**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, 2005
 
 Commission
        File Number 0-2000
 
 **Entrx
        Corporation**
 (Exact
        name of registrant as specified in its charter)
  **Delaware**
                  (State
                    or other jurisdiction of
                  incorporation
                    or organization)
              **95-2368719**
                (I.R.S.
                  Employer ID No.)
  **800
                    Nicollet Mall, Suite 2690**
                  **Minneapolis,
                    Minnesota**
                  (Address
                    of Principal Executive Office)
              **55402**
                  (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 exchange
                on
                  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 (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
o
        No x
 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.
 
 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, 2005
        totaled $14,711,095.
 
 The
        aggregate market value of the common stock held by nonaffiliates of the
        registrant as of May 16, 2006 was approximately $839,956 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 May 13,
        2006 was 7,951,147.
 
 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.
  **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 2198
        South Dupont Drive, Anaheim, California 92806.
  **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. 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, 2005, one of our full-time
        salaried employees and 47 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.
 
 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.
  2
  ***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, 2005 for Curtom-Metalclad projects were approximately $1,418,000
        or
        9.6% of our revenue, compared to $3,457,000 or 26.6% of revenue in 2004.
        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
        2005,
        JE Merit Constructors, Inc. accounted for 19.1% of our revenues and Calpine
        Construction Management Company, Inc. accounted for 13.4% of our revenues.
        We
        cannot project whether a significant portion of our revenues will be derived
        from these customers in 2006. 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 18 to
        the
        Consolidated Financial Statements.)
 
 ***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.
  3
  ***Backlog.*** Our
        backlog for insulation services at December 31, 2005 and December 31, 2004
        was
        $10,120,000 and $9,003,000, 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 76% 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, 2005
        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, the Company was 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.
 
 Based
        on
        the trend of reducing asbestos-related injury claims made against the Company
        over the past four years, we project that 533 asbestos-related injury claims
        will be made against the Company in the future, in addition to the 507 claims
        existing as of December 31, 2005, totaling 1,040 claims. Multiplying the
        average
        indemnity paid per resolved claim over the past five years of $20,056, times
        1,040, we project the probable future indemnity to be paid on those claims
        to be
        equal to approximately $21 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 1,040, we project the probable
        future defense costs to equal approximately $14 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 $35,000,000 liability for such
        claims
        at December 31, 2005.
 
 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 (as discussed below) 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 is taking the position
        that
        it has no legal obligation to assume or pay for such defense.
  4
  ***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, 2005.
 
 **Employees** .
 
 As
        of
        December 31, 2005, we had two part-time salaried employees in our executive
        offices and 11 full-time salaried employees in our insulation business in
        California, for a total of 13 employees. These included three executive
        officers, project managers/estimators, purchasing, accounting, and office
        staff.
 
 As
        of
        December 31, 2005, our subsidiary, Metalclad Insulation Corporation, employed
        approximately 124 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 expires in December
        2006. Approximately 5% of our hourly employees are covered by the Labors
        Local
        300 agreement.
  5
  **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.
  **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 Anaheim, California. This facility consists of 26,000 square
        feet of
        office and warehouse space. We purchased this facility in May 2002, for
        $2,047,000, and sold the facility on April 20, 2006, for $3,900,000. The
        Company
        has leased the building back for eight months at $21,800 per month, while
        it
        seeks a new facility to lease.
 
 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.
  6
  **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.
  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. At December 31, 2001, 2002, 2003, 2004 and 2005, there
        were,
        respectively, approximately 1,009, 988, 853, 710 and 507 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.
        To
        date all of our asbestos-related injury claims have been paid and defended
        by
        our insurance carriers. See Item 1 - “Description of Business - Insurance and
        Bonding.”
 
 Set
        forth
        below is a table for the years ended December 31, 2001, 2002, 2003, 2004
        and
        2005, 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:
  ****
                **2001**
                ****
                **2002**
                ****
                **2003**
                ****
                **2004**
                ****
                **2005(2)**New
                    cases filed
                
                
                725
                
                
                590
                
                
                351
                
                
                265
                
                
                199Defense
                    Judgments and dismissals
                
                
                162
                
                
                382
                
                
                311
                
                
                311
                
                
                294Settled
                    cases
                
                
                158
                
                
                229
                
                
                175
                
                
                97
                
                
                108Total
                    resolved cases(1)
                
                
                320
                
                
                611
                
                
                486
                
                
                408
                
                
                402(2)Pending
                    cases(1)
                
                
                1,009
                
                
                988
                
                
                853
                
                
                710
                
                
                507(3)Total
                    indemnity payments
                
                $
                8,486,348
                
                $
                9,244,000
                
                $
                10,618,700
                
                $
                6,366,750
                
                $
                8,513,750Average
                    indemnity paid on settled cases
                
                $
                53,711
                
                $
                40,366
                
                $
                60,678
                
                $
                65,637
                
                $
                78,831Average
                    indemnity paid on all resolved cases
                
                $
                26,520
                
                $
                15,129
                
                $
                21,849
                
                $
                15,605
                
                $
                21,178(2)
  (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 has
        reflected a relatively consistent downward trend from 2002 through 2005,
        as has
        the number of cases pending at the end of those years. We believe that it
        is
        probable that this trend will continue, although such continuance cannot
        be
        assured. The average indemnity paid on all resolved claims has fluctuated
        over
        the past five-year period ended December 31, 2005 from a high of $26,520
        in
        2001, to a low of $15,129 in 2002, with an average indemnity payment of $20,056
        over the same five-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 or direct
        defense costs will increase materially in the future.
  7
  In
        addition, direct defense costs per resolved claim have increased from $9,407
        in
        2001 to $12,240 in 2005. 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 we 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 years, we project that approximately 533 asbestos-related
        injury claims will be made against the Company in the future, in addition
        to the
        507 claims existing as of December 31, 2005, totaling 1,040 claims. Multiplying
        the average indemnity per resolved claim over the past five years of $20,056,
        times 1,040, we project 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 project the probable future defense costs to equal
        approximately $14 million. Accordingly, our total estimated asbestos-related
        future liability at December 31, 2005 was $35 million. After estimating our
        asbestos-related liabilities as of December 31, 2005, and by adopting a
        methodology similar to that described above, we estimated our future
        asbestos-related liability to be $48.5 million at December 31, 2004, which
        was
        consistent with actual results. These estimated liabilities are included
        as
        liabilities on our 2004 and 2005 balance sheets.
 
 We
        intend
        to re-evaluate our estimate of future liability for asbestos-related claims
        at
        the end of each fiscal year. 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 or future liability
        based on 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. See Item 1 - “Description of Business - Insurance and
        Bonding.”
 
 Although
        defense costs are included in our insurance coverage, we expended $220,000,
        $174,000, $304,000 and $188,000 in 2002, 2003, 2004 and 2005, 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.
        These costs are expenses as incurred.
 
 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 (as discussed under Part 2, Item 6
“Management’s Discussion and Analysis of Plan of Operation”) 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 is taking the position
        that
        it has no legal obligation to assume or pay for such defense.
  8
  **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. We have fully reserved for the $779,000 note receivable, which was
        recorded at the date of sale.
 
 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
        December 31, 2005 or 2004. 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.
 
 **Claim
        Against Insurer**
 
 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.
  9
  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 will result in the Company
        paying an additional $45,000 in the three months ended June 30, 2006 which
        has
        been accrued at December 31, 2005. The Company is continuing to pursue its
        claims against its former insurance broker, Meyers-Reynolds, in this
        action.
  **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 and 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.
 
 **Bid
                  Price****High**
              
              **Low****Fiscal
                  Year Ended December 31, 2004**Quarter
                  Ended March 31, 2004
              
              $
              1.88
              
              $
              0.95Quarter
                  Ended June 30, 2004
              
              
              1.35
              
              
              0.70Quarter
                  Ended September 30, 2004
              
              
              0.92
              
              
              0.30Quarter
                  Ended December 31, 2004
              
              
              0.85
              
              
              0.34**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
 
 As
        of
        March 13, 2006, the closing bid ** price
        for
        the common shares in the pink sheets was $0.13.
 
 On
        December 14, 2004, the Company received a notice from the NASDAQ Stock Market
        that its common stock was no longer eligible to be listed on the NASDAQ Small
        Cap Market. This is because the bid price of Entrx’s common stock closed below
        $1.00 per share for 30 consecutive business days prior to June 14, 2004,
        and
        therefore did not meet the continuing inclusion criteria set forth in NASDAQ
        Marketplace Rule 4310(c)(4). In accordance with NASDAQ Marketplace Rule
        4310(c)(8)(D), Entrx was provided 180 calendar days, or until December 13,
        2004,
        to come back into compliance with the $1.00 per share minimum closing bid
        requirement. The closing bid price of Entrx’s common stock did not exceed $1.00
        per share during that 180-day period, and the Company was, accordingly, notified
        that its common stock would be delisted from the NASDAQ Small Cap Market
        at the
        opening of business on December 23, 2004. The Company unsuccessfully appealed
        NASDAQ’s determination to a NASDAQ Listing Qualifications Panel, which stayed
        the delisting of Entrx’s common stock until the opening of business on February
        16, 2005. Since February 16, 2005, the Company’s common stock has been trading
        on the pink sheets.
  10
  Shareholders
        of Record
 
 As
        of
        March 13, 2006, 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 2005 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)**1/3/2005
                Options
                    for 55,000 Shares
                Members
                    of the Board of Directors of Entrx Corporation (4 members)
                Services
                    as directors
                Section
                    4(2) of the Securities Act of 1933, as a transaction not involving
                    a
                    public offering.Various
                    times 1/1/05 -
                  11/23/05
                Warrants
                  for
                    133,467
                  Shares
                Pandora
                    Select Partners L.P.
                Penalty
                    for registration not being declared effective by June 1,
                    2004.
                Section
                    4(2) of the Securities Act of 1933, as a transaction not involving
                    a
                    public offering.11/23/05
                300,000
                    Shares
                Pandora
                    Select Partners L.P.
                Exchanged
                    for warrants held by Pandora for
                  the
                    purchase of 598,467 shares of
                  common
                    stock
                Section
                    4(2) of the Securities Act of 1933, as a transaction not involving
                    a
                    public offering.
  (1)
              All
                  options were acquired by the optionees and warrantholders with
                  the
                  understanding that the options and warrants were, and the underlying
                  common stock upon exercise would be, acquired for investment, without
                  a
                  view toward distribution. Each member of the Board of Directors
                  of Entrx
                  Corporation and the chief executive officer of Entrx 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 $12,996,000 in 2004 to $14,711,000 in 2005. Gross
        margin
        percentage decreased from 14.7% in 2004 to 10.3% in 2005. 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 decreased for 2005 as compared with 2004 due
        to the
        Company recording an anticipated loss of $1,050,000 on a single project in
        2005.
        The Company recorded a $404,000 accrued expense with regard to the anticipated
        loss. The Company anticipates that due to cost overruns its expected costs
        to
        complete the project will exceed its revenue. We anticipate that our revenues
        will continue to increase in 2006 due to the increase in our backlog at December
        31, 2005 as compared to December 31, 2004, and anticipate that gross margin
        percentages in 2006 will increase from those of 2005.
  11
  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. We had net income of $611,000 in 2004, which included
        income of $2,125,000 related to a settlement with one of our insurers, expense
        of $250,000 related to a reserve established against a note receivable from
        a
        shareholder and an expense of $141,000 as the result of an impairment charge
        on
        one of our investments in a privately-held company. Without the insurance
        settlement we would have had an operating loss for the year. While we anticipate
        an improvement in overall operating results in 2006, we still project an
        operating loss for 2006 on a consolidated basis.
 
 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
        two privately-held companies, Catalytic Solutions, Inc. and 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 12.8% and 15.1% of the Company’s total assets at December 31, 2005
        and 2004, respectively. Catalytic Solutions, Inc. manufactures and delivers
        proprietary technology that improves the performance and reduces the cost
        of
        catalytic converters. Clearwire Corporation is a provider of non-line-of-sight
        plug-and-play broadband wireless access systems. 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. There is no market for the securities of
        Catalytic Solutions, Inc. or Clearwire Corporation.
 
 In
        January of 2005, our operating subsidiary, Metalclad Insulation Corporation
        (“Metalclad”), renewed its line of credit financing from the Far East National
        Bank, Newport Beach, California. The line of credit is for up to $1,000,000,
        but
        subject to 80% of eligible accounts receivable as defined in the loan agreement.
        On October 28, 2005 the due date of the line of credit was extended from
        October
        28, 2005 until January 1, 2006 and in December 2005 was further extended
        until
        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.
 
 On
        June
        22, 2004, Metalclad Insulation Corporation, our wholly owned subsidiary,
        and the
        Company, entered into a Settlement Agreement and Full Policy Release (the
        “Settlement Agreement”) releasing Allstate Insurance Company (“Allstate”) 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”). Under the terms of the
        Settlement Agreement, 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 Allstate respecting the Policy, limited to $2,500,000 in amount.
        On
        November 1, 2005, Metalclad Insulation Corporation received a cross-complaint
        by
        Allstate in a declaratory judgment action (the “ACE Lawsuit”) originally brought
        by ACE Property & Casualty Company (and affiliated entities) in February
        2005. Allstate’s cross complaint asks the court to determine the Company’s
        obligation to assume and pay the costs of Allstate’s defense in the Ace Lawsuit
        under the indemnification clause of the Settlement Agreement. See Part I,
        Item
        3, “Legal Proceedings - Asbestos Related Claims.”
 
 Our
        subsidiary, Metalclad Insulation Corporation, continues to be engaged in
        lawsuits involving asbestos-related injury or potential injury claims. The
        199
        claims made in 2005 were down from the 725, 590, 351 and 265 claims made
        in
        2001, 2002, 2003 and 2004, respectively. The average indemnity payment on
        all
        resolved during each of said years has fluctuated from a high of $26,520
        in
        2001, to a low of $15,129 in 2002, and was $21,178 in 2005. These claims
        are
        currently defended and covered by insurance. We have projected that our future
        liability for currently outstanding and estimated future asbestos-related
        claims
        was approximately $35,000,000 at December 31, 2005, and $48,500,000 at December
        31, 2004. 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
        trend of reducing asbestos-related injury claims will continue 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 $188,000, $304,000 and $175,000 in 2005, 2004 and 2003,
        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.
  12
  **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.
 
 ***Year
        Ended December 31, 2005 Compared to Year Ended December 31,
        2004.***
 
 ***Revenue.*** Total
        revenues were $14,711,000 in 2005 as compared to $12,996,000 for 2004, an
        increase of 13.2%. The increase from 2005 to 2004 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 2005 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, 2005 was $13,199,000 as compared
        to $11,083,000 for the year ended December 31, 2004, an increase of 19.1%.
        The
        gross margin as a percentage of revenue was approximately 10.3% for the year
        ended December 31, 2005 compared to 14.7% for the year ended December 31,
        2004.
        The decrease in the gross margin percentage during the year ended December
        31,
        2005 as compared with the year ended December 31, 2004 is primarily the result
        of the Company recording a charge of $1,050,000 related to an anticipated
        loss
        on a project, partially offset by the Company concentrating on securing higher
        margin projects during the year ended December 31, 2005 as compared with
        December 31, 2004. The increase in the cost of revenues for the year ended
        December 31, 2005 as compared to the year ended December 31, 2004 was primarily
        due to higher revenues as discussed above as well as the result of the Company
        recording a charge of $1,050,000 related to an anticipated loss on a project.
        The Company anticipates that due to cost overruns its expected costs to complete
        the project will exceed its revenue.
 
 ***Selling,
        General and Administrative Expenses.*** Selling,
        general and administrative expenses were $2,425,000 for the year ended December
        31, 2005 as compared to $2,728,000 for the year ended December 31, 2004,
        a
        decrease of 11.1% due primarily to a decreases in legal expenses, salary
        and
        employee related expenses, consulting expense, shareholder reporting expenses
        and rent expense, partially offset by an increase in workers compensation
        expense related to the settlement with American Home Assurance Company and
        an
        increase in auto expense primarily related to increased fuel costs.
 
 ***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. 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, 2005 was $555,000 as compared with
        interest expense of $438,000 for the year ended December 31, 2004. The increase
        in 2005 as compared to 2004 was primarily due to expensing 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, partially offset by a decrease in the interest on the note due
        to a
        decrease of the average outstanding balance on the convertible note in 2005.
        Interest income increased from $117,000 in the year ended December 31, 2004
        to
        $132,000 in the year ended December 31, 2005, primarily due to an increase
        in
        the prime rate on the loan to Blake Capital Partners, LLC (an affiliate of
        Wayne
        W. Mills, the Company’s former President and Chief Executive Officer) since the
        amendment of the note on November 1, 2003.
 
 ***Other
        Income and Expense.*** Income
        related to an insurance settlement for the year ended December 31, 2004 was
        $2,125,000. The income was due to a settlement agreement we entered into
        in June
        2004 releasing one of our insurers from its policy obligations, and was net
        of a
        reserve of $375,000. Based on past experience related to asbestos insurance
        coverage, we believe that the settlement agreement will result in a probable
        loss contingency for future insurance claims based on the indemnification
        provision in that 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 adequacy of the reserve will be evaluated quarterly
        since
        an insurance policy has not been purchased.
  13
  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,
        2005 we recognized an impairment charge of $409,000 related to our investment
        in
        Catalytic Solutions, Inc. and for the year ended December 31, 2004, we
        recognized an impairment charge of $141,000 related to the same investment.
        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 a net loss of $1,743,000 (or a loss of $0.23 per share) for the
        year
        ended December 31, 2005, as compared to net income of $611,000 (or income
        of
        $0.08 per share) for the comparable period ended December 31, 2004. 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. The net income of $611,000
        for the year ended December 31, 2004 included income of $2,125,000 related
        to an
        insurance settlement, expense of $250,000 related to a reserve established
        against a note receivable from a shareholder and an expense of $141,000 as
        the
        result of an impairment charge on one of our investments in a privately-held
        company.
  **Liquidity
        and Capital Resources**
 
 As
        of
        December 31, 2005, we had $413,000 in cash and cash equivalents and $143,000
        in
        available-for-sale securities. The Company had working capital of $557,000
        as of
        December 31, 2005.
 
 On
        January 27, 2005, our subsidiary, Metalclad Insulation Corporation, renewed
        its
        line of credit with Far East National Bank, Newport Beach, California,
        originally obtained in 2003. The renewed line of credit is for up to $1,000,000,
        subject to 80% of eligible accounts receivable as defined in the loan agreement,
        and bears interest at a floating rate based upon the bank’s prime rate plus 1.5%
        (8.75% at December 31, 2005). 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 in December 2005. Metalclad Insulation Corporation also obtained a
        $1,596,000 mortgage on the building from Far East that matured in October
        2008,
        and bears interest at a floating rate based upon the bank’s prime rate plus 1%
        (8.25% at December 31, 2005). The line of credit was collateralized by certain
        assets of the Company, including the Company’s operating facilities in Anaheim,
        California, and both the line of credit and mortgage were personally guaranteed
        by the Company’s former President and Chief Executive Officer, Wayne Mills, who
        received a fee for such guarantees of $92,880. At December 31, 2005, the
        Company
        had $775,000 outstanding on the line of credit and $1,500,678 due on the
        mortgage.
 
 Under
        the
        loan agreement with Far East National Bank we made a number of warranties,
        representations and covenants, which if violated, would constitute an event
        of
        default under the loan agreement and allow Far East National Bank to call
        the
        loan immediately due. The warranties and representations related to, among
        other
        things, the organization of the Company, the accuracy of the Company’s
        consolidated financial statements, litigation against the Company, and the
        filing and paying of taxes. The covenants related to, among other things,
        the
        Company’s agreement to properly maintain its books and records, and to furnish
        Far East National Bank with periodic financial statements; and required,
        among
        other things, that Metalclad Insulation Corporation maintain a current ratio
        in
        excess of 1.25 to 1, a cash flow ratio in excess of 1.5 to 1, a tangible
        net
        worth of not less than $3,000,000, and a debt to worth ratio in excess of
        2 to
        1, and that Entrx Corporation maintain a tangible net worth of not less than
        $4,000,000. The covenants relating to financial statements and financial
        ratios
        were, in most cases, measurable quarterly and related to Metalclad Insulation
        Corporation. In addition, there were covenants requiring certain insurance
        coverage, compliance with applicable laws and regulations, the payment of
        taxes
        and the observance of other matters. As of December 31, 2005, the last period
        a
        compliance check of the covenants was required, we were in compliance with
        the
        representations, warranties and covenants in the loan agreement with Far
        East
        National Bank, except for the minimum cash flow ratio covenant and the covenant
        requiring Entrx Corporation to maintain a tangible net worth of not less
        than
        $4,000,000. The Company received a waiver from Far East National Bank with
        regards to the non-compliance of the minimum cash flow ratio as of December
        31,
        2005, and sought a waiver for the non-compliance of the Entrx Corporation
        tangible net worth covenant.
  14
  On
        April
        20, 2006, however, Metalclad Insulation Corporation sold its Anaheim, California
        facilities for $3,900,000, and paid off its line of credit to the Far East
        National Bank in the amount of $1,000,000 and the mortgage held by the Far
        East
        National Bank on its Anaheim property in the amount of $1,500,093. The Company
        may seek another line of credit in the future.
 
 In
        April
        2006, the net cash proceeds to the Company related to the sale of the building
        was approximately $1,060,000.
 
 Cash
        used
        by continuing operations was $950,000 for 2005, compared with cash provided
        by
        continuing operations of $991,000 in 2004. 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.
        These uses of cash were partially offset by non-cash charges for depreciation
        and amortization, impairment charge on an investment in a privately-held
        company
        and the amortization of original issue discount. 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. Our net income in 2004 (which included an insurance settlement
        of
        $2,125,000, net of a $375,000 reserve) and non-cash expenses for depreciation
        and amortization, an allowance on shareholder note receivable and an impairment
        charge on one of our investments in a privately-held company provided a positive
        cash flow in the year ended December 31, 2004. In addition, $308,000 of cash
        was
        also provided from continuing operations in 2004 due to an increase in accounts
        payable and accrued expenses primarily related to reserve established on
        the
        insurance settlement. An increase in accounts receivable and costs and estimated
        earnings in excess of billings on uncompleted contracts used cash in the
        year
        ended December 31, 2004. A decrease in billings in excess of costs and estimated
        earnings on uncompleted contracts used $200,000 of cash in the year ended
        December 31, 2004 **.**
 
 Net
        investing activities used $181,000 of cash in the year ended December 31,
        2005,
        and used $53,000 of cash in 2004. Additions to property and equipment used
        $194,000 and $87,000 in 2005 and 2004, respectively, primarily for our
        subsidiary, Metalclad Insulation Corporation. In 2005 and 2004, proceeds
        from
        sales of assets provided cash of $12,766 and $34,200, respectively.
 
 Cash
        used
        by financing activities totaled $812,000 in 2005 compared with cash used
        by
        financing activities of $226,000 in 2004. Long-term borrowings provided $73,000
        and $78,000 of cash in 2005 and 2004, and payments on long-term borrowings
        used
        $147,000 and $156,000 of cash in 2005 and 2004. Payments on the convertible
        note
        payable used $462,000 of cash in 2005, and $283,000 of cash in 2004. The
        sale of
        common stock provided $200,000 of cash in 2004.
 
 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 is 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 us, subject to certain conditions
        and
        limitations, to make monthly installment payments with our common stock at
        a
        price per share approximating the then market value. In connection with the
        financing we 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
        (adjusted to $1.44), 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 warrant, 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 we 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 warrant issued to the noteholder. The note, the warrant and the
        registration rights agreement had cross default provisions. The note is
        personally guaranteed by the Company’s former President and Chief Executive
        Officer, Wayne W. Mills, for which he was not compensated. In November 2005,
        the
        Company and the noteholder reached an agreement whereby the Company was 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 5 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, we 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 since this value exceeded the value of the
        300,000 shares of common stock issued to the noteholder. (See Note 10 to
        consolidated financial statements and Item 8B. - “Other
        Information.”)
  15
  In
        2001,
        $1,255,000 was loaned to an affiliate of Wayne W. Mills, Blake Capital Partners,
        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, including his guarantees of approximately $3,557,000 of our
        debt
        (not including the New Note) as of December 31, 2004, 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.
 
 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. At December 31, 2001, 2002, 2003, 2004 and 2005, there
        were,
respectively, approximately 1,009, 988, 853, 710 and 507 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, 2001, 2002, 2003, 2004
        and
        2005, 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:
  16
  **2001**
                
                **2002**
                
                **2003**
                
                **2004**
                
                **2005(2)**New
                    cases filed
                
                
                725
                
                
                590
                
                
                351
                
                
                265
                
                
                199Defense
                    Judgments and dismissals
                
                
                162
                
                
                382
                
                
                311
                
                
                311
                
                
                294Settled
                    cases
                
                
                158
                
                
                229
                
                
                175
                
                
                97
                
                
                108Total
                    resolved cases(1)
                
                
                320
                
                
                611
                
                
                486
                
                
                408
                
                
                402(2)Pending
                    cases(1)
                
                
                1,009
                
                
                988
                
                
                853
                
                
                710
                
                
                507(3)Total
                    indemnity payments
                
                $
                8,486,348
                
                $
                9,244,000
                
                $
                10,618,700
                
                $
                6,366,750
                
                $
                8,513,750Average
                    indemnity paid on settled cases
                
                $
                53,711
                
                $
                40,366
                
                $
                60,678
                
                $
                65,637
                
                $
                78,831Average
                    indemnity paid on all resolved cases
                
                $
                26,520
                
                $
                15,129
                
                $
                21,849
                
                $
                15,605
                
                $
                21,178(2)
  (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 507cases 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 has
        reflected a relatively consistent downward trend from 2002 through 2005,
        as has
        the number of cases pending at the end of those years. We believe that it
        is
        probable that this trend will continue, although such continuance cannot
        be
        assured. The average indemnity paid on all resolved claims has fluctuated
        over
        the past five-year period ended December 31, 2005 from a high of $26,520
        in
        2001, to a low of $15,129 in 2002, with an average indemnity payment of $20,056
        over the same five-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 $12,240 in 2005. 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 years, we project that approximately 533 asbestos-related
        injury claims will be made against the Company in the future, in addition
        to the
        507 claims existing as of December 31, 2005, totaling 1,040 claims. Multiplying
        the average indemnity per resolved claim over the past five years of $20,056,
        times 1,040, we project 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 project 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. After
        estimating our asbestos-related liabilities as of December 31, 2005, and
        by
        adopting a methodology similar to that described above, we estimated our
        future
        asbestos-related liability to be $48.5 million at December 31, 2004, which
        was
        consistent with actual results. These estimated liabilities are included
        as
        liabilities on our 2004 and 2005 balance sheets.
  17
  We
        intend
        to re-evaluate our estimate of future liability for asbestos claims at the
        end
        of each fiscal year. 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. See Item 1 - “Description of Business - Insurance and
        Bonding.”
 
 Although
        defense costs are included in our insurance coverage, we expended $220,000,
        $174,000, $304,000 and $188,000 in 2002, 2003, 2004 and 2005, respectively,
        to
        administer the asbestos claims, which is not covered by any insurance. 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. These costs are expensed as
        incurred.
 
 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 $35 million future liability
        for such claims as of December 31, 2005. Accordingly, we have included
        $35,000,000 and $48,500,000 of such insurance coverage receivable as an asset
        on
        our 2005 and 2004 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.
 
 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 (as discussed under Part 2, Item 6
“Management’s Discussion and Analysis of Plan of Operation”) 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.
  18
  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.
        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 reconsidered by the Senate 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, 2005. 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 12).
 
 **Total**
              ****
              **1
                  Year or Less**
              ****
              **1-3
                  Years**
              ****
              **4-5
                  Years**
              ****
              **Over
                  5 Years**Long-term
                  debt
              
              $
              145,169
              
              $
              85,875
              
              $
              59,294
              
              $
              -
              
              $
              -Note
                  payable to bank
              
              
              775,000
              
              
              775,000
              
              
              -
              
              
              -
              
              
              -Mortgage
                  payable
              
              
              1,500,678
              
              
              39,946
              
              
              1,460,732
              
              
              -
              
              
              -Note
                  payable
              
              
              554,969
              
              
              510,121
              
              
              44,848
              
              
              -
              
              
              -Estimated
                  interest payments(1)
              
              
              378,102
              
              
              160,429
              
              
              217,673
              
              
              -
              
              
              -Total
              
              $
              3,353,918
              
              $
              1,571,371
              
              $
              1,782,547
              
              $
              -
              
              $
              -
  (1)
        The
        interest rate on the Company’s mortgage with Far East National Bank is a
        floating rate based upon the bank’s prime rate plus 1%. For purposes of
        calculating the estimated interest payments, the Company used the interest
        rate
        on December 31, 2005, which was 8.25%.
 
 During
        2005 and 2004, 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 net cash proceeds from
        the
        sale of its property in Anaheim, California, of approximately $950,000, 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 noteholder or customer may require an adjustment to the allowance
        for uncollectible notes and accounts receivable. We have estimated the probable
        amount of future claims and defense costs related to our asbestos liability,
        and
        the probable amount of insurance coverage related to those claims and costs,
        and
        have recorded these estimates as insurance claims receivable and reserve
        for
        asbestos liability claims, respectively, in our financial statements. We
        never
        have access to the cash, and the cash from the insurance companies goes directly
        to pay successful plaintiffs and defense attorneys. 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.
  19
  **New
        Accounting Pronouncements**
 
 In
        December 2004, the FASB issued a revision of SFAS No. 123, "Accounting for
        Stock-Based Compensation", (SFAS No. 123R). SFAS No. 123R supersedes APB
        Opinion
        No. 25, "Accounting for Stock Issued to Employees," and its related
        implementation guidance. SFAS No. 123R establishes standards for the accounting
        for transactions in which an entity incurs liabilities in exchange for goods
        or
        services that are based on the fair value of the entity's equity instruments
        or
        that may be settled by the issuance of those equity instruments. SFAS No.
        123R
        does not change the accounting guidance for share-based payment transactions
        with parties other than employees provided in SFAS No. 123 as originally
        issued
        and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
        to
        Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
        or
        Services." SFAS 123R is effective as of the beginning of the Company's first
        fiscal year beginning after June 15, 2005. The Company’s adoption of SFAS No.
        123R fair value method is not expected to have an impact in 2006 since all
        of
        the Company’s outstanding stock options are fully vested at December 31,
        2005.
 
 In
        June
        2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“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 is effective for accounting changes and corrections
        of errors made in fiscal years beginning after December 15, 2005. Earlier
        application is permitted for accounting changes and corrections of errors
        made
        occurring in fiscal years beginning after June 1, 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 Company does not expect the adoption of SFAS No. 154 to have
        a
        material effect on its consolidated financial statements.
  20
 
 **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, 2005 and 2004, and the related consolidated
        statements of operations and comprehensive income (loss), 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. 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, 2005 and 2004 and the results of their
        operations and their cash flows for the years then ended, in conformity with
        U.S. generally accepted accounting principles.
 
 As
        discussed in Note 2 to the consolidated financial statements, the Company
        has
        restated its consolidated balance sheet as of December 31, 2004 to reflect
        the
        Company’s change in accounting for asbestos-related injury claims.
  /s/
                  Virchow, Krause & Company,
                  LLPMinneapolis,
                  MinnesotaFebruary
                  3, 2006 (except as to Notes 2, 8, 11, 13, 19 and 22, as to which
                  the date
                  is April 21, 2006)
  21
  **ENTRX
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **December
                  31,**
                **2005**
              ****
              **December
                  31,**
                **2004**
                **(Restated)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              413,395
              
              $
              2,357,208Available-for-sale
                  securities
              
              
              142,925
              
              
              152,455Accounts
                  receivable, less allowance for doubtful accounts of $11,000 and
                  $50,000 as
                  of December 31, 2005 and 2004, respectively
              
              
              2,916,505
              
              
              2,013,342Costs
                  and estimated earnings in excess of billings on uncompleted
                  contracts
              
              
              193,231
              
              
              305,057Inventories
              
              
              135,391
              
              
              108,415Prepaid
                  expenses and other current assets
              
              
              243,364
              
              
              173,748Insurance
                  claims receivable
              
              
              8,000,000
              
              
              13,500,000Other
                  receivables
              
              
              540,136
              
              
              314,375Total
                  current assets
              
              
              12,584,947
              
              
              18,924,600Property,
                  plant and equipment, net
              
              
              363,910
              
              
              355,951Assets
                  held for sale, net
              
              
              1,979,047
              
              
              2,006,227Investment
                  in unconsolidated affiliates
              
              
              1,206,889
              
              
              1,615,889Shareholder
                  note receivable, net of allowance of $250,000 as of December 31,
                  2005 and
                  2004
              
              
              1,246,370
              
              
              1,246,370Insurance
                  claims receivable
              
              
              27,000,000
              
              
              35,000,000Other
                  assets
              
              
              75,596
              
              
              74,111$
              44,456,759
              
              $
              59,223,148**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Note
                  payable to bank
              
              $
              775,000
              
              $
              1,000,000Current
                  portion of note payable
              
              
              510,121
              
              
              336,716Current
                  portion of capital lease obligation
              
              
              -
              
              
              11,955Current
                  portion of long-term debt
              
              
              85,875
              
              
              124,767Current
                  portion of mortgage payable
              
              
              39,946
              
              
              43,980Accounts
                  payable
              
              
              746,057
              
              
              524,048Accrued
                  expenses
              
              
              1,694,607
              
              
              1,040,575Reserve
                  for asbestos liability claims
              
              
              8,000,000
              
              
              13,500,000Billings
                  in excess of costs and estimated earnings on uncompleted
                  contracts
              
              
              176,641
              
              
              39,457Total
                  current liabilities
              
              
              12,028,247
              
              
              16,621,498Long-term
                  debt, less current portion
              
              
              59,294
              
              
              94,358Note
                  payable, less current portion
              
              
              44,848
              
              
              419,495Reserve
                  for asbestos liability claims
              
              
              27,000,000
              
              
              35,000,000Mortgage
                  payable, less current portion
              
              
              1,460,732
              
              
              1,496,501Total
                  liabilities
              
              
              40,593,121
              
              
              53,631,852Commitments
                  and contingenciesShareholders’
                  equity:Preferred
                  stock, par value $1; 5,000,000 shares authorized; none
                  issued
              
              
              -
              
              
              -Common
                  stock, par value $.10; 80,000,000 shares authorized; 8,405,947
                  and
                  7,951,147 issued and outstanding, respectively, as of December
                  31, 2005,
                  and 8,105,947 and 7,651,147 issued and outstanding, respectively,
                  as of
                  December 31, 2004
              
              
              840,595
              
              
              810,595Additional
                  paid-in capital
              
              
              70,257,746
              
              
              70,263,161Less
                  treasury stock at cost, 454,800 shares as of December 31, 2005
                  and
                  2004
              
              
              (380,765
              )
              
              (380,765
              )Accumulated
                  deficit
              
              
              (66,806,297
              )
              
              (65,063,582
              )Accumulated
                  other comprehensive loss
              
              
              (47,641
              )
              
              (38,113
              )Total
                  shareholders’ equity
              
              
              3,863,638
              
              
              5,591,296$
              44,456,759
              
              $
              59,223,148
 See
        Notes
        to Consolidated Financial Statements
  22
  **ENTRX
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**
 
 **Year
                  Ended December 31,******
              ****
              ****
              **2005**
              ****
              ****
              **2004**Contract
                  revenues
              
              $
              14,711,095
              
              $
              12,996,280Contract
                  costs and expenses
              
              
              13,199,468
              
              
              11,082,776Gross
                  margin
              
              
              1,511,627
              
              
              1,913,504Operating
                  expenses:Selling,
                  general and administrative
              
              
              2,424,764
              
              
              2,727,877Change
                  in allowance on shareholder note receivable
              
              
              -
              
              
              250,000Gain
                  on disposal of property, plant and equipment, net
              
              
              (1,816
              )
              
              (12,021
              )Total
                  operating expenses
              
              
              2,422,948
              
              
              2,965,856Operating
                  loss
              
              
              (911,321
              )
              
              (1,052,352
              )Interest
                  income
              
              
              132,187
              
              
              117,148Interest
                  expense
              
              
              (554,581
              )
              
              (438,209
              )Insurance
                  settlement, net of reserve
              
              
              -
              
              
              2,125,000Impairment
                  charge on investment in privately-held companies
              
              
              (409,000
              )
              
              (141,000
              )Net
                  income (loss)
              
              
              (1,742,715
              )
              
              610,587Other
                  comprehensive lossUnrealized
                  losses on available-for-sale securities
              
              
              (9,528
              )
              
              (126,203
              )Comprehensive
                  income (loss)
              
              $
              (1,752,243
              )
              $
              484,384Weighted
                  average number of common shares — basic
              
              
              7,683,202
              
              
              7,331,203Weighted
                  average number of common shares — diluted
              
              
              7,683,202
              
              
              7,405,564Basic
                  net income (loss) per common share
              
              $
              (0.23
              )
              $
              0.08Diluted
                  net income (loss) per common share
              
              $
              (0.23
              )
              $
              0.08
 
 See
        Notes
        to Consolidated Financial Statements
  23


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**





Years
      Ended December 31, 2005 and 2004





**Common
                Stock**
            ****
            **Additional**
              **Paid-in**
            ****
            **Treasury
                Stock**
            ****
            **Accumulated**
            ****
            **Accumulated**
              **Other**
              **Comprehensive**
            ****
            **Total
                Shareholders’**
            ********
            ****
            **Shares**
            ****
            **Amounts**
            ****
            **Capital**
            ****
            **Shares**
            ****
            **Amounts**
            ****
            **Deficit**
            ****
            **Income
                (loss)**
            ****
            **Equity**Balance
                at December 31, 2003
            
            
            7,244,215
            
            $
            769,901
            
            $
            70,047,305
            
            
            454,800
            
            $
            (380,765
            )
            $
            (65,674,169
            )
            $
            88,090
            
            $
            4,850,362Unrealized
                loss on available-for-sale securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (126,203
            )
            
            (126,203
            )Stock
                warrants issued for services
            
            
            -
            
            
            -
            
            
            24,050
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            24,050Stock
                warrants issued related to note payable
            
            
            -
            
            
            -
            
            
            32,500
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            32,500Sale
                of common stock
            
            
            400,000
            
            
            40,000
            
            
            160,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            200,000Additional
                shares of common stock due to correction of stock transfer agent
                report
            
            
            6,932
            
            
            694
            
            
            (694
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            610,587
            
            
            -
            
            
            610,587Balance
                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
            )
            $
            3,863,638




See
      Notes
      to Consolidated Financial Statements


24


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Year
                Ended December 31,**
            ********
            ****
            **2005**
            ****
            **2004**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (1,742,715
            )
            $
            610,587Adjustments
                to reconcile net income (loss) to net cash provided by (used
              in)
                operating activities:Depreciation
                and amortization
            
            
            202,308
            
            
            175,038Gain
                on disposal of property, plant and equipment
            
            
            (1,816
            )
            
            (12,021
            )Impairment
                charge on investment in privately-held companies
            
            
            409,000
            
            
            141,000Change
                in allowance for doubtful accounts
            
            
            (39,388
            )
            
            (13,636
            )Allowance
                on shareholder note receivable
            
            
            -
            
            
            250,000Net
                interest income recorded on shareholder note receivable
            
            
            (10,001
            )
            
            (17,505
            )Issuance
                of stock warrants for services
            
            
            -
            
            
            24,050Amortization
                of original issue discount
            
            
            260,525
            
            
            125,139Issuance
                of stock warrants related to note payable
            
            
            24,585
            
            
            32,500Changes
                in operating assets and liabilities:Accounts
                receivable, net
            
            
            (863,775
            )
            
            (280,825
            )Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            
            111,826
            
            
            (125,403
            )Inventories
            
            
            (26,976
            )
            
            26,408Prepaid
                expenses and other current assets
            
            
            (69,616
            )
            
            50,641Other
                receivables
            
            
            (215,758
            )
            
            (94,075
            )Other
                assets
            
            
            (1,485
            )
            
            (7,751
            )Accounts
                payable and accrued expenses
            
            
            876,041
            
            
            307,685Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            137,184
            
            
            (200,493
            )Net
                cash provided by (used in) operating activities
            
            
            (950,061
            )
            
            991,339Cash
                flows from investing activities:Capital
                expenditures
            
            
            (194,037
            )
            
            (87,111
            )Proceeds
                from sale of property, plant and equipment
            
            
            12,766
            
            
            34,200Net
                cash used in investing activities
            
            
            (181,271
            )
            
            (52,911
            )Cash
                flows from financing activities:Proceeds
                from long-term debt
            
            
            73,176
            
            
            77,955Net
                repayments on note payable to bank
            
            
            (225,000
            )
            
            -Payments
                on long-term debt
            
            
            (147,132
            )
            
            (155,653
            )Payments
                on note payable
            
            
            (461,767
            )
            
            (283,265
            )Payments
                on mortgage payable
            
            
            (39,803
            )
            
            (46,047
            )Payments
                on capital lease obligation
            
            
            (11,955
            )
            
            (18,521
            )Proceeds
                from sale of common stock
            
            
            -
            
            
            200,000Net
                cash used in financing activities
            
            
            (812,481
            )
            
            (225,531
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (1,943,813
            )
            
            712,897Cash
                and cash equivalents at beginning of year
            
            
            2,357,208
            
            
            1,644,311Cash
                and cash equivalents at end of year
            
            $
            413,395
            
            $
            2,357,208


See
      Notes
      to Consolidated Financial Statements


25


**ENTRX
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2005 AND 2004**





**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 46, “Consolidation of Variable Interest Entities” (see Note 3).
      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
                  unrealized gains**
              ****
              **Gross
                  unrealized losses**
              ****
              **Cost**Available
                  for sale securities –
                  December
                  31, 2005
              
              $
              142,925
              
              $
              -
              
              $
              (47,641
              )
              $
              190,566Available
                  for sale securities – December 31, 2004
              
              $
              152,455
              
              $
              -
              
              $
              (38,113
              )
              $
              190,568





The
      Company's net unrealized holding loss was $9,528 and $126,203 for the years
      ended December 31, 2005 and 2004, 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. Based
      on the investment and volatility of common stock in a publicly-traded company
      and the ability and the intent of the Company to hold the investment until
      a
      recovery of fair value, the Company believes that the cost of the investment
      is
      recoverable within a reasonable period of time. The Company also reviewed the
      stock price history of the investment and noted that for approximately 23%
      of
      the trading days in 2005, the investment’s stock price was greater than or equal
      to the Company’s cost basis in the investment. Therefore, the impairment was not
      considered other-than-temporary at December 31, 2005.




26




The
      following table shows the gross unrealized losses and fair value of Company's
      investments with unrealized losses that are not deemed to be
      other-than-temporarily impaired, aggregated by investment category and length
      of
      time that individual securities have been in a continuous unrealized loss
      position, at December 31, 2005.








**Less
                than 12 Months**
            ****
            **12
                Months or Greater**
            ****
            **Total****Description
                of Securities**
            ****
            **Fair
                Value**
            ****
            **Unrealized
                Losses**
            ****
            **Fair
                Value**
            ****
            **Unrealized
                Losses**
            ****
            **Fair
                Value**
            ****
            **Unrealized
                Losses**Marketable
                equity securities
            
            $
            142,925
            
            $
            (47,641
            )
            $
            -
            
            $
            -
            
            $
            142,925
            
            $
            (47,641
            )Total
            
            $
            142,925
            
            $
            (47,641
            )
            $
            -
            
            $
            -
            
            $
            142,925
            
            $
            (47,641
            )




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 6)





**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. 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 $850
      and
      $0 for the years ended December 31, 2005 and 2004,
      respectively.





27




**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. The Company recorded $466,000 of accrued
      expense related to the anticipated losses at December 31, 2005. 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, 2005 and 2004.





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. Weighted average shares outstanding-diluted for the
      year
      ended December 31, 2004 includes 74,361 shares of dilutive securities. Options
      and warrants totaling 3,009,040 and 3,322,570 were excluded from the computation
      of diluted earnings per share for the years ended December 31, 2005 and 2004,
      respectively, as their effect was antidilutive. Following is a reconciliation
      of
      basic and diluted net income (loss) per share:





**2005**
            ****
            **2004**Basic
                net income (loss) per common shareNet
                income (loss)
            
            $
            (1,742,715
            )
            $
            610,587Weighted
                average shares outstanding
            
            
            7,683,202
            
            
            7,331,203Basic
                net income (loss) per common share
            
            $
            (0.23
            )
            $
            0.08Diluted
                net income (loss) per common shareNet
                income (loss)
            
            $
            (1,742,715
            )
            $
            610,587Weighted
                average shares outstanding
            
            
            7,683,202
            
            
            7,331,203Effect
                of diluted securities
            
            
            -
            
            
            74,361Weighted
                average shares outstanding
            
            
            7,683,202
            
            
            7,405,564Diluted
                net income (loss) per common share
            
            $
            (0.23
            )
            $
            0.08





**Legal
      Costs**





The
      Company expenses its legal costs as incurred.





**Stock-Based
      Compensation**





In
      accordance with Accounting Principles Board (APB) Opinion No. 25 and related
      interpretations, the Company uses the intrinsic value-based method for measuring
      stock-based compensation cost which measures compensation cost as the excess,
      if
      any, of the quoted market price of the Company's common stock at the grant
      date
      over the amount the employee must pay for the stock. The Company's general
      policy is to grant stock options and warrants at fair value at the date of
      grant. Options and warrants issued to employees are recorded at fair value,
      as
      required by SFAS No. 123 “Accounting
      for Stock Based Compensation” (Statement 123) ,
      using
      the Black-Scholes pricing model. The Company adopted the disclosure-only
      requirement of SFAS No. 148, “Stock Based Compensation.”





28




The
      Company applies APB No. 25 and related interpretations in accounting for its
      stock options and warrants. Accordingly, $24,585 and $56,550 of compensation
      cost has been recognized in the accompanying consolidated statements of
      operations and comprehensive income (loss) for the years ended December 31,
      2005
      and 2004, respectively. Had compensation costs for the Company's stock options
      and warrants been determined based on the fair value at the grant dates
      consistent with the method of SFAS No. 123, the Company's net income (loss)
      and
      income (loss) per share would have been changed to the approximate pro forma
      amounts indicated below:


**Year
                    Ended December 31,**
                ********
                ****
                **2005**
                ****
                **2004**Net
                    income (loss):As
                    reported
                
                $
                (1,742,715
                )
                $
                610,587Pro
                    forma
                
                
                (1,838,533
                )
                
                407,726Basic
                    net income (loss) per common shareAs
                    reported
                
                $
                (0.23
                )
                $
                0.08Pro
                    forma
                
                
                (0.24
                )
                
                0.06Diluted
                    net income (loss) per common shareAs
                    reported
                
                $
                (0.23
                )
                $
                0.08Pro
                    forma
                
                
                (0.24
                )
                
                0.06Stock-based
                    compensationAs
                    reported
                
                $
                24,585
                
                $
                56,550Pro
                    forma
                
                
                179,524
                
                
                202,861


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


**Year
                  Ended December 31,**
              ********
              ****
              **2005**
              ****
              **2004**Risk
                  free interest rate
              
              
              2.77
              %
              
              3.25
              %Expected
                  life
              
              
              3.00
                  years
              
              
              4.67
                  yearsExpected
                  volatility
              
              
              153
              %
              
              135
              %Expected
                  dividends
              
              
              -
              
              
              -Weighted
                  average fair value
                of options granted
              
              $
              0.43
              
              $
              0.41


**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.





29




**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, 2005 and
      2004, the Company recorded other comprehensive loss of $9,528 and $126,203,
      respectively, for unrealized losses on available-for-sale securities. 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.





**New
      Accounting Pronouncements**





In
      December 2004, the FASB issued a revision of SFAS No. 123, "Accounting for
      Stock-Based Compensation", (SFAS No. 123R). SFAS No. 123R supersedes APB Opinion
      No. 25, "Accounting for Stock Issued to Employees," and its related
      implementation guidance. SFAS No. 123R establishes standards for the accounting
      for transactions in which an entity incurs liabilities in exchange for goods
      or
      services that are based on the fair value of the entity's equity instruments
      or
      that may be settled by the issuance of those equity instruments. SFAS No. 123R
      does not change the accounting guidance for share-based payment transactions
      with parties other than employees provided in SFAS No. 123 as originally issued
      and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
      to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services." SFAS 123R is effective as of the beginning of the Company's first
      fiscal year beginning after June 15, 2005. The Company’s adoption of SFAS No.
      123R fair value method is not expected to have an impact in 2006 since all
      of
      the Company’s outstanding stock options are fully vested at December 31, 2005.
      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.





In
      June
      2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standards (“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 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. Earlier
      application is permitted for accounting changes and corrections of errors made
      occurring in fiscal years beginning after June 1, 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 Company does not expect the adoption of SFAS No. 154 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, including property and intangible 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.





30




**Reclassifications**





Certain
      reclassifications have been made to the prior year consolidated financial
      statements to conform with the current year presentation. These
      reclassifications had no effect on the net loss or shareholders’
equity.








**NOTE
      2 – PRIOR
      PERIOD RESTATEMENT**





Following
      a review of the Company’s accounting for asbestos-related injury claims the
      Company changed its method of accounting for such claims. To reflect this
      change, the Company has restated its consolidated balance sheet as of December
      31, 2004.





Historically,
      the Company offset estimated proceeds from its insurance carriers resulting
      from
      claims of personal injury allegedly related to asbestos exposure against the
      estimated liabilities related to such claims. To date, all of the
      asbestos-related injury claims have been defended and paid by the Company’s
      insurance carriers. The Company never has access to the cash and the cash from
      the insurance company goes directly to the plaintiff. The Company never has
      control over any of the funds the insurance company issues to the plaintiff.
      The
      Company has revised its accounting to record the estimated liabilities related
      to asbestos-related injury claims independently from the insurance claim
      receivable.





Below
      is
      a summary of the impact of this change on each financial statement line item
      in
      the Company’s consolidated balance sheet as of December 31, 2004. The Company
      did not present a summary of the impact of the restatement on the consolidated
      statements of operations and comprehensive income (loss), the consolidated
      statements of shareholders’ equity or the consolidated statements of cash flows
      as the impact for 2004 and prior years is zero.





**Consolidated
                Balance Sheet Line Item**
            ****
            **As
                of December 31, 2004 as previously reported**
            ****
            **As
                of December 31, 2004 as restated**Insurance
                claims receivable - current
            
            $
            -
            
            $
            13,500,000Insurance
                claims receivable - non-current
            
            
            -
            
            
            35,000,000Reserve
                for asbestos liability claims - current
            
            
            -
            
            
            13,500,000Reserve
                for asbestos liability claims - non-current
            
            
            -
            
            
            35,000,000




**NOTE
      3 – 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.





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.





31




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.





**NOTE
      4 – ACCOUNTS RECEIVABLE**





Accounts
      receivable consisted of the following at December 31:





**2005**
            ****
            **2004**BilledCompleted
                contracts
            
            $
            772,090
            
            $
            445,929Contracts
                in process
            
            
            718,788
            
            
            596,061Time
                and material work
            
            
            1,174,994
            
            
            806,389Material
                sales
            
            
            38,908
            
            
            28,410Unbilled
                retainage
            
            
            222,337
            
            
            186,5532,927,117
            
            
            2,063,342Less:
                Allowance for doubtful accounts
            
            
            (10,612
            )
            
            (50,000
            )$
            2,916,505
            
            $
            2,013,342




**NOTE
      5 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS**





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





**2005**
            ****
            **2004**Costs
                incurred on uncompleted contracts
            
            $
            7,157,528
            
            $
            2,061,896Estimated
                earnings
            
            
            1,593,335
            
            
            359,1318,750,863
            
            
            2,421,027Less
                billings to date
            
            
            (8,734,273
            )
            
            (2,155,427
            )$
            16,590
            
            $
            265,600





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





**2005**
            ****
            **2004**Costs
                and estimated earnings in excess of billings on uncompleted
                contracts
            
            $
            193,231
            
            $
            305,057Billings
                in excess of costs and estimated earnings on uncompleted
                contracts
            
            
            (176,641
            )
            
            (39,457
            )$
            16,590
            
            $
            265,600






32





**NOTE
      6 – 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 may be
      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 will
      automatically convert 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 is being done through a rights offering to current shareholders and
      includes a “pay-to-play” provision. The pay-to-play provision requires all
      preferred shareholders to participate in the New Financing on a pro-rata basis.
      If a preferred shareholder elects not to participate in the New Financing,
      that
      shareholder’s preferred shares will be 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
      are 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
      each of the years ended December 31, 2005 and 2004. 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 and $141,000 during
      the years ended December 31, 2005 and 2004, respectively.





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, 2005 and 2004.





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





**December
                31,**
            ********
            ****
            **2005**
            ****
            **2004**Clearwire
                Corporation
            
            $
            756,889
            
            $
            756,889Catalytic
                Solutions, Inc.
            
            
            450,000
            
            
            859,000$
            1,206,889
            
            $
            1,615,889






33





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





Property,
      plant and equipment consist of the following:





**December
                31,**
            ********
            ****
            **2005**
            ****
            **2004**Machinery
                and equipment
            
            $
            525,841
            
            $
            403,942Automotive
                equipment
            
            
            499,853
            
            
            513,3811,025,694
            
            
            917,323Less
                accumulated depreciation
              and
                amortization
            
            
            (661,784
            )
            
            (561,372
            )$
            363,910
            
            $
            355,951





Depreciation
      and amortization expense for the years ended December 31, 2005 and 2004 was
      $202,308 and $175,038, respectively.





**NOTE
      8 – 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, in December 2005 the Company
      signed an agreement to sell its facilities in Anaheim, California for
      $3,900,000. It is anticipated that the sale of the building will be completed
      in
      April 2006. The building, land and building improvements have a carrying value
      of $2,080,082 as of December 31, 2005 and 2004 and accumulated depreciation
      of
      $101,035 and $73,855 as of December 31, 2005 and 2004, respectively, with an
      estimated gain on the sale of $1,738,000 and are considered held for sale.
      The
      Company will be leasing the facilities back for eight months and will recognize
      the gain on the sale in the three months ended June 30, 2006. The Company has
      a
      mortgage on the building of $1,500,678 as of December 31, 2005, that will be
      repaid upon the sale of the building. In accordance with SFAS 144 “Accounting
      for the Impairment or Disposal of Long-lived Assets,” the Company has classified
      the building and land as assets held for sale on the balance sheets. The Company
      subsequently sold the building, land and building improvements in April 2006
      (see Note 22).





**NOTE
      9 – ACCRUED EXPENSES**





Accrued
      expenses consist of the following:





**December
                31,**
            ********
            ****
            **2005**
            ****
            **2004**Accrued
                interest
            
            $
            3,344
            
            $
            17,393Wages,
                bonuses and taxes
            
            
            135,858
            
            
            112,441Union
                dues
            
            
            197,972
            
            
            152,895Accounting
                and legal fees
            
            
            85,000
            
            
            28,000Insurance
            
            
            256,084
            
            
            196,200Insurance
                settlement reserve
            
            
            375,000
            
            
            375,000Accrued
                loss on projects
            
            
            466,002
            
            
            -Other
            
            
            175,347
            
            
            158,646$
            1,694,607
            
            $
            1,040,575








34




**NOTE
      10 – 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 is 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, 2004, the Company issued 65,000 fully-vested
      four-year warrants with an exercise price of $1.44. These warrants were valued
      at $32,500 using the Black-Scholes pricing model and expensed on the
      consolidated statement of operations. 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 is 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.
      Principal maturities on the note are as follows:





**Year
                ending**
              **December
                31,**2006
            
            $
            510,1212007
            
            
            44,848Total
            
            
            554,969Less
                current portion
            
            
            (510,121
            )Long-term
                debt, net
            
            $
            44,848




**NOTE
      11 – NOTE PAYABLE TO BANK**





The
      Company, through its subsidiary Metalclad Insulation Corporation, had a line
      of
      credit agreement with Far East National Bank which originally matured on October
      28, 2004, which maturity date was extended to December 1, 2004, was further
      extended to January 14, 2005 and was further extended to January 27, 2005,
      bore
      interest at a floating rate based upon the bank’s prime rate plus 1% (6.25% at
      December 31, 2004). 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. Borrowings under the agreement were
      limited to $1,000,000 plus the amount of cash collateral posted, up to $500,000,
      in the form of a certificate of deposit at the bank.





35




On
      January 27, 2005, we renewed our line of credit with Far East National Bank.
      The
      renewed line of credit is for up to $1,000,000, subject to 80% of eligible
      accounts receivable as defined in the loan agreement, and bears 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 is 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 and 2004, $775,000 and $1,000,000, respectively, was
      outstanding on the credit agreement with available borrowings of $225,000 and
      $0, respectively. The loan terms stipulate that the Company maintain compliance
      with certain financial covenants and ratios. At December 31, 2004, the Company
      was in compliance with these covenants, but as of December 31, 2005 was not
      in
      compliance with the minimum cash flow ratio and the covenant requiring Entrx
      Corporation to maintain a tangible net worth of not less than $4,000,000. The
      Company received a waiver from Far East National Bank through April 3, 2006
      with
      regards to the non-compliance of the minimum cash flow ratio as of December
      31,
      2005, and at December 31, 2005 was seeking a waiver for the non-compliance
      of
      the Entrx Corporation tangible net worth covenant. The debt was paid off on
      April 20, 2006; therefore no additional waivers were obtained (see Note 22).





**NOTE
      12 – 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 2008. Principal
      maturities over the next five years are as follows:





**Year
                ending**
              **December
                31,**2006
            
            $
            85,8752007
            
            
            49,9142008
            
            
            9,380Totals
            
            
            145,169Less
                current portion
            
            
            (85,875
            )Long-term
                portion
            
            $
            59,294




**NOTE
      13 – 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 matures in October 2008 and bears 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 and 2004 the interest rate was 8.25% and 6.25%, respectively.
      The mortgage is 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 (see Note 22). The
      mortgage is collateralized by the building (See Note 8). The line of credit
      agreement and the mortgage with Far East include cross default provisions.
      Principal maturities on the mortgage are as follows:





36








**Year
                ending**
              **December
                31,**2006
            
            $
            39,9462007
            
            
            43,3692008
            
            
            1,417,363Totals
            
            
            1,500,678Less
                current portion
            
            
            (39,946
            )Long-term
                portion
            
            $
            1,460,732




**NOTE
      14 – 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 and $9,998 at December 31, 2005 and 2004,
      respectively.





**NOTE
      15 - INCOME TAXES**





The
      major
      deferred tax items are as follows:





**December
                31,**
            ********
            ****
            **2005**
            ****
            **2004**Assets:Allowances
                established against realization of certain assets
            
            $
            1,271,000
            
            $
            494,000Net
                operating loss carryforwards
            
            
            13,347,000
            
            
            13,083,000Liabilities:Accrued
                liabilities and other
            
            
            (32,000
            )
            
            (65,000
            )14,586,000
            
            
            13,512,000Valuation
                allowance
            
            
            (14,586,000
            )
            
            (13,512,000
            )$
            -
            
            $
            -





The
      change in valuation allowance was $1,074,000 and $(575,000) for the years ended
      December 31, 2005 and 2004, 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:





**2005**
            
            **2004**Federal
                statutory tax rate benefits
            
            
            (35.0
            %)
            
            35.0
            %State
                tax, net of federal benefit
            
            
            (5.0
            %)
            
            5.0
            %Change
                in valuation allowance
            
            
            39.0
            %
            
            (42.4
            %)Permanent
                differences
            
            
            1.0
            %
            
            2.4
            %Effective
                tax rate
            
            
            0.0
            %
            
            0.0
            %




37




At
      December 31, 2005, the Company has available for U.S. federal income tax
      purposes net operating loss carry-forwards of approximately $33,367,000. 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
      16 - 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, 2005, there were options outstanding under the 1992
      Plan
      for 1,750 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,
      2005, there were options outstanding under the 1993 Plan for 5,890 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.





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, 2005, 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, 2005, there were options outstanding under the 2000
      plan
      for 1,676,400 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 100,000 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 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.





38





The
      following is a summary of options granted:





**Year
                Ended December 31,**
            ********
            ****
            **2005**
            ****
            **2004****Shares**
            ****
            **WeightedAverage
                Exercise Price**
            ****
            **Shares**
            ****
            **Weighted
                Average Exercise Price**Options
                outstanding at beginning of the year
            
            
            2,382,570
            
            $
            4.13
            
            
            2,297,400
            
            $4.31Granted
            
            
            55,000
            
            
            0.55
            
            
            240,000
            
            0.59Exercised
            
            
            -
            
            
            -
            
            
            -
            
            -Canceled
            
            
            (203,530
            )
            
            14.56
            
            
            (154,830
            )
            1.35Options
                outstanding at end of the year
            
            
            2,234,040
            
            $
            3.09
            
            
            2,382,570
            
            $4.13Options
                Exercisable
            
            
            2,234,040
            
            $
            3.09
            
            
            2,109,470
            
            $4.47




**Options
                Outstanding**
            ****
            **Options
                Exercisable**
            ******Range
                of exercise prices**
            ****
            **Number
                outstanding**
              **as
                of 12/31/05**
            ****
            **Weighted
                average remaining contractual lifein
                years**
            ****
            **Weighted
                average**
              **exercise
                price**
            ****
            **Number
                exercisable as of 12/31/05**
            ****
            **Weighted
                average**
              **exercise
                price**$0.50
            
            
            250,000
            
            
            3.89
            
            $
            0.50
            
            
            250,000
            
            $
            0.50$0.55
                - $1.20
            
            
            213,000
            
            
            4.14
            
            $
            0.87
            
            
            213,000
            
            $
            0.87$2.00
            
            
            510,000
            
            
            5.44
            
            $
            2.00
            
            
            510,000
            
            $
            2.00$2.50
            
            
            283,400
            
            
            3.09
            
            $
            2.50
            
            
            283,400
            
            $
            2.50$3.00
            
            
            870,000
            
            
            4.39
            
            $
            3.00
            
            
            870,000
            
            $
            3.00$12.50
                - $45.00
            
            
            107,640
            
            
            1.62
            
            $
            20.94
            
            
            107,640
            
            $
            20.94$0.50
                - $45.00
            
            
            2,234,040
            
            
            4.25
            
            $
            3.09
            
            
            2,234,040
            
            $
            3.09




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 nine years. The Company issued a consultant a five-year
      warrant to purchase 50,000 shares of the Company’s common stock during the year
      ended December 31, 2004 and recognized $24,050 of expense related to the
      warrant. The Company issued five-year warrants to purchase 133,467 and 65,000
      shares of the Company’s common stock to Pandora Select Partners, L.P.
      (“Pandora”) during the years ended December 31, 2005 and 2004, respectively, and
      recognized $24,586 and $32,500 of expense related to the warrants, respectively.
      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 10). At December 31, 2005 and 2004, the weighted
      average exercise price for warrants outstanding was $1.39 and $1.41,
      respectively, expiring through July, 2009.





Summarized
      information for stock purchase warrants is as follows:




39





**Number
                of Warrants**
            ****
            **Price
                per share**Warrants
                outstanding at December 31, 2003
            
            
            1,150,680
            
            $
            0.50
                - $3.50Issued
            
            
            115,000
            
            $
            0.75
                - $1.44Expired
            
            
            (25,680
            )
            $
            3.50Warrants
                outstanding at December 31, 2004
            
            
            1,240,000
            
            $
            0.50
                - $1.50Issued
            
            
            133,467
            
            $
            1.44Cancelled
            
            
            (598,467
            )
            $
            1.44Warrants
                outstanding at December 31, 2005
            
            
            775,000
            
            $
            0.50
                - $1.50




**Common
      Stock**





During
      the year ended December 31, 2004, the Company sold 400,000 shares for a total
      of
      $200,000.





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.





**NOTE
      17 - 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, 2005 and 2004.





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 $407,170 and $413,965 for the years ended
      December 31, 2005 and 2004, respectively.





**NOTE
      18 - SIGNIFICANT CUSTOMERS**





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.





Sales
      for
      the year ended December 31, 2004 to Southern California Edison Company (“SCE”)
      under the strategic alliance program with Curtom-Metalclad were approximately
      $2,725,000. Additionally, the Company had sales of approximately $1,701,000
      to
      Calpine during the year ended December 31, 2004. Accounts receivable from
      Calpine was approximately $701,000 as of December 31, 2004 and accounts
      receivable from JE Merit Constructors, Inc. was approximately
      $233,000.





40




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
      19 - COMMITMENTS AND CONTINGENCIES**





**Collective
      Bargaining Agreements**





Approximately
      90% of the Company’s employees are covered under collective Bargaining
      Agreements. One agreement, the “Maintenance Agreement” with Local No. 5 of the
      International Association of Heat and Frost Insulators and Asbestos Workers
      expired in December 2003. The “Basic Agreement” with Local No. 5 of the
      International Association of Heat and Frost Insulators and Asbestos Workers
      expired in August 2004. In August, 2004 a new “Basic Agreement” was signed with
      Local No. 5 that expires in September 2008. The new “Basic Agreement” included
      the “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 expires in December 2006.
      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.





Total
      rent expense under operating leases was $34,887 and $67,631 for the years ended
      December 31, 2005 and 2004, respectively. There are no future minimum
      non-cancelable lease commitments. Due to the sale of the Company’s facilities in
      Anaheim, California on April 20, 2006, the Company is leasing the facilities
      back for eight months at a market rate of $21,800 per month.





**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. At December 31, 2001, 2002, 2003, 2004 and 2005, there
      were,
      respectively, approximately 1,009, 988, 853, 710 and 507 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, 2001, 2002, 2003, 2004 and
      2005, 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:




41




**2001**
              
              **2002**
              ****
              **2003**
              ****
              **2004**
              ****
              **2005(2)**New
                  cases filed
              
              
              725
              
              
              590
              
              
              351
              
              
              265
              
              
              199Defense
                  Judgments and dismissals
              
              
              162
              
              
              382
              
              
              311
              
              
              311
              
              
              294Settled
                  cases
              
              
              158
              
              
              229
              
              
              175
              
              
              97
              
              
              108Total
                  resolved cases(1)
              
              
              320
              
              
              611
              
              
              486
              
              
              408
              
              
              402(2)Pending
                  cases(1)
              
              
              1,009
              
              
              988
              
              
              853
              
              
              710
              
              
              507(3)Total
                  indemnity payments
              
              $
              8,486,348
              
              $
              9,244,000
              
              $
              10,618,700
              
              $
              6,366,750
              
              $
              8,513,750Average
                  indemnity paid on settled cases
              
              $
              53,711
              
              $
              40,366
              
              $
              60,678
              
              $
              65,637
              
              $
              78,831Average
                  indemnity paid on all resolved cases
              
              $
              26,520
              
              $
              15,129
              
              $
              21,849
              
              $
              15,605
              
              $
              21,178(2)




(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 has
      reflected a relatively consistent downward trend from 2002 through 2005, as
      has
      the number of cases pending at the end of those years. We believe that it is
      probable that this trend will continue, although such continuance cannot be
      assured. The average indemnity paid on all resolved claims has fluctuated over
      the past five-year period ended December 31, 2005 from a high of $26,520 in
      2001, to a low of $15,129 in 2002, with an average indemnity payment of $20,056
      over the same five-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 $12,240 in 2005. 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 years, we project that approximately 533 asbestos-related
      injury claims will be made against the Company in the future, in addition to
      the
      507 claims existing as of December 31, 2005, totaling 1,040 claims. Multiplying
      the average indemnity per resolved claim over the past five years of $20,056,
      times 1,040, we project 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 project 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. After
      estimating our asbestos-related liabilities as of December 31, 2005, and by
      adopting a methodology similar to that described above, we estimated our future
      asbestos-related liability to be $48.5 million at December 31, 2004, which
      was
      consistent with actual results. These estimated liabilities are included as
      liabilities on our 2004 and 2005 balance sheets.





42


We
        intend
        to re-evaluate our estimate of future liability for asbestos claims at the
        end
        of each fiscal year. 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. See Item 1 –“Description
        of
        Business – Insurance and Bonding.”


Although
      defense costs are included in our insurance coverage, we expended $220,000,
      $174,000, $304,000 and $188,000 in 2002, 2003, 2004 and 2005, respectively,
      to
      administer the asbestos claims, which is not covered by any insurance. 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. These costs are expensed as
      incurred.”





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 $35 million future liability
      for such claims as of December 31, 2005.





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 (as discussed under Part 2, Item 6
      (“Management’s Discussion and Analysis of Plan of Operation”) 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 is taking the position
      that
      it has no legal obligation to assume or pay for such defense.





43




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 was rejected by the full Senate in
      February 2006, when a cloture motion on the bill was withdrawn. 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 reconsidered by the Senate 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. We have fully reserved for the $779,000 note receivable, which was
      recorded at the date of sale.





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. 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, 2005 or 2004. 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.





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.





44




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 $84,000
      in the three months ended December 31, 2005. The Company is continuing to pursue
      its claims against its former insurance broker, Meyers-Reynolds, in this
      action.





On
      February 5, 2003, a Notice of Involuntary Lien was filed against the Company
      with the County Recorder for Orange County California in the amount of $104,046.
      This lien relates to a judgment against the Company for attorney fees in the
      Company’s NAFTA settlement. The total amount of the claim including interest and
      collection costs was $111,406. Subsequent to the lien being filed, $27,050
      was
      paid to the lien holder from a trust fund established by the Company and a
      third
      party to pay for any judgments and defense costs related to this lawsuit. The
      Company agreed to pay the remaining $84,356 of the claim in three installments.
      At December 31, 2003, the Company had paid the judgment in full.





The
      Company had been indemnified by the third party, Mr. Clyde C. Pearce, against
      any judgments and costs related to this lawsuit in excess of the trust fund
      and
      contacted Mr. Pearce seeking indemnification. Mr. Pearce refused to honor his
      indemnification obligation and the Company therefore initiated legal proceedings
      against Mr. Pearce. Mr. Pearce filed a cross-complaint against the Company
      seeking $100,000 due to undue influence, duress, fraud, unconscionability and
      conspiracy related to the original indemnification agreement.





In
      May
      2004, the Company reached a settlement with Mr. Pearce whereby both parties
      agreed to dismiss, with prejudice, their respective cases against the other
      party. As part of the settlement the Company received 7,407 shares of Narus,
      Inc.’s Series D Preferred Stock, a privately-held company.





**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.





45




**Other
      Matters**





The
      Company had under contract uncompleted work at bid prices totaling approximately
      $10,120,000 and $9,003,000 at December 31, 2005 and 2004, respectively.





**Employment
      Agreement**





The
      Company had an employment agreement with its former President and Chief
      Executive Officer, Wayne Mills, which was terminable at-will. The agreement
      required minimum annual compensation of $200,000, plus an annual incentive
      bonus
      as defined in the agreement and six months severance, in the event of sale
      or
      merger of the Company or if terminated without cause. Mr. Mills resigned his
      positions with the Company on October 15, 2004. The Board of Directors agreed
      to
      continue his salary and benefits through December 31, 2004.





The
      Company also had an employment agreement with another one of its officers,
      which
      would have expired in April 2006. The agreement required minimum annual
      compensation of $165,000, plus an annual bonus as defined in the agreement
      and
      three months severance, in the event of sale or merger of the Company or if
      terminated without cause. This officer resigned from his position with the
      Company on April 2, 2004 and received no further payment.








**NOTE
      20**–**SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
      NON-CASH INVESTING ACTIVITIES**





**Supplemental
      Disclosures of Cash Flow Information**





Cash
      paid
      for interest was $283,520 and $279,834 for the years ended December 31, 2005
      and
      2004, respectively.





**NOTE
      21 - 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. The carrying value continued to fluctuate
      as
      the market value of the Collateral changed.





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.





46




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.





At
      December 31, 2005, the shareholder note receivable balance, including interest
      of $42,513, was $1,538,883. The Company recorded a reserve against the
      receivable of $250,000 based upon the Company’s estimation as to the
      collectibility of the note receivable during the year ended December 31,
      2004.





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, 2004, were $0.53 and $0.80,
      respectively, placing an aggregate market value on shares of the Company and
      VioQuest Pharmaceuticals, Inc. held as collateral on that date at $265,000
      and
      $200,000, 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.





A
      director and an officer of the Company were employed by a corporation which
      has
      received payments for rent, health insurance and consulting services of $151,985
      for the year ended December 31, 2004, and an officer of the Company was employed
      by a corporation which received payments for rent and health insurance of
      $50,898 for the year ended December 31, 2005.





**NOTE
      22**–**SUBSEQUENT EVENTS**





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 issued in connection with the loan is due and payable 10
      days following written demand and bears interest at 2% over the prime interest
      rate as published in the Wall Street Journal. The promissory note is secured
      by
      a deed of trust on the Company’s facilities in Anaheim, California. The loan was
      re-paid to Mr. Hauser on April 21, 2006 when the Company’s Anaheim facilities
      were sold.




47




**Building
      Sale**





On
      April
      20, 2006, the Company sold its facilities in Anaheim, California for $3,900,000.
      These facilities contained the industrial insulation service operations of
      the
      Company’s subsidiary, Metalclad Insulation Corporation. With the proceeds of
      such sale the Company paid off its mortgage on the facility granted to Far
      East
      National Bank, in the amount of $1,500,093, as well as the line of credit to
      Far
      East National Bank of $1,000,000. In addition, the Company repaid $150,000
      which
      it had borrowed from its Chairman and Chief Executive Officer, Peter Hauser.
      The
      Company is leasing these facilities back from the purchaser for eight months
      at
      a monthly rent of $21,800.


48





**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, 2005, 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, 2005, 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, 2005
      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**





On
      December 29, 2005, the Company issued 300,000 shares (the “Shares”) of its
      common stock to Pandora Select Partners, L.P. (“Pandora”), pursuant to an
      Exchange Agreement entered into on November 23, 2005. The Shares were issued
      in
      exchange for warrants which Pandora held for the purchase of 598,467 shares
      of
      the Company’s common stock as of the date of the Exchange Agreement, and the
      cancellation of the right of Pandora to convert a promissory note of the Company
      held by Pandora into common stock and the right to require registration of
      the
      shares purchasable under the warrants and promissory note under the Securities
      Act of 1933. The issuance of the Shares was made in reliance on Section 4(2)
      of
      the Securities Act of 1933, as a transaction not involving any public offering,
      as Pandora represented in the Exchange Agreement that it was an accredited
      investor and took the Shares for investment without a view toward
      redistribution. See Item G. “Management’s Discussion and Analysis or Plan of
      Operation - Liquidating and Capital Resources” and Note 10 to Item 7 -
“Financial Statements.”


49





**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
            
            
            64
            
            
            President,
                Chief Executive Officer, Chairman of the Board and
                DirectorKenneth
                W. Brimmer(1)(2)(3)
            
            
            2002
            
            
            50
            
            
            DirectorJoseph
                M. Caldwell(4)(5)(6)
            
            
            2002
            
            
            38
            
            
            DirectorE.
                Thomas Welch(7)
            
            
            2004
            
            
            67
            
            
            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 chairman, president and chief executive officer of Entrx Corporation since
      October 15, 2004, and expects to devote 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.





50




*Kenneth
      W. Brimmer* has been
      a member of the Board of Directors of Entrx since February 2002, and Chairman
      of
      the Board of Directors from March 2002 until October 15, 2004. Mr. 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 11 fast-food 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: WITN.OB). Until April
      2000, Mr. Brimmer was an executive officer of Rainforest Cafe, Inc., serving
      as
      its treasurer from 1995, and its president from April 1997. Mr. Brimmer is
      currently a member of the board of directors of Hypertension Diagnostics, Inc.
      (OTCBB: HDII.OB). He
      currently  also serve s as a
      board member at Landry’s
      Restaurants, Inc. (NYSE: LNY) and is a member and the chairman of the board
      of
      directors of Spectre Gaming, Inc. (OTCBB: SGMG). Mr.
      Brimmer is a member of our Audit Committee and has been determined to be the
      audit committee financial expert, and is independent, as defined under criteria
      established by Nasdaq and the regulations of the Securities and Exchange
      Commission. Mr. Brimmer has a Bachelor of Arts degree in
      accounting.





*Joseph
      M. Caldwell* has been
      a director of Entrx since June 2004. Mr. 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
      a director of Entrx since December 2004. Mr. Welch has been the president of
      BNC
      National Bank at its Minneapolis, Minnesota office, since April, 2005. BNC
      National Bank, with corporate offices in Bismarck, North Dakota, conducts
      banking business through 20 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 2001 until April, 2005, where he was
      primarily responsible for fiduciary and risk management, compliance and other
      fiduciary matters. U.S. Trust Company is 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. At various times during that period,
      Mr.
      Welch was an officer and director of various affiliates of Resource Trust
      Company. Resource Trust Company and its principal affiliated companies were
      acquired by U.S. Trust Company in April 2001. Mr. Welch has a Bachelor of Arts
      degree in accounting and a J.D. 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, 2005, the Board of Directors held six meetings.
      Each
      member of the Board of Directors was present for all of the meetings, except
      for
      E. Thomas Welch, who did not attend two of the meetings and Peter L. Hauser,
      who
      did not attend one of the meetings.





51




**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 five meetings
      during the year ended December 31, 2005.





***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 held no meetings during the year ended December 31, 2005, and the
      compensation of the Company’s executive officers for 2005 was unchanged from
      2004.





***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 held no meetings during the year ended December
      31, 2005, as there was no meeting of the shareholders held in 2005.





For
      the
      shareholder meeting held on December 23, 2004, the Nominating Committee
      recommended the re-election of Peter L. Hauser, Joseph M. Caldwell and Kenneth
      W. Brimmer, and the nomination of E. Thomas Welch. The Board of Directors
      adopted that recommendation.





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 Kenneth Brimmer, 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. The Stock Option Committee works
      closely with, and considers the recommendations of, the Compensation Committee
      in cases involving the granting of stock options to executive officers of Entrx.
      The Stock Option Committee met on one occasion in the year ended December 31,
      2005, to grant options for 10,000 shares to each of the four members of the
      Board of Directors, and for 15,000 shares to one of those directors as an
      inducement to serve on the Board of Directors, all of which are exercisable
      at
      $0.55 per share.





52





**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**
            ****
            **Position**Brian
                D. Niebur
            
            
            43
            
            
            Treasurer
                and Chief Financial OfficerJohn
                J. Macias
            
            
            60
            
            
            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* is the
      president of Entrx’s wholly owned operating subsidiary, Metalclad Insulation
      Corporation. Mr. Macias has been employed by Metalclad Insulation Corporation
      since 1971 in various positions, including labor superintendent from 1985 until
      April 14, 2004, when he became its president and chief executive
      officer.





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, 2005, 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 and Joseph M.
      Caldwell were each granted options to purchase 10,000 shares of Entrx's common
      stock at $1.03 per share on May 10, 2004, and again on January 3, 2005 at $0.55
      per share, for which they failed to timely file a Form 4 or Form
      5..





53




**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: (1) each person
      who served as the chief executive officer of Entrx at any time during the year
      ended December 31, 2005, regardless of compensation level, and each of our
      other
      executive officers, other than the chief executive officer, serving as an
      executive officer at December 31, 2005. The foregoing persons are collectively
      referred to in this Form 10-KSB as the “Named Executive Officers.” Compensation
      information is shown for fiscal years 2003, 2004 and 2005.


****
                  ****
                  ****
                  ****
                    **Annual
                      Compensation**
                  ****
                  **Long
                        Term
                        Compensation****Awards******
                  ****
                  ****
                  ******Name/Principal
                      Position**
                  ****
                  **Year**
                  ****
                  **Salary**
                    **($)**
                  ****
                  **Bonus**
                    **($)**
                  ****
                  **Other
                      Annual Compensation**
                    **($)**
                  ****
                  **Restricted**
                    **Stock**
                    **Awards**
                    **($)**
                  ****
                  **Securities**
                    **Underlying**
                    **Options/SARs**
                    **(#)**
                  ****
                  **All
                      Other**
                    **Compensation**
                    **($)**Peter
                      L. Hauser(1)President
                      and Chief
                  
                  
                  2005
                  
                  
                  75,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  10,000
                  
                  
                  —Executive
                      Officer
                  
                  
                  2004
                    2003
                  
                  
                  15,625
                    —
                  
                  
                  —
                    —
                  
                  
                  ——
                  
                  
                  —
                    —
                  
                  
                  200,000
                    —
                  
                  
                  —
                    —Brian
                      D. NieburTreasurer
                      and Chief
                  
                  
                  2005
                  
                  
                  75,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Financial
                      Officer
                  
                  
                  2004
                    2003
                  
                  
                  75,000
                    75,000
                  
                  
                  —
                    —
                  
                  
                  —
                    —
                  
                  
                  —
                    —
                  
                  
                  —
                    20,000
                  
                  
                  —
                    —John
                      J. Macias(2)
                  
                  
                  2005
                  
                  
                  160,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —President
                      of Metalclad
                  
                  
                  2004
                  
                  
                  139,022
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Insulation
                      Corporation
                  
                  
                  2003
                  
                  
                  108,150
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —







(1)
            Commenced
                employment on October 15, 2004, and is entitled to an annual salary
                of
                $75,000.


(2)
            Mr.
                Macias was elected president of Entrx’s subsidiary, Metalclad Insulation
                Corporation on April 14, 2004. Mr. Macias has been employed by Metalclad
                Insulation Corporation since February 1971. His compensation for
                all of
                2003 and 2002 was as a non-officer employee. His compensation in
                2004
                includes compensation received as both an officer and a non-officer
                employee of Metalclad Insulation
                Corporation.





**Option
      Grants in Last Fiscal Year**





The
      following table provides certain information regarding options to purchase
      shares of our common stock granted to the Named Executive Officers during the
      year ended December 31, 2005.




54




**Individual
                      Grants**
                  ******Number
                      of**
                    **Securities**
                    **Underlying**
                    **Options/SARs**
                    **Granted**
                  
                  **Percentage
                      of**
                    **Total**
                    **Options/SARs**
                    **Granted
                      to**
                    **Employees
                      in**
                  
                  **Exercise
                      or**
                    **Base
                      Price**
                  
                  **Expiration**
                  
                  **Potential
                      Realizable **Value
                      of Assumed****
                    **Annual
                      Rates of Stock Price Appreciation for**
                    **Option
                        Term****(1)****Name**
                  ****
                  **(#)**
                  ****
                  **Fiscal
                      Year 2005**
                  ****
                  **($/Share)**
                  ****
                  **Date**
                  ****
                  **5%
                      ($)**
                  ****
                  **10%
                      ($)**Peter
                      L. Hauser
                  
                  10,000
                  
                  100%
                  
                  $0.55
                  
                  12/31/09
                  
                  1,264
                  
                  3,036Brian
                      D. Niebur
                  
                  -----
                  
                  -----
                  
                  N/A
                  
                  N/A
                  
                  N/A
                  
                  N/AJohn
                      J. Macias
                  
                  -----
                  
                  -----
                  
                  N/A
                  
                  N/A
                  
                  N/A
                  
                  N/A





(1)
            On
                January 3, 2005 (the grant date of Mr. Hauser’s option), the closing bid
                price of Entrx’s common stock on the NASDAQ Small Cap Market was $0.53 per
                share.





**Aggregated
      Option Exercises and Year End Option Values**





The
      following table provides certain information regarding the exercise of stock
      options to purchase shares of our common stock during the year ended December
      31, 2005, by the Named Executive Officers, and the fiscal year-end value of
      stock options held by such officers.


**Name**
              
              **Shares**
                **Acquired
                  on Exercise (#)**
              
              **Number
                  of Securities Underlying Unexercised Options/SARs at Fiscal Year
                  End (#) (Exercisable/Unexercisable)**
              
              **Value
                  of Unexercised**
                **In-the-Money
                  Options/SARs**
                **at
                  Fiscal Year End
                  ($)(Exercisable/Unexercisable)(1)**Peter
                  L. Hauser
              
              None
              
              210,000
              -
              
              -
              -Brian
                  D. Niebur
              
              None
              
              70,000
              -
              
              -
              -John
                  J. Macias
              
              None
              
              14,750
              -
              
              -
              -





(1)
            Based
                on a fiscal year end of December 31, 2005 and a closing bid price
                on the
                NASDAQ small cap market of $0.18 per share on December 31, 2005.
                The value
                of in-the-money options is calculated as the difference between the
                fair
                market value of the Common Stock underlying the options at fiscal
                year end
                and the exercise price of the options. Exercisable options refer
                to those
                options that are exercisable as of December 31, 2005, while unexercisable
                options refer to those options that become exercisable at various
                times
                thereafter.





**Director
      Compensation**





In
      March
      2002, the Board of Directors established a plan whereby each member of Entrx's
      Board of Directors would receive a stock option for 10,000 shares of Entrx's
      common stock in January of each year, at the then fair market value of the
      shares. In furtherance of such plan on January 3, 2005, the Stock Options
      Committee granted options to Peter L. Hauser, Kenneth W. Brimmer, and Joseph
      M.
      Caldwell and E. Thomas Welch, to each purchase 10,000 shares of Entrx’s common
      stock at $0.55 per share, when the fair market value of those shares as reported
      on the NASDAQ Market System as of January 3, 2005 was $0.55. As an inducement
      to
      his joining the Company’s Board of Directors, on January 3, 2005, the Company
      granted E. Thomas Welch options to purchase 15,000 shares of Entrx’s common
      stock at $0.55 per share. All options were granted under Entrx’s 2000 Omnibus
      Stock Option and Incentive Plan, as amended in 2002, which plan and amendment
      were approved by Entrx’s shareholders.





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


55




**Share
      Ownership of Officers and Directors**





The
      following table sets forth certain information as of May 16, 2006, 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. Macias whose address is 2198 South Dupont Drive, Anaheim, CA 92806. 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
                
                972,075(1)
                
                11.8%Kenneth
                    W. Brimmer
                
                190,000(2)(3)
                
                2.4%Joseph
                    M. Caldwell
                
                90,000(3)
                
                1.1%E.
                    Thomas Welch
                
                25,000(4)
                
                *Brian
                    D. Niebur
                
                70,000(5)
                
                *John
                    J. Macias
                
                14,750(6)
                
                *All
                    executive officers and directors as a group (6 persons)
                
                1,361,825(7)
                
                16.0%







*
            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
                14,750 shares which Mr. Macias 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 July 15,
                2006.


(8)
            The
                percentage of outstanding shares of common stock as shown in the
                table
                above is calculated on 7,951,147 shares outstanding, as of May 16,
                2006,
                plus it assumes in each case that the shareholder exercised all vested
                options available to that person as of July 15,
                2006.





**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
      May
      16, 2006. Unless otherwise indicated, the shareholders listed in the table
      below
      have sole voting and investment powers with respect to the shares
      indicated:




56




**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)
              
              22.1Peter
                  L. Hauser
                16913
                  Kings Court
                Lakeville,
                  MN 55044
              
              972,075(2)
              
              11.8Grant
                  S. Kesler
                3739
                  Brighton Point Drive
                Salt
                  Lake City, UT 84121
              
              764,335(3)
              
              8.9Anthony
                  C. Dabbene
                26921
                  Magnolia Court
                Laguna
                  Hills, CA 92653
              
              487,200(4)
              
              5.8George
                  W. Holbrook, Jr.
                1157
                  S.W. 30thStreet
                Suite
                  E
                Box
                  1938
                Palm
                  City, FL 34991
              
              551,615(5)
              
              6.9James
                  R. McGoogan
                1157
                  S.W. 30thStreet
                Suite
                  E
                Box
                  1938
                Palm
                  City, FL 34991
              
              487,740(5)
              
              6.1Bradley
                  Resources Company
                1157
                  S.W. 30thStreet
                Suite
                  E
                Box
                  1938
                Palm
                  City, FL 34991
              
              476,255(5)
              
              5.9







(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, and 10,000 shares which Mr. Hauser may purchase
                under
                currently exercisable options at $0.55 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.


(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 7.0% of our common
                stock.


(6)
            The
                percentage of outstanding shares of common stock shown in the table
                above
                is calculated based upon 7,951,147 shares outstanding as of the close
                of
                business May 16, 2006, plus it assumes in each case that the shareholder
                exercised all options available to that person that would vest within
                60
                days thereafter.






57




**Equity
      Compensation Plan Information**





The
      following table sets forth as of December 31, 2005, 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
              
              2,134,040(1)
              
              $2.23
              
              473,600Equity
                  compensation plans not approved by security holders
              
              875,000(2)
              
              $3.68
              
              NoneTotal
              
              3,009,040
              
              $2.65(3)
              
              473,600




____________________


(1)
            Options
                for 1,676,400 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 457,640 shares were granted
                under
                similar plans which were previously adopted and approved by the
                shareholders, and which have been
                terminated.


(2)
            Options
                for 100,000 shares were granted at various times from January 1996
                through
                February 1998 to 4 employees (72,500 shares) and to two other persons
                who
                were not directors or employees (27,500 shares). The options are
                exercisable at prices ranging from $15.00 to $45.00 per share. Warrants
                for 775,000 shares have been issued from March 1, 2001 through December
                31, 2005, to nine persons in connection with various financings,
                services
                and concessions. The warrants are exercisable at prices ranging from
                $0.50
                to $1.50 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 $45.00
                per
                share.








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





**Employment
      Agreement of Wayne W. Mills**





Entrx
      entered into an Employment Agreement with its former president and chief
      executive officer, Wayne W. Mills, effective commencing October 1, 2003. The
      Employment Agreement was terminable for cause (as defined in the Employment
      Agreement) or without cause on 15 days notice. If terminated by Entrx without
      cause, Mr. Mills was to receive a severance salary equal to six months of his
      then annual base pay. If Mr. Mills’ employment was terminated as a result of a
      change in control of Entrx, he would have been entitled to a severance salary
      equal to up to two years of his then annual base pay, depending upon the
      aggregate market value of Entrx’s common stock at the time. Under the Employment
      Agreement, Mr. Mills was entitled to an annual salary of $200,000. The salary
      was to be increased to $250,000 per year if the Company achieved two consecutive
      quarters of net profit, retroactive to the beginning of such two-quarter period.
      In addition, Mr. Mills was entitled to bonuses equal to (i) 5% of the increase
      in the aggregate market value of Entrx’s outstanding common stock from year to
      year, beginning with the year 2004, subject to certain adjustments and
      limitations as to amount, and (ii) 10% of the profit earned from the sale by
      the
      Company of NextNet Wireless, Inc. Series A Preferred Stock owned by Entrx,
      using
      a base value for that capital stock which equals the Company’s cost basis ($4.23
      per share) through March 31, 2004, and increase annually thereafter at a rate
      of
      approximately 15% per year. If Entrx had not disposed of all of its shares
      of
      NextNet Wireless, Inc. Series A Preferred Stock as of March 31, 2008, Entrx
      would have been obligated to pay Mr. Mills a bonus equal to 10% of the amount
      by
      which the then market value of NextNet Wireless, Inc. shares then owned by
      Entrx
      exceeded the aggregate base value of those shares calculated at $7.40 per share.
      Mr. Mills was entitled to receive this bonus on NextNet Wireless, Inc. shares
      even if he was not employed by Entrx. The acquisition of NextNet Wireless,
      Inc.
      by Clearwire Corporation resulting in the exchange of the Company’s NextNet
      Wireless, Inc. Series A Preferred Stock for warrants to purchase Clearwire
      Corporation common stock was considered a disposition of the NextNet stock
      and
      triggered the bonus calculation for Mr. Mills. Since the warrants were valued
      for less than cost of the Company’s investment in the NextNet Wireless, Inc.
      Series A Preferred Stock, Mr. Mills received no bonus. Mr. Mills resigned his
      employment with the Company effective October 15, 2004. The Company continued
      to
      pay his salary and benefits through December 31, 2004.





58




**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.





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 Chiral Quest, Inc.
      common stock for each two shares of Entrx common stock held as of October 11,
      2002. Prior to the dividend, Chiral Quest, Inc. (then Surg II, 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 Chiral Quest, 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 Chiral Quest, 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 Chiral Quest, 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 Chiral Quest, 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, and the Board of Directors
      did not take any action to foreclose on the collateral.





**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.





59




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, including his guarantees of
      approximately $2,845,000 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.





**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)






60






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. (Filed Herewith)





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. (Filed Herewith)





14.
            Code
                of Ethics (13)





21.
            List
                of Subsidiaries of the Registrant.
                (14)





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, 2003, on March 24, 2004 as exhibit 14 and incorporated herein
                by
                reference.


(14)
            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.








**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 and 2005
      fiscal years.





61




**Audit
      Fees**





Virchow
      Krause billed Entrx $57,990 and $61,100 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 2004 and 2005 fiscal years,
      respectively.





**Audit-Related
      Fees**





Virchow
      Krause billed Entrx $16,510 and $6,385 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 2004 and 2005 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 $11,010 and $14,325 for services in connection with tax
      compliance, tax advice and tax planning for the 2004 and 2005 fiscal years,
      respectively. The services billed for in 2004 and 2005 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 2004 or 2005.





**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 2004 and 2005,
      and
      to provide its report thereon, (ii) the preparation of our 2004 and 2005 federal
      and state income tax returns, (iii) the review of our quarterly reports on
      Form
      10Q filed in 2004 and 2005, 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 2004 or 2005.


62


**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. NieburChief
              Financial OfficerDate:
              May 22, 2006





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
              May
                  22, 2006Peter
                  L. Hauser
              
              (Principal
                  Executive Officer)/s/
                  Brian D. Niebur
              
              Chief
                  Financial Officer
              May
                  22, 2006Brian
                  D. Niebur
              
              (Principal
                  Financial and Accounting Officer)/s/
                  Kenneth W. Brimmer
              
              Director
              May
                  22, 2006Kenneth
                  W. Brimmer/s/
                  Joseph M. Caldwell
              
              Director
              May
                  22, 2006Joseph
                  M. Caldwell/s/
                  E. Thomas Welch
              
              Director
              May
                  22, 2006E.
                Thomas Welch


63