 and 2006 federal
      and state income tax returns, (iii) the review of our quarterly reports on
      Form
      10Q filed in 2005 and 2006, and (iv) review of a Form S-2 registration statement
      filing and assistance with responses to SEC comment letters on the Form S-2
      filing. No other services, other than those set forth in the foregoing sentence,
      were performed by Virchow Krause on our behalf in 2005 or 2006.




64


**SIGNATURES**





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


ENTRX
              CORPORATIONBy:
            /s/
              Brian D. NieburBrian
                D. Niebur
              Chief
                Financial Officer
              Date:
                March 23, 2007




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





Signatures
            
            Title
            
            Date/s/
                Peter L. Hauser
            
            Chief
                Executive Officer and Chairman
            
            March
                23, 2007Peter
                L. Hauser
            
            (Principal
                Executive Officer)/s/
                Brian D. Niebur
            
            Chief
                Financial Officer
            
            March
                23, 2007Brian
                D. Niebur
            
            (Principal
                Financial and Accounting Officer)/s/
                Kenneth W. Brimmer
            
            Director
            
            March
                23, 2007Kenneth
                W. Brimmer/s/
                Joseph M. Caldwell
            
            Director
            
            March
                23, 2007Joseph
                M. Caldwell/s/
                E. Thomas Welch
            
            Director
            
            March
                23, 2007E.
                Thomas Welch




65