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

                                    FORM 10-Q

(Mark One)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the quarterly period ended September 30, 2006

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from _____________ to _____________.

                         Commission File Number: 0-17072

                       WINDSWEPT ENVIRONMENTAL GROUP, INC.
             (Exact name of registrant as specified in its charter)

          Delaware                                               11-2844247
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                100 Sweeneydale Avenue, Bay Shore, New York 11706
               (Address of principal executive offices) (Zip Code)

                                 (631) 434-1300
              (Registrant's telephone number, including area code)

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

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

Large Accelerated Filer |_|    Accelerated Filer |_|   Non-Accelerated Filer |X|

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

The number of shares of Common Stock, par value $.0001, outstanding on November
10, 2006 was 33,901,215.

<PAGE>

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

              WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                       SEPTEMBER 30, 2006 AND JUNE 20 2006

<TABLE>
<CAPTION>
                                                                                       September 30,     June 30,
                                                                                            2006           2006
                                                                                       -------------   ------------
                                                                                        (unaudited)
<S>                                                                                    <C>             <C>
ASSETS:
CURRENT ASSETS:
  Cash                                                                                 $    220,410    $    610,884
  Accounts receivable, net allowance for doubtful accounts of $2,410,440
    and $1,962,138 respectively                                                           9,212,774      11,235,904
  Inventory                                                                                 202,066         211,058
  Costs and estimated earnings in excess of billings on uncompleted contracts                24,120          71,720
  Prepaid expenses and other current assets                                                 167,999         204,832
                                                                                       ------------    ------------
  Total current assets                                                                    9,827,369      12,334,398
                                                                                       ------------    ------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
   amortization of $7,406,533 and $7,178,262, respectively                                2,691,605       2,919,876
OTHER ASSETS:
  Deferred financing costs                                                                2,076,079       2,372,662
  Other                                                                                     214,722         167,220
                                                                                       ------------    ------------
  Total other assets                                                                      2,290,801       2,539,882
                                                                                       ------------    ------------
TOTAL                                                                                  $ 14,809,775    $ 17,794,156
                                                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY / (DEFICIENCY):

CURRENT LIABILITIES:
  Accounts payable                                                                     $  1,444,989    $  1,011,700
  Liability for repurchased account receivable                                              189,197         189,197
  Accrued expenses                                                                        1,002,833       1,569,993
  Billings in excess of costs and estimated earnings on uncompleted contracts                39,717          42,400
  Secured convertible notes payable                                                         499,696              --
  Accrued payroll and related fringe benefits                                               372,634         429,717
  Current maturities of long-term debt                                                      170,559         188,310
  Income taxes payable                                                                      909,024       1,838,509
  Derivative liabilities: notes, warrants and options                                            --      27,163,901
  Other current liabilities                                                                 168,226         121,533
                                                                                       ------------    ------------
  Total current liabilities                                                               4,796,875      32,555,260
                                                                                       ------------    ------------
LONG-TERM DEBT:
  Secured notes payable                                                                   4,626,115         500,000
  Other                                                                                     153,527         188,244
                                                                                       ------------    ------------
    Total long-term debt                                                                  4,779,642         688,244
                                                                                       ------------    ------------
COMMITMENTS AND CONTINGENCIES

SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000 shares
authorized, issued and outstanding at September 30, 2006 and June 30, 2006                1,300,000       1,300,000
                                                                                       ------------    ------------
STOCKHOLDERS' EQUITY / (DEFICIENCY):
  Series B preferred stock, $.01 par value; 50,000 shares issued and authorized; 0
    shares outstanding at September 30, 2006 and June 30, 2006                                   --              --
  Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0 shares
    issued and outstanding at September 30, 2006 and June 30, 2006                               --              --
  Common stock, $.0001 par value; 150,000,000 shares authorized; 33,901,215 shares
    outstanding at September 30, 2006 and 33,571,215 shares issued and outstanding
    at June 30, 2006                                                                          3,390           3,357
  Additional paid-in-capital                                                             44,978,375      38,429,185
  Accumulated deficit                                                                   (41,048,507)    (55,181,890)
                                                                                       ------------    ------------
    Total stockholders' equity (deficiency)                                               3,933,258     (16,749,348)
                                                                                       ------------    ------------
TOTAL                                                                                  $ 14,809,775    $ 17,794,156
                                                                                       ============    ============
</TABLE>

See notes to consolidated financial statements.


                                        2

<PAGE>

              WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                            Three Months      Thirteen
                                                               Ended        Weeks Ended
                                                           September 30,   September 27,
                                                               2006             2005
                                                           -------------   -------------
<S>                                                        <C>              <C>
Revenues                                                   $  2,483,811     $  5,164,339
Cost of revenues                                              2,855,739        4,385,270
                                                           ------------     ------------
Gross (loss)/profit                                            (371,928)         779,069
Operating expenses:
  Selling, general and administrative expenses                1,642,483        2,900,543
                                                           ------------     ------------
Loss from operations                                         (2,014,411)      (2,121,474)
                                                           ------------     ------------
Other (income) expense:
  Mark-to-market (gain)/ loss on embedded derivatives       (15,721,986)      20,999,559
  Interest expense                                            1,201,883        1,412,780
  (Gain)/loss on partial extinguishment of embedded
    derivative liability arising from conversion and
    repayment of note                                          (987,105)         449,850
  Other expense (income), net                                      (544)          22,054
                                                           ------------     ------------
    Total other (income)/expense:                           (15,507,752)      22,884,243
                                                           ------------     ------------
Income/ (loss) before benefit/provision for income taxes     13,493,341      (25,005,717)
(Benefit)/provision for income taxes                           (640,042)           8,218
                                                           ------------     ------------
Net income/( loss)                                           14,133,383      (25,013,935)
Dividends on preferred stock                                     19,500           19,500
                                                           ------------     ------------
Net profit/(loss) attributable to common shareholders      $ 14,113,883     $(25,033,435)
                                                           ============     ============
Basic and diluted net loss per common share:
  Basic and diluted                                        $       0.40     $      (0.76)
                                                           ============     ============
Weighted average number of common shares outstanding:
  Basic and Diluted                                          35,110,563       32,888,414
                                                           ============     ============
</TABLE>

See notes to consolidated financial statements.


                                        3

<PAGE>

              WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)

<TABLE>
<CAPTION>
                                              Common Stock
                                        ----------------------   Additional
                                         Number of                 Paid-in      Accumulated
                                          Shares     Par Value     Capital        Deficit         Total
                                        ----------   ---------   -----------   ------------   ------------
<S>                                     <C>            <C>       <C>           <C>            <C>
Balance June 30, 2006                   33,571,215     $3,357    $38,429,185   $(55,181,890)  $(16,749,348)
Exercise of options                        330,000         33         29,667                        29,700
Extinguishment of embedded derivative
  liability                                                        6,539,023                     6,539,023
Dividends on Series A preferred stock                                (19,500)                      (19,500)
Net Income                                                                       14,133,383     14,133,383
                                        ----------     ------    -----------   ------------   ------------
                                        33,901,215     $3,390    $44,978,375   $(41,048,507)  $  3,933,258
                                        ==========     ======    ===========   ============   ============
</TABLE>


                                        4

<PAGE>

              WINDSWEPT ENVIRONMENTAL GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                            Three Months   Thirteen Weeks
                                                                                                Ended          Ended
                                                                                            September 30    September 27
                                                                                                2006           2005
                                                                                            ------------   --------------
<S>                                                                                         <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income/ (loss)                                                                        $ 14,133,383    $(25,013,935)
  Adjustments to net cash used in operating activities
    Mark-to-market (gain)/loss on embedded derivative liabilities                            (15,721,986)     20,999,559
    Non-cash interest expense on convertable secured note                                        739,724         692,951
   (Gain)/loss on exercise of options -Laurus                                                   (987,105)        449,850
    Depreciation and amortization                                                                228,271         160,250
    Provision for doubtful accounts, net                                                         448,302         200,000
    Amortization of deferred financing cost                                                      296,583         292,809
    Amortization of discount on secured convertible note                                               0         291,252
    Stock-based compensation                                                                           0       1,394,139
  Changes in operating assets and liabilities:
    Accounts receivable                                                                        1,385,631      (1,465,620)
    Inventory                                                                                      8,992          (5,288)
    Costs and estimated earnings in excess of billings on uncompleted contracts                   47,600        (352,289)
    Prepaid expenses and other current assets                                                     36,833        (750,342)
    Other assets                                                                                 (47,502)        131,021
    Accounts payable and accrued expenses                                                       (153,371)      2,221,087
    Accrued payroll and related fringe benefits                                                  (57,083)         71,904
    Income tax payable                                                                          (929,485)              0
    Other current liabilities                                                                     46,693         102,715
    Billings in excess of costs and estimated earnings on uncompleted contracts                   (2,683)         12,684
                                                                                            ------------    ------------
NET CASH USED IN OPERATING ACTIVITIES:                                                          (527,203)       (567,253)
                                                                                            ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                                  0        (885,482)
                                                                                            ------------    ------------
NET CASH USED IN INVESTING ACTIVITIES                                                                  0        (885,482)
                                                                                            ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments of long-term debt                                                           (52,468)        (46,318)
  Proceeds from third party receivables                                                          189,197               0
  Proceeds from long-term debt                                                                         0         157,063
  Exercise of stock options                                                                            0             150
  Payments for deferred financing costs                                                                0      (2,261,510)
  Repayment and cancellation of secured note payable to a related party                                0      (2,761,868)
  Proceeds from secured notes payable                                                                  0       6,000,000
                                                                                            ------------    ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                        136,729       1,087,517
                                                                                            ------------    ------------
NET DECREASE IN CASH                                                                            (390,474)       (365,218)

CASH - BEGINNING OF PERIOD                                                                       610,884         512,711
                                                                                            ------------    ------------
CASH - END OF PERIOD                                                                        $    220,410    $    147,493
                                                                                            ============    ============

Cash paid during the period for:
  Interest                                                                                  $    157,258    $     91,477
                                                                                            ============    ============
  Income taxes                                                                              $    290,509    $          0
                                                                                            ============    ============
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Extinguishment of derivative liabilitiues                                                   $  6,539,022    $          0
                                                                                            ============    ============
Reduction of long-term debt through stock conversion - Laurus                               $     29,700    $          0
                                                                                            ============    ============
Recognition of embedded derivative liabilities                                              $          0    $  6,121,172
                                                                                            ============    ============
Recognition of discount on secured convertible note                                         $          0    $  5,428,211
                                                                                            ============    ============
Capitalized gain on extinguishment of secured note payable - related party                  $          0    $  1,230,228
                                                                                            ============    ============
Financing cost related to guaranties of CEO remunerated through sale of discounted shares   $          0    $  1,195,708
                                                                                            ============    ============
Property and equipment acquired through financing                                           $          0    $    157,063
                                                                                            ============    ============
Account receivable repurchased in connection with refinancing                               $          0    $    189,197
                                                                                            ============    ============
Paid-in capital arising from reduction in derivative option liability on option exercise    $          0    $    135,000
                                                                                            ============    ============
Capitalized cancellation of put right relating to redeemable common stock                   $          0    $     76,089
                                                                                            ============    ============
Financing cost related to issuance of options to preferred stockholders                     $          0    $     44,650
                                                                                            ============    ============
</TABLE>

See notes to consolidated financial statements


                                        5

<PAGE>

                       WINDSWEPT ENVIRONMENTAL GROUP, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    BASIS FOR PRESENTATION - The accompanying unaudited consolidated financial
      statements include the accounts of Windswept Environmental Group, Inc.
      (the "Company") and its subsidiaries, Trade-Winds Environmental
      Restoration, Inc. ("Trade-Winds") and North Atlantic Laboratories, Inc.
      All inter-company accounts and transactions have been eliminated in
      consolidation. The unaudited consolidated financial statements have been
      prepared by the Company in accordance with accounting principles generally
      accepted in the United States of America ("generally accepted accounting
      principles") for interim financial statements and with the instructions to
      Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
      include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements. In the
      opinion of the Company, all adjustments (consisting of only normal and
      recurring accruals) considered necessary to present fairly the financial
      position of the Company and its subsidiaries on a consolidated basis as of
      September 30, 2006, the results of operations for the three months ended
      September 30, 2006 and the thirteen weeks ended September 27, 2005 and
      cash flows for the three months ended September 30, 2006 and the thirteen
      weeks ended September 27, 2005 have been included. Certain prior period
      amounts have been reclassified to conform to the September 30, 2006
      presentation.

      The results for the three months ended September 30, 2006 are not
      necessarily indicative of the results for an entire year. These unaudited
      consolidated financial statements should be read in conjunction with the
      Company's audited consolidated financial statements and notes thereto
      included in the Company's Form 10-K for the fiscal year ended June 30,
      2006.

      The accompanying consolidated financial statements have been prepared
      assuming that the Company will continue as a going concern. The Company
      has incurred recurring losses from operations, and is experiencing
      difficulty in generating sufficient cash flow to meet its obligations and
      sustain its operations, which may raise doubt about the Company's ability
      to continue as a going concern. The consolidated financial statements do
      not include any adjustments that might result from the outcome of this
      uncertainty.

2.    STOCK-BASED COMPENSATION - The Company consummated various transactions
      where it paid the consideration primarily in options or warrants to
      purchase its common stock. These transactions include financing
      transactions and providing incentives to attract, retain and motivate
      employees, officers and directors.

      When options or warrants to purchase the Company's common stock are used
      as incentives for employees, officers or directors, the Company now uses
      the fair value method required by SFAS No. 123R. Prior to the adoption of
      SFAS No. 123R, the Company disclosed the pro forma effects in accordance
      with SFAS No. 123. During the three months ended September 30, 2006, the
      Company did not issue any stock based compensation.

      The fair value of options or warrants to purchase the Company's common
      stock is now exclusively determined using the Black-Scholes valuation
      method, a method widely accepted as providing the fair market value of an
      option or warrant to purchase stock at a fixed price for a specified
      period of time. Black-Scholes uses five variables to determine market
      value as follows:

            o     exercise price (the price to be paid for a share of the
                  Company's common stock);

            o     price of the Company's common stock on the day the options or
                  warrants are granted;

            o     the expected number of days that the options or warrants will
                  be held before they are exercised, based on the average of
                  their vesting and contractual periods;

            o     trading volatility of the Company's common stock, based on
                  historical prices for a retrospective period equal to the
                  expected holding period together with certain other factors;
                  and

            o     the annual risk free interest rate on the day the option or
                  warrant is granted for the expected holding period.

      The determination of expected volatility requires management to make
      certain estimates and the actual volatility may vary significantly from
      that estimate. Accordingly, the determination of the resulting expense is
      based on a management estimate.

      Stock option compensation expense in fiscal 2006 was the estimated fair
      value of options granted amortized on a straight-line basis over the
      requisite vesting period for entire portion of the award.


                                       6

<PAGE>

3.    NET INCOME (LOSS) PER COMMON SHARE -Basic and diluted income/(loss) per
      common share was calculated for all periods in accordance with the
      requirements of Statement of Financial Accounting Standards No. 128,
      "Earnings per Share". The following table sets forth the computation of
      the basic and diluted loss per share for the three months ended September
      30, 2006 and the thirteen weeks ended September 27, 2005, respectively:

                                     Three Months   Thirteen Weeks
                                        Ended            Ended
                                    September 30,    September 27,
                                         2006            2005
                                    -------------   --------------
Numerator:
Net income/(loss) attributable to
  common shareholders               $ 14,113,883    $ (25,033,435)
(Deduct)/Add:
  Mark-to-market gain                (15,721,986)              --
  Interest on convertible debt           739,724               --
  Dividends on preferred stock            19,500           19,500
                                    ------------    -------------
  Net (loss) attributable
    to common shareholders
    and assumed conversion             ($849,879)    ($25,013,935)
                                    ------------    -------------
Denominator:

  Share reconciliation:
  Shares used for basic
    income/(loss) per share           35,110,563       32,888,414
  Effect of dilutive items:
    Stock options                             --               --
    Convertible securities
                                              --               --
  Shares used for diluted
    income/(loss) per share           35,110,563       32,888,414
Income/(loss) per share:
  Basic and diluted                 $        .40    $        (.76)

      The diluted income per share for the three months ended September 30, 2006
      excludes from the calculation 79,146,452 shares issuable upon the exercise
      of stock options and warrants and 27,662,506 shares issuable upon the
      conversion of convertible securities, respectively. These shares are
      excluded due to their anti-dilutive effect as a result of the Company's
      net loss after adjusting for the embedded derivatives income effect during
      this period.

4.    PROVISION FOR INCOME TAXES - The provision for income taxes for the three
      months ended September 30, 2006 and the thirteen weeks ended September 27,
      2005 consists of the following:

                     Three Months   Thirteen Weeks
                        Ended           Ended
                    September 30,    September 27,
                         2006            2005
                    -------------   --------------
Federal - current     $(646,912)        $   --
State - current           6,870          8,218
                      ---------         ------
Total                 $(640,042)        $8,218
                      ---------         ------

      The effective rate for income taxes differs from the statutory rate
      primarily as a result of the 100% valuation allowance against deferred tax
      assets. The Company has a 100% valuation allowance against deferred tax
      assets because management believes that it is more likely than not that
      such deferred tax assets will not be realized.

5.    CONTINGENCIES - The Company is a plaintiff in approximately 20 lawsuits,
      including those described in the Notes to the Financial Statements
      included in the Company's Annual Report on Form 10-K for the year ended
      June 30, 2006, claiming an aggregate of approximately $8,000,000 pursuant
      to which it is seeking to collect amounts it believes are owed to it by
      customers, included in its accounts receivable, primarily with respect to
      changed work orders or other modifications to its scope of work. The
      defendants in these actions have asserted counterclaims for an aggregate
      of approximately $1,500,000.

      The Company is a party to other litigation matters and claims that are
      normal in the course of its operations, and while the results of such
      litigation and claims cannot be predicted with certainty, management
      believes that the final outcome of such matters will not have a materially
      adverse effect on the Company's consolidated financial statements.


                                       7

<PAGE>

6.    FINANCING AND RELATED PARTY TRANSACTIONS- On September 29, 2006, the
      Company entered into an Omnibus Amendment with Laurus Master Fund, Ltd.
      ("Laurus") and amended and restated its existing secured convertible term
      note (the "Note"). The Omnibus Amendment and the Note improve for the
      Company certain terms of the original agreements. The Omnibus Amendment
      significantly reduce the shares issuable to Laurus and, among other
      things, includes the following terms:

            1) $4,000,000 of the remaining principal balance on the Note became
            non-convertible.

            2) Six months (July through December 2006) of principal payments
            under the Note have been deferred to the maturity date.

            3) Future monthly payments on the Note have been reduced to $100,000
            beginning January 1, 2007, first applied to interest and then to
            principal.

            4) If at any time the Company has a cash and cash equivalents total
            balance in excess of $1,000,000, 50% of any cash received by us in
            excess of such total balance will be used to pay down principal of
            the Note.

            5) The Note was extended for one year through June 2009.

            6) An option to purchase 11,145,000 shares of Common Stock at a
            nominal exercise price was issued to Laurus on September 29, 2006
            (together with the option originally issued to Laurus, the
            "Options").

            7) The beneficial ownership cap on the Company's securities that may
            be beneficially owned by Laurus at any one time has been raised from
            4.99% to 9.99%.

            8) Laurus agreed to transfer voting control of all of the Company's
            securities owned by them either to the Company or to a third party.

      The Note is the only Laurus note issued by the Company that is currently
      outstanding. Payments made on the Note on the required due dates, and
      conversions on the Note, have reduced the current principal balance of the
      Note to $5,942,175 as of November 17, 2006.

      On June 30, 2005, we issued a variable interest rate secured promissory
      note in the principal amount of $500,000 to Spotless Plastics (USA), Inc.
      ("Spotless"), an affiliate of our previous majority stockholder and senior
      secured lender, bearing interest at LIBOR plus 1%.

      Below is a summary of the material terms of the agreements governing the
      Laurus financing transaction, as amended through September 30, 2006.

      Principal Borrowing Terms and Prepayment. Pursuant to the terms of the
      Note, which matures on June 30, 2009, the Company made, on the first day
      of each month, monthly payments of principal to Laurus in the amount of
      $229,687, plus interest, for the period from January 1, 2006 through June
      30, 2006. For the period from July 1, 2006 through December 31, 2006, the
      Company is required to make interest payments only, which payments have
      been made through the date of filing of this Form 10-Q. Commencing January
      1, 2007, until maturity, the Company is required to make monthly payments
      to Laurus of $100,000, first applied to interest and then to principal. In
      addition, if at any time after September 29, 2006, the Company has a cash
      and cash equivalents balance over $1,000,000, 50% of any cash received by
      the Company in excess of such amount will be used to pay down principal of
      the Note. Principal repayments were originally due to commence starting
      November 1, 2005 but, in November 2005, Laurus agreed to defer the initial
      repayment date until January 1, 2006. The principal monthly payments due
      November 1, 2005 and December 1, 2005 in the aggregate amount of $459,375
      have been deferred until June 30, 2009. The Company is required to pay
      such amounts in shares of its common stock should all of the following
      conditions be satisfied:

            o     the average closing price of the Company's common stock for
                  the five (5) trading days immediately prior to the first of
                  each month is equal to or greater than $.10;

            o     the amount of the payment then due is not an amount greater
                  than thirty percent (30%) of the aggregate dollar trading
                  volume of the common stock for the period of twenty-two (22)
                  trading days immediately prior to the first day of each month
                  for which payment is due;


                                       8

<PAGE>

            o     the common stock to be issued has been registered under an
                  effective registration statement under the Securities Act of
                  1933 or is otherwise covered by an exemption from registration
                  for resale pursuant to Rule 144 of the Securities Act of 1933;

            o     Laurus' aggregate beneficial ownership of the Company's shares
                  of common stock does not and would not by virtue thereof
                  exceed 9.99%;

            o     the Company is not in default of the Note; and

            o     the maximum number of shares of common stock into which the
                  Note is convertible is not exceeded.

      Should the Company be required to pay cash, this may have an adverse
      effect on the Company's cash flow and liquidity.

      The Note may be redeemed by the Company in cash by paying the holder of
      the Note 110% of the principal amount, plus accrued interest. As discussed
      below, the holder of the Note may convert a portion of the Note, together
      with related interest and fees, into fully paid shares of the Company's
      common stock at any time, provided that the amount converted cannot exceed
      $1,942,175. The number of share to be issued shall equal the total amount
      of the Note to be converted, divided by an initial fixed conversion price
      of $.09.

      The conversion price of the Note may be adjusted pursuant to customary
      anti-dilution provisions, such as if the Company pays a stock dividend,
      reclassifies its capital stock or subdivides or combines its outstanding
      shares of common stock into a greater or lesser number of shares.

      The Company may receive proceeds from the exercise of the Options and the
      warrant described above if Laurus elects to pay the exercise price in cash
      rather than executing a cashless exercise. Laurus may effect a cashless
      exercise of the warrant if the market price of the Company's common stock
      exceeds the per share exercise price, and it may effect a cashless
      exercise of the Options if (a) the market price of the Company's common
      stock exceeds the per share exercise price and (b) (1) the Company has not
      registered the shares underlying the Options pursuant to an effective
      registration statement or (2) an event of default under the Note has
      occurred and is continuing. Upon a cashless exercise in lieu of paying the
      exercise price in cash, Laurus would receive shares of the Company's
      common stock with a value equal to the difference between the market price
      per share of the Company's common stock at the time of exercise and the
      exercise price per share set forth in the Options and the warrant,
      multiplied by the number of shares with respect to which the Options or
      warrant are exercised. There would be no proceeds payable to the Company
      upon a cashless exercise of the Options or the warrant. There can be no
      assurances that Laurus will exercise the Options and warrant or that it
      will elect to pay the exercise price in cash in lieu of a cashless
      exercise. On September 12, 2005, the Company issued 1,500,000 shares of
      its common stock to Laurus in connection with its partial exercise of the
      option issued to it in connection with its original investment at an
      exercise price of $.0001 per share for an aggregate exercise price of
      $150.

      Laurus has contractually agreed to restrict its ability to convert the
      Note and/or exercise its warrant and options if such conversion and/or
      exercise would cause its beneficial ownership of shares of the Company's
      common stock to exceed 9.99% of the outstanding shares of common stock.
      The 9.99% limitation is null and void without notice to the Company upon
      the occurrence and during the continuance of an event of default or upon
      61 days' prior written notice to the Company. As of the date of this
      filing, Laurus directly beneficially owns 1,500,000 shares of the
      Company's common stock, or approximately 4.42% of the outstanding common
      stock. As a result, Laurus could only acquire up to approximately
      1,856,220 additional shares, which would constitute conversion of
      approximately $167,060 of the principal amount of the Note, while
      remaining in compliance with the 9.99% limitation. Since Laurus is
      irrevocably prohibited from waiving this 9.99% limitation, except as
      described above, even if the other conditions allowing the Company to pay
      in shares of common stock have been satisfied, if Laurus cannot or does
      not reduce its ownership of the Company's common stock at a time when such
      reduction would be necessary to allow the Company to make a payment in
      shares of common stock, the Company would be required to pay Laurus in
      cash. This may have an adverse effect on the Company's cash flow and
      liquidity.

      Events of Default and Collateral. In the event the Company defaults on the
      Note, it will be required to pay 110% of the outstanding principal amount
      of the Note, plus accrued but unpaid interest. In addition, upon the
      occurrence of an event of default, the interest rate charged with respect
      to the Note will be increased by 2% per month until the default is cured.
      The Note is secured by a lien on substantially all of the Company's
      assets, including the stock of its subsidiaries, all cash, cash
      equivalents, accounts receivable, deposit accounts, inventory, equipment,
      goods, fixtures, documents, instruments, including promissory notes,
      contract rights and general intangibles, including payment intangibles.
      The Master Security Agreement, dated June 30, 2005, between the Company
      and Laurus, and as currently in effect, contains no specific financial
      covenants. The Master Security Agreement and the Note, as amended, define
      the circumstances under which the Company can be declared in default and
      subject to termination, including:


                                       9

<PAGE>

            o     a failure to pay interest and principal payments under the
                  Note when due on the first day of the month or prior to the
                  expiration of the three-business day grace period, unless
                  agreed otherwise;

            o     a breach by the Company of any material covenant or term or
                  condition of the Note in any agreement made in connection
                  therewith and, to the extent subject to cure, the continuation
                  of such breach without remedy for a period of fifteen or
                  thirty days, as the case may be;

            o     a breach of any material representation or warranty made in
                  the Note or in any agreement made in connection therewith;

            o     any form of bankruptcy or insolvency proceeding instituted by
                  or against the Company, which is not vacated within 30 days;

            o     any attachment or lien in excess of $75,000 in the aggregate
                  made upon the Company's assets or a judgment rendered against
                  its property involving a liability of more than $75,000 which
                  shall remain unvacated, unbonded or unstated for a period of
                  30 days;

            o     a failure to timely deliver shares of common stock when due
                  upon conversion of the Note or a failure to timely deliver a
                  replacement note;

            o     a Securities and Exchange Commission ("SEC") stop trade order
                  or principal market trading suspension of the Company's common
                  stock is in effect for 5 consecutive trading days or 5 days
                  during a period of 10 consecutive trading days, if the Company
                  is not able to cure such trading suspension within 30 days of
                  receiving notice or are not able to list its common stock on
                  another principal market within 60 days of such notice;

            o     an indictment or threatened indictment of the Company or any
                  of its executive officers under any criminal statute or
                  commencement or threatened commencement of criminal or civil
                  proceedings against the Company or any of its executive
                  officers pursuant to which statutory or proceeding penalties
                  or remedies available include forfeiture of any of its
                  property; and

            o     the departure of Michael O'Reilly from senior management.

Registration Rights. Pursuant to the terms of the Registration Rights Agreement,
as amended, the Company is obligated to file, on or prior to December 15, 2006,
a registration statement with the Securities and Exchange Commission registering
the resale of 5,395,061 shares of the Company's common stock issuable to Laurus,
which registration statement is required to become effective by February 15,
2007. The Company has also agreed to file such further registrations as
necessary to register the remaining shares of common stock underlying the
securities owned by Laurus not registered in the foregoing registration
statement, in each case within 45 days of written notice by Laurus.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

OVERVIEW

We, through our wholly-owned subsidiaries, provide a full array of emergency
response, remediation and disaster restoration services to a broad range of
clients. We have expertise in the areas of hazardous materials remediation,
microbial remediation, testing, toxicology, training, wetlands restoration,
wildlife and natural resources rehabilitation, asbestos and lead abatement,
technical advisory services, restoration and site renovation services.

      Our revenues are derived primarily from providing emergency response,
remediation and disaster restoration services to new and repeat customers on
time and materials basis or pursuant to fixed-price contracts, including in
connection with sudden catastrophes, such as in connection with the services
that we provided in the aftermath of Hurricanes Katrina and Wilma. In the
quarter ended September 30, 2006 and in the prior fiscal year, substantially all
of our revenues were derived from time and materials contracts. Since most of
our projects consist of emergency or disaster responses, which do not permit a
definitive prior assessment of the full scope of work entailed and require
immediate attention in order to mitigate loss and maximize recovery, most of our
projects are performed on a time and materials basis. Under our time and
materials contracts, we charge our customers for labor, equipment usage,
allocated overhead and a markup relating thereto. Our cost of revenues consists
primarily of labor and labor-related costs, insurance, benefits, travel and
entertainment, repairs, maintenance, equipment rental, materials and supplies,
disposal costs and depreciation of capital equipment. Our selling, general, and
administrative expenses primarily consist of expenses related to provisions for
doubtful accounts, professional fees, sales and office salaries, marketing and
consulting.


                                       10

<PAGE>

We have encountered difficulty with cash collections and slow cash flow due
primarily to factors including:

      o     customers refusing to pay prior to receiving insurance
            reimbursements;

      o     customers' facility managers needing to wait for insurance adjustors
            to approve work before the remission of payment; and

      o     certain customers refusing to pay in connection with disputed change
            orders.

In an effort to enhance our cash flows, we have implemented improvements in our
billing and invoicing procedures as follows:

      o     we generally do not commence projects until we have a fully executed
            contract;

      o     our contracts provide that our customers are directly obligated for
            our services;

      o     we require client approval with respect to the work performed or to
            be performed;

      o     we seek deposits or mobilization fees for our time and materials
            contracts;

      o     we engage local legal counsel in the areas in which we operate in
            order to file liens against customers' real property in the event of
            contract disputes; and

      o     all invoices submitted for payment are reviewed for proper
            documentation.

In light of the foregoing, we expect to generate sufficient cash flow from
operations to support our working capital needs and to adequately fund our
current operations for at least the next twelve months. However, any further
difficulty in collecting our accounts receivable or future growth could
adversely affect our liquidity. In the event that we do not generate sufficient
positive cash flow from operations, we may need to seek additional financing in
addition to the financing provided by Laurus. Laurus is under no obligation to
provide any further funding to us. Currently, we have no credit facility for
additional borrowing.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of our financial position and results of
operations is based upon our audited consolidated financial statements for our
fiscal year ended June 30, 2006, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, and
our unaudited interim consolidated financial statements for our fiscal quarter
ended September 30, 2006. The preparation of these consolidated financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. We believe that the critical accounting policies and areas
that require the most significant judgments and estimates to be used in the
preparation of our consolidated financial statements are accounting for embedded
derivative liabilities, stock based transactions, contracts, allowance for
doubtful accounts and the valuation allowance related to deferred tax assets.

Embedded Derivative Liabilities- Historically, in order to calculate the effects
of derivative accounting, we projected the following factors over various
periods:

      o     the prime interest rate was projected to increase 0.25% per quarter
            for the first year;

      o     the future volatility of common stock was projected at 150%;

      o     the stock price annual growth rate was estimated at the cost of
            equity;

      o     a default on registration requirements was projected at 5.0%;

      o     other forms of default were projected at 5.0% initially, increasing
            0.1% monthly;

      o     the availability of alternative financing to redeem the note, if
            exercise of redemption option was triggered, starting at 0%,
            increasing monthly by 1% to a maximum of 25%;

      o     the twenty-two day trading volume remaining flat; and

      o     the weighted average reset period projected at $0.0899

At the end of each successive quarterly period, we had to re-measure the
embedded derivative liabilities against revised projections, with the revisions
therein directly based on the actual experience. Each of the above factors
contributed differently to the actual calculations, but we believed the
variations in our stock price were the most significant.

By virtue of the Omnibus Amendment entered into with Laurus on September 29,
2006, together with the amended and restated note issued to Laurus pursuant
thereto, the then existing derivative liabilities were credited to equity at
their then measured values as of such date.


                                       11

<PAGE>

Stock Based Transactions- When options or warrants to purchase our common stock
are used as incentives for employees, officers or directors, we now use the fair
value method required by SFAS No.123R. The accompanying financial statements
reflect the adoption of this pronouncement as of the beginning of fiscal 2006,
as required.

The fair value of options or warrants to purchase our common stock is now
exclusively determined using the Black-Scholes valuation method, a method widely
accepted as providing the fair market value of an option or warrant to purchase
stock at a fixed price for a specified period of time. Black Scholes uses five
variables to determine market value as follows:

      o     exercise price (the price to be paid for a share in our stock);

      o     price of our stock on the day the options or warrants are granted;

      o     the expected number of days that the options or warrants will be
            held before they are exercised, based on the average of their
            vesting and contractual periods;

      o     trading volatility of our stock, based on historical prices for a
            retrospective period equal to the expected holding period together
            with certain other factors as applicable; and

      o     the annual risk free interest rate on the day the option or warrant
            is granted for the expected holding period.

The determination of expected volatility requires management to make certain
estimates and the actual volatility may vary significantly from that estimate.
Accordingly, the determination of the resulting expense is based on a management
estimate.

Revenue Recognition- Revenue derived from services provided to customers over
periods of less than one month is recognized when billed.

Revenue from claims, such as claims related to disputed change orders, is
recognized where realization is probable and the amount can be reliably
estimated, based upon meeting the following conditions:

      o     The original contract or other evidence provides a legal basis for
            the claim;

      o     The additional costs were caused by circumstances that were
            unforeseen at the contract date and were not the result of
            deficiencies in our performance;

      o     Costs associated with the claims are identifiable; and

      o     The evidence supporting the claims is objective and verifiable.

Allowance for Doubtful Accounts- We maintain an allowance for doubtful trade
accounts receivable for estimated losses resulting from the inability of our
customers to make required payments. In determining collectibility, we review
available customer account and financial information, including public filings
and credit reports, current trends, credit policy, and accounts receivable aging
and may also consult legal counsel when appropriate. A considerable amount of
judgment is required when we assess the likelihood of our realization of
accounts receivables, including assessing the probability of collection and the
current credit worthiness of each customer. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, an additional provision for doubtful accounts could be required.
The need to file a lawsuit in a particular case is determined by a variety of
factors, including our mandate to aggressively pursue all monies owed. The other
considered factors include the responsiveness of the client, the running of
applicable limitations periods, the ability to perfect a lien against the
subject property, the value of the receivable compared to the costs of
litigation and the likelihood of success in the lawsuit. When it is deemed
probable that a specific customer account is uncollectible, that balance is
included in the reserve calculation. Actual results could differ from these
estimates.

Deferred Tax Asset Valuation Allowance - We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be
realized. Due to our history of losses, we have recorded a full valuation
allowance against our net deferred tax assets as of September 30, 2006 and June
30, 2006. We currently provide for income taxes only to the extent that we
expect to pay cash taxes on current income. When we are profitable at levels
which cause management to conclude that it is more likely than not that we will
realize all or a portion of our deferred tax assets, we record the estimated net
realizable value of our deferred tax assets at that time and provide for income
taxes at our combined federal and state effective rates.

RESULTS OF OPERATIONS

Three months ended September 30, 2006 and thirteen weeks ended September 27,
2005


                                       12

<PAGE>

Revenue

Total revenues for the three months ended September 30, 2006 decreased by
$2,680,528, or 51.9%, to $2,483,811 from $5,164,339 for the thirteen weeks ended
September 27, 2005. This decrease in revenue was primarily attributable to a
decrease of $1,232,129 in our asbestos, lead and mold work, a decrease of
$943,419 in our emergency, disaster response and remediation work (e.g.
hurricane-related work) and a decrease of $589,234 in insurance work. These
decreases were partially offset by a $578,119 increase in our emergency spills
and soil environmental remediation, and a $101,398 increase in training and air
monitoring work.

Cost of Revenues

Cost of revenues decreased $1,529,531 or 34.9%, to $2,855,739 for the three
months ended September 30, 2006 as compared to $4,385,270 for the thirteen weeks
ended September 27, 2005. This decrease was primarily attributable to lower
project managers costs and direct labor costs, including fringe benefits
($1,063,863), costs of subcontractors ($320,175) and supplies, materials and
other direct costs ($373,425) due to reduced sales, partially offset by
increased insurance expenses ($199,063). Our cost of revenues consists primarily
of labor and labor-related costs, payroll taxes, benefits, training, job-related
insurance costs, travel and entertainment costs, repairs, maintenance and rental
of job equipment, materials and supplies, testing and sampling, transportation,
disposal, and depreciation of capital equipment.

Gross Profit

Gross profit decreased by $1,150,997, or 148%, to a loss of $371,928, or (15%)
of total revenues for the three months ended September 30, 2006, as compared to
a gross profit of $779,069, or 15% of total revenues for the thirteen weeks
ended September 27, 2005. This decrease in gross profit was due primarily to the
factors described above in relation to the decrease in our revenue and decrease
in our cost of revenues.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by $1,258,060, or 43.4%,
to $1,642,483 for the three months ended September 30, 2006 from $2,900,543 for
the thirteen weeks ended September 27, 2005 and constituted approximately 66.1%
and 56.2% of revenues in such periods, respectively. This decrease was almost
entirely due to the adoption of SFAS No. 123R in the thirteen weeks ended
September 27, 2005, and the related inclusion in that quarter of $1,394,139
arising from the employment-related option to purchase 15,469,964 shares granted
to our chief executive officer. Other changes in this account classification
were a decrease in professional fees of $334,703, a $24,740 decrease in travel
and entertainment expenses and a $49,768 decrease in insurance expenses. These
were partially offset by an increase of $343,280 in the provision for doubtful
accounts. Our selling, general, and administrative expenses primarily consist of
expenses related to provisions for doubtful accounts, professional fees, sales
and office salaries and benefits, stock-based compensation, marketing and
consulting.

Mark-to-Market Gain on Embedded Derivative Liabilities

The ending of derivative accounting in the current period resulted in a
mark-to-market gain on the embedded derivatives in the amount of $15,721,986,
principally driven by the decrease in our common stock price from $0.45 to
$0.15, as compared to a loss of $20,999,559 during the thirteen weeks ended
September 27, 2005 as a result of an increase in our common stock prices during
the period.

Interest Expense

Interest expense decreased by $210,897, or 14.9%, to $1,201,883 for the three
months ended September 30, 2006 from $1,412,780 for the thirteen weeks ended
September 27, 2005. All of the decrease was due to the Laurus financing and the
application of derivative accounting.

Gain on Conversion of Note

The partial conversion by Laurus of its Note into 330,000 shares of our common
stock during the quarter ended September 30, 2006 resulted in a gain of $987,105
due to the decrease in our common stock price during the quarter. In the
thirteen weeks ended September 27, 2005, a loss of $449,850 was recognized by
virtue of repayment of a portion of the Laurus Note along with an increase in
our common stock price during such period.

Benefit / Provision for Income Taxes

The benefit for income taxes for the three months ended September 30, 2006 was
$640,042 as compared to a provision of $8,218 for the thirteen weeks ended
September 27, 2005. This difference was the result of a loss in operations in
the current quarter as compared to a taxable profit in the prior year, when we
had an income tax liability.


                                       13

<PAGE>

Liquidity and Capital Resources

As of September 30, 2006, we had a cash balance of $220,410, working capital of
$5,030,494 and stockholders' equity of $3,933,258. As of June 30, 2006, we had a
cash balance of $610,884, a working capital deficit of $20,220,862 (including
derivative liabilities of $27,163,901) and a stockholders' deficiency of
$16,749,348. We realized a net income of $14,133,383 for our fiscal quarter
ended September 30, 2006.

Accounts receivable, net of allowance for doubtful accounts at September 30,
2006 and June 30, 2006 were $9,212,774 and $11,235,904, respectively. For these
periods, approximately $3,114,000 and $5,089,000, respectively, of these amounts
were disputed claims subject to collection litigation, primarily related to
disputes over changed work orders or other modifications of our work. We do not
believe that the disputed receivables had a material effect on liquidity for the
periods presented.

Net cash used in operating activities was $527,203 for the three months ended
September 30, 2006, as compared to net cash used in operations of $567,253 for
the thirteen weeks ended September 27, 2005. Accounts receivable increased by
$1,002,618, or 12.2%, as of September 30, 2006 to $9,212,774, from $8,210,155 as
of September 27, 2005, primarily due to difficulties with cash collections of
certain receivables that arose out of our work during hurricane Katrina.
Accounts receivable increased by $1,465,620, or 17.7%, as of September 27, 2005
to $8,210,155, from $6,755,338 as of September 27, 2004, primarily as a result
of hurricane related work billed toward the end of the 2005 period and
difficulties with cash collections. Accounts payable and accrued expenses
decreased by $2,447,492, or 50.0%, as of September 30, 2005 to $2,477,822, from
$4,895,314 as of September 27, 2005, primarily as a result of hurricane
mobilization costs incurred in 2005 that were not incurred in 2006.

Net cash provided by financing activities for the three months ended September
30, 2006 was $136,729, primarily due to proceeds received from third party
receivables, as compared to cash used by financing activities of $1,087,517 for
the thirteen weeks ended September 27, 2005. Financing activities for the
thirteen weeks ended September 27, 2005 was a result of $6,000,000 received in
2005 in connection with our debt restructuring with Laurus, which was used to
pay related transaction and other expenses in the amount and the repayment of
indebtedness to Spotless.

There was no cash used for capital expenditures during the three months ended
September 30, 2006, as compared to $885,482 for the thirteen weeks ended
September 27, 2005. The expenditures in 2005 were due to the purchase of capital
equipment, including 10 trucks, 5 campers, 1 trailer, 1 life raft, blowers,
dehumidifiers and other assets to be utilized in the clean-up efforts relating
to Hurricane Katrina. At this time, we do not have any other material
commitments or plans for capital expenditures. We intend, however, to make
additional capital expenditures, to the extent our financial condition permits,
as may be required in connection with rendering our services in the future.

Historically, we have financed our operations primarily through issuance of debt
and equity securities, through short-term borrowings from our former majority
shareholder, and through cash generated from operations. We expect to generate
sufficient cash flow from operations to support our working capital needs and to
adequately fund our current operations for at least the next twelve months.
However, any further difficulty in collecting our accounts receivable or future
growth could adversely affect our liquidity. In the event that we do not
generate sufficient positive cash flow from operations, or if we experience
changes in our plans or other events that adversely affect our operations or
cash flow, we may need to seek additional financing in addition to the financing
provided by Laurus. Laurus is under no obligation to provide any further funding
to us. Currently, we have no credit facility for additional borrowing.

Our future cash requirements are expected to depend on numerous factors,
including, but not limited to our ability to:

      o     Obtain profitable environmental or related construction contracts.
            So long as we have sufficient working capital, we anticipate that we
            will continue to bid on large projects, although there can be no
            assurance that any of our bids will be accepted or that we will have
            sufficient working capital.

      o     Control our selling, general and administrative expenses, which were
            increased in connection with our need to incur labor, operating and
            equipment expenses in relation to our operations in the gulf coast
            and Florida regions during fiscal 2006. In order to control our
            selling, general and administrative expenses, we have or are in the
            process of optimizing the efficiency of our support staff through
            enhanced task allocation while reducing unneeded resources and
            reviewing non-project related expenses in an effort to reduce costs
            where appropriate while preserving the quality of our service.

      o     Raise additional capital or obtain additional financing. Management
            has preliminarily explored additional funding sources, but has been
            unable to attract additional debt or equity capital. In addition,
            the existence of the Laurus and Spotless security interests may
            impair our ability to raise additional debt capital. No assurance
            can be given that we will be able to obtain additional debt or
            equity capital, although our management expects to continue seeking
            any such favorable opportunities.


                                       14

<PAGE>

      o     Generate positive cash flow from operations. We seek to obtain
            profitable contracts that generate gross profits more than
            sufficient to pay our expenses and addressing our difficulty with
            cash collections and slow cash flow.

We have experienced difficulties with cash collections and slow cash flow due
primarily to factors including:

      o     customers refusing to pay prior to receiving insurance
            reimbursements;

      o     customers' facility managers needing to wait for insurance adjustors
            to approve work before the remission of payment; and

      o     certain customers refusing to pay in connection with disputed change
            order.

In an effort to enhance our cash flows from operations, we began implementing
improvements in our billing and invoicing procedures as follows:

      o     we generally do not commence projects until we have a fully executed
            contract;

      o     our contracts provide that our customers are directly obligated for
            our services;

      o     we require client approval with respect to the work performed or to
            be performed;

      o     we seek deposits or mobilization fees for time and material
            contracts;

      o     we engage local legal counsel in the areas in which we operate in
            order to file liens against customers' real property in the event of
            contract disputes; and

      o     all invoices submitted for payment are reviewed for proper
            documentation.

Due to the nature of our business, which includes responding to emergency
situations on a 24 hour/7days a week basis, we, on occasion, will commence a
emergency project prior o obtaining a formal contract. In these situations, we
may commence emergency services upon the oral authorization of the property
owners or their agents or government workers (e.g. policy or Coast Guard). In
these isolated instances, we do not incur significant expense and require an
executed contract within 48 hours of commencement of work.

On September 29, 2006, we entered into an Omnibus Amendment with Laurus and
amended and restated our existing Note. The Omnibus Amendment and the Note
improve for us certain terms of the original agreements. The Omnibus Amendment
significantly reduces the shares issuable to Laurus and, among other things,
includes the following terms:

      (1) $4,000,000 of the remaining principal balance on the Note became
      non-convertible.

      (2) Six months (July through December 2006) of principal payments under
      the Note have been deferred to the maturity date.

      (3) Future monthly payments on the Note have been reduced to $100,000
      beginning January 1, 2007, first applied to interest and then to
      principal.

      (4) If at any time we have a cash and cash equivalents total balance in
      excess of $1,000,000, 50% of any cash received by us in excess of such
      total balance will be used to pay down principal of the Note.

      (5) The Note was extended for one year through June 2009.

      (6) An option to purchase 11,145,000 shares of Common Stock at a nominal
      exercise price was issued to Laurus on September 29, 2006.

      (7) The beneficial ownership cap on our securities that may be
      beneficially owned by Laurus at any one time has been raised from 4.99% to
      9.99%.

      (8) Laurus agreed to transfer voting control of all of our securities
      owned by them either to us or to a third party.

The Note is the only Laurus note issued by us that is currently outstanding.
Payments made on the Note on the required due dates, and conversions on the
Note, have reduced the current principal balance of the Note to $5,942,175 as of
September 30, 2006.

On June 30, 2005, we issued a variable interest rate secured promissory note in
the principal amount of $500,000 to Spotless, an affiliate of our previous
majority stockholder and senior secured lender, bearing interest at LIBOR plus
1%.


                                       15

<PAGE>

On September 8, 2006, we signed a lease effective September 15, 2006 for a
68,000 square foot building for our new offices and warehouse to replace our
current leased facilities. The original term of this lease is for seven years
and contains renewal provisions for three (3) five-year extensions at our
option. The initial rent during the first year ranges from $17,000 per month to
$36,000 per month with an increase of 3% per annum in years 3 through 7. The
lease is a net lease and we are responsible for any increases in real estate
taxes and building insurance over the base year 2006-2007. The cost of the
initial seven year commitment is approximately $3,400,000.

The table below summarizes contractual obligations and commitments as of
September 30, 2006, including principal and interest payments on our debt:

<TABLE>
<CAPTION>
                                  Total        1 Year      2-3 Years    4-5 Years   Thereafter
                               -----------   ----------   ----------   ----------   ----------
<S>                            <C>           <C>          <C>          <C>          <C>
Operating Leases               $ 3,681,268   $  619,946   $  990,704   $1,027,698   $1,042,920
Capitalized Leases-Principal       324,086      170,559      144,918        8,609           --
Capitalized Leases- Interest        23,087       16,484        6,563           40           --
Laurus Note
Principal                        5,942,175      458,643    5,483,532           --           --
Laurus Note
Interest Expense - Cash          1,191,583      538,496      653,087           --           --
Spotless Note Principal            500,000      142,656      357,344           --           --
Spotless Note
Interest Expense                    75,851        7,344       68,507           --           --
Total                          $11,738,050   $1,954,128   $7,704,655   $1,036,347   $1,042,920
</TABLE>

The above amounts are based on assumed interest payments reflecting:

      o     the Laurus note at a rate of 10.25% per annum;

      o     the Spotless note at a rate of 6.49% per annum; and

      o     an aggregate of $324,086 of other long-term debt with maturities
            ranging from 2 months to 47 months for financed trucks and vehicles
            with interest rates ranging from 0.01% to 13.99%.

Off-Balance Sheet Arrangements

Although we do not have any financing arrangements that have not been recorded
in our financial statements, our transaction with Laurus resulted in a discount
that reduced the carrying value on our balance sheet of our debt obligation. As
of September 30, 2006, the Note had a principal balance of $5,942,175 with a
corresponding discount of $1,316,362, resulting in a carrying amount of
$4,625,813 on our balance sheet. Of this amount, $357,040 is included as a
current liability and $4,268,773 is a long-term liability.

Effect of Inflation

Although inflation did not have a material impact on our operations for the
three months ended September 30, 2006, we did experience an increase of 1.9% in
fuel costs due to increased gasoline prices.


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<PAGE>

Seasonality

Since we and our subsidiaries are able to perform most of our services
throughout the year, our business is not considered seasonal in nature. However,
we are affected by:

      o     the timing of large projects in certain of our service areas, i.e.,
            asbestos and mold abatement and construction;

      o     the timing of catastrophes; and

      o     inclement weather conditions. In particular, extended periods of
            rain, cold weather or other inclement weather conditions may result
            in delays in commencing or completing projects, in whole or in part.
            Any such delays may adversely affect our operations and financial
            results and may adversely affect the performance of other projects
            due to scheduling and staffing conflicts

                           FORWARD-LOOKING STATEMENTS

Statements contained in this Form 10-Q include "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended, that are based on the beliefs and
current expectations of and assumptions made by our management. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "expect," "believe," "estimate," "anticipate," "continue" or similar
terms, variations of those terms or the negative of those terms. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause the actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, not to occur or be
realized. Such forward-looking statements generally are based upon our best
estimates of future results, performance or achievement, based upon current
conditions and the most recent results of operations. Actual results could
differ materially from any expectation, estimate or projection conveyed by these
statements and there can be no assurance that any such expectation, estimate or
projection will be met. Numerous important factors, risks and uncertainties
effect our operating results and could cause actual results to differ from the
results implied by these or any other forward looking statements. These
potential factors, risks and uncertainties include, among other things, such
factors as:

            o     the market acceptance and amount of sales of our services;

            o     our success in increasing revenues and reducing expenses;

            o     the frequency and magnitude of environmental disasters or
                  disruptions resulting in the need for the types of services we
                  provide;

            o     our ability to service our debt and other financial
                  obligations, particularly if required to pay in cash;

            o     the extent of the enactment, enforcement and strict
                  interpretations of laws relating to environmental remediation;

            o     our ability to obtain and manage new and large projects;

            o     the competitive environment within the industries in which we
                  operate;

            o     our ability to raise or access capital;

            o     our ability to continue as a going concern;

            o     our ability to effectively implement and maintain internal
                  controls and procedures;

            o     our dependence on key personnel;

            o     our ability to timely collect our accounts receivable;

            o     our ability to attract and retain qualified personnel; and

            o     the other factors and information disclosed and discussed in
                  other sections of this quarterly report on Form 10-Q and in
                  our report on Form 10-K for the fiscal year ended June 30,
                  2006.

You should carefully consider such risks, uncertainties and other information,
disclosures and discussions which contain cautionary statements identifying
important factors that could cause actual results to differ materially from
those provided in the forward-looking statements.

Except as may be required, we undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

The foregoing discussion and analysis provides information which management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
appearing in Item 1 and with the consolidated financial statements included in
our annual report on Form 10-K for the period ended June 30, 2006.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Equity Price Risk - Our primary market risk exposure relates to the shares of
common stock issuable upon conversion of the Note. In connection with the
issuance of the Note, we issued to Laurus a warrant to purchase 13,750,000
shares of our common stock and options to purchase 30,395,175 and 11,145,000
shares of our common stock. On September 12, 2005, we issued 1,500,000 shares of
our common stock to Laurus in connection with its partial exercise of the
original option. These shares have been recorded at their intrinsic value, which
is based on the difference between the exercise price per share and the market
price per share of our common stock on June 30, 2005, the date of issuance at
the inception date of the agreement.


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<PAGE>

Interest Rate Sensitivity - Interest rate risk is the risk that interest rates
on our debt are fully dependent upon the volatility of these rates. We do not
use derivative financial instruments to manage interest rate risk. The Laurus
Note bears interest at the prime rate as published in the Wall St. Journal plus
2% (but not to less than 7.25%), decreasing by 2% (but not to less than 0%) for
every 25% increase in the Market Price (as defined therein) of our common stock
above the fixed conversion price of $.09 following the effective date of the
registration statement covering the common stock issuable upon conversion.
Should the price of our common stock maintain a price equal to 125% of $.09 for
a twelve month period and if our registration statement registering the shares
of our common stock issuable to Laurus has been declared effective by the SEC,
we would benefit from a reduced interest rate of 2% on the outstanding principal
amount for that twelve-month period. On June 30, 2005, we also issued a variable
interest rate secured promissory note in the principal amount of $500,000 to
Spotless, bearing interest at LIBOR plus 1%. We also have various other debt
with maturities ranging from 2 months to 47 months aggregating to $324,086 for
financed trucks and vehicles. A hypothetical 1% increase in the interest rate
applicable to the outstanding amounts of the Laurus and Spotless notes along
with the various other debt for financed trucks and vehicles would increase our
interest expense by approximately $68,000 annually. This hypothetical
calculation reflects the assumed interest payments for the:

      o     Note at a rate of 10.25% per annum;

      o     Spotless note at a rate of 6.49% per annum; and

      o     Various other debt for financed trucks and vehicles with maturities
            ranging from 2 months to 47 months with interest rates ranging from
            .01% to 13.99%.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, an
evaluation was performed under the supervision and with the participation of our
principal executive and financial officers of the effectiveness of the design
and operation of our "disclosure controls and procedures" (as defined under Rule
13a-15(e) and Rule 15d-15(e)) as of the end of the period covered by this
quarterly report on Form 10-Q.

In connection with the foregoing, our chief executive officer and chief
financial officer have concluded that our current disclosure controls and
procedures are effective as of the end of the period covered by this annual
report to ensure that information that is required to be disclosed in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and include controls and procedures designed to ensure that information
we are required to disclose in such reports is accumulated and communicated to
management, including its principal executive and financial officers, as
appropriate to allow timely decisions regarding required disclosure.

During the quarter ended September 30, 2006, there were no changes in our
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


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<PAGE>

                           PART 2 - OTHER INFORMATION

Item 1.Legal Proceedings

We are a plaintiff in approximately 20 lawsuits claiming an aggregate of
approximately $8,000,000 pursuant to which we are seeking to collect amounts we
believe are owed to us by customers that are included in our accounts
receivable, primarily with respect to changed work orders or other modifications
to our scope of work. The defendants in these actions have asserted
counterclaims for an aggregate of approximately $1,500,000.

We are a party to other litigation matters and claims that are normal in the
course of its operations, and while the results of such litigation and claims
cannot be predicted with certainty, management believes that the final outcome
of such matters will not have a materially adverse effect on our consolidated
financial statements.

For a description of other legal proceedings in which we are involved, reference
is made to our Annual Report on Form 10-K for the year ended June 30, 2006.

Item 1A. Risk Factors.

There have been no material changes in our risk factors from the risk factors
disclosed in our Form 10-K for the year ended June 30, 2006.

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

Not applicable.

Item 3.Defaults upon Senior Securities

Not applicable.

Item 4.Submission of Matters to a Vote of Security Holder

Not applicable.

Item 5.Other Information

Not applicable.

Item 6.Exhibits

The following exhibits are included as part of this report:

10.1  Amendment and Fee Waiver Agreement, dated July 21, 2006, by and between
      Windswept and Laurus (Incorporated by reference to Exhibit 10.1 of
      Windswept's Current Report on Form 8-K (Date of Report: July 21, 2006)
      filed with the SEC on July 25, 2006).

10.2  Amendment and Fee Waiver Agreement, dated August 25, 2006, by and between
      Windswept and Laurus (Incorporated by reference to Exhibit 10.1 of
      Windswept's Current Report on Form 8-K (Date of Report: September 29,
      2006) filed with the SEC on October 5, 2006).

10.3  Omnibus Amendment, dated September 29, 2006, between Windswept and Laurus
      (Incorporated by reference to Exhibit 10.1 of Windswept's Current Report
      on Form 8-K (Date of Report: September 29, 2006) filed with the SEC on
      October 5, 2006).

10.4  Amended and Restated Secured Convertible Term Note, dated September 29,
      2006, issued by the Company to Laurus (Incorporated by reference to
      Exhibit 10.2 of Windswept's Current Report on Form 8-K (Date of Report:
      September 29, 2006) filed with the SEC on October 5, 2006).

10.5  Option, dated September 29, 2006, to purchase 11,145,000 shares of common
      stock issued by Windswept to Laurus (Incorporated by reference to Exhibit
      10.3 of Windswept's Current Report on Form 8-K (Date of Report: September
      29, 2006) filed with the SEC on October 5, 2006).


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<PAGE>

10.6  Lease Agreement dated September 8, 2006 between TradeWinds and 895 Waverly
      Associates, LLC 31.1Certification of Chief Executive Officer pursuant to
      Sarbanes-Oxley Section 302(a).

31.2  Certification of Chief Financial Officer pursuant to Section 302(a).

32.1  Certification of Chief Executive Officer and Chief Financial Officer
      pursuant to 18 U.S.C. Section 1350.


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<PAGE>

                                   SIGNATURES

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


WINDSWEPT ENVIRONMENTAL GROUP, INC.


Date: November  20, 2006          By: /s/ Michael O'Reilly
                                      ------------------------------------------
                                      MICHAEL O'REILLY
                                      President and Chief Executive Officer
                                      (Principal Executive Officer)


Date: November  20, 2006          By: /s/ Arthur J. Wasserspring
                                      ------------------------------------------
                                      ARTHUR J. WASSERSPRING
                                      Chief Financial Officer
                                      (Principal Financial Officer)


                                       21

<PAGE>

                                  EXHIBIT INDEX

Exhibit No.   Description
-----------   -----------
10.1          Amendment and Fee Waiver Agreement, dated July 21, 2006, by and
              between Windswept and Laurus (Incorporated by reference to Exhibit
              10.1 of Windswept's Current Report on Form 8-K (Date of Report:
              July 21, 2006) filed with the SEC on July 25, 2006).

10.2          Amendment and Fee Waiver Agreement, dated August 25, 2006, by and
              between Windswept and Laurus (Incorporated by reference to Exhibit
              10.1 of Windswept's Current Report on Form 8-K (Date of Report:
              September 29, 2006) filed with the SEC on October 5, 2006).

10.3          Omnibus Amendment, dated September 29, 2006, between Windswept and
              Laurus (Incorporated by reference to Exhibit 10.1 of Windswept's
              Current Report on Form 8-K (Date of Report: September 29, 2006)
              filed with the SEC on October 5, 2006).

10.4          Amended and Restated Secured Convertible Term Note, dated
              September 29, 2006, issued by the Company to Laurus (Incorporated
              by reference to Exhibit 10.2 of Windswept's Current Report on Form
              8-K (Date of Report: September 29, 2006) filed with the SEC on
              October 5, 2006).

10.5          Option, dated September 29, 2006, to purchase 11,145,000 shares of
              common stock issued by Windswept to Laurus (Incorporated by
              reference to Exhibit 10.3 of Windswept's Current Report on Form
              8-K (Date of Report: September 29, 2006) filed with the SEC on
              October 5, 2006).

10.6          Lease Agreement dated September 8, 2006 between TradeWinds and 895
              Waverly Associates, LLC

31.1          Certification of Chief Executive Officer pursuant to
              Sarbanes-Oxley Section 302(a).

31.2          Certification of Chief Financial Officer pursuant to Section
              302(a).

32.1          Certification of Chief Executive Officer and Chief Financial
              Officer pursuant to 18 U.S.C. Section 1350.


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