# 

# UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549FORM 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 March 29, 2005,

OR

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

For the transition period from
_____________ to __________.

Commission File Number:
000-17072

WINDSWEPT
ENVIRONMENTAL GROUP, INC.(Exact Name of Registrant As Specified In Its Charter)

|                                | 
|------------------------------- | 
|Delaware                        | 
|(State or other jurisdiction of | 
|incorporation or organization)  | 

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 an accelerated filer (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 May 6, 2005 was 77,936,358.
| | --------------------------------------------------------------------------------------------------

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# PART 1  FINANCIAL INFORMATION

Item
1. Financial Statements

WINDSWEPT ENVIRONMENTAL
GROUP, INC.CONSOLIDATED BALANCE SHEETSMARCH 29, 2005 AND JUNE 29, 2004

|                                                                                                    
|----------------------------------------------------------------------------------------------------
|(Unaudited)                                                                                         
|ASSETS:                                                                                             
|CURRENT ASSETS:                                                                                     
|Cash                                                                                                
|Accounts receivable, net of allowance for doubtful accounts of $1,351,831 and $689,140, respectively
|Inventory                                                                                           
|Costs and estimated earnings in excess of billings on uncompleted contracts                         
|Refundable income taxes                                                                             
|Prepaid expenses and other current assets                                                           
|Total current assets                                                                                
|PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $6,205,905              
|and $5,707,705, respectively                                                                        
|OTHER ASSETS                                                                                        
|TOTAL                                                                                               
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):                                                     
|CURRENT LIABILITIES:                                                                                
|Accounts Payable                                                                                    
|Accrued expenses                                                                                    
|Short-term notes payable to related party                                                           
|Billings in excess of cost and estimated earnings on uncompleted contracts                          
|Accrued payroll and related fringe benefits                                                         
|Current maturities of long-term debt                                                                
|Other current liabilities                                                                           
|Total current liabilities                                                                           
|LONG-TERM DEBT                                                                                      
|COMMITMENTS AND CONTINGENCIES                                                                       
|SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000 shares                   
|authorized; 1,300,000 shares outstanding at March 29, 2005 and June 29, 2004                        
|STOCKHOLDERS' EQUITY (DEFICIT):                                                                     
|Series B preferred stock, $.01 par value; 50,000 shares authorized; 0 shares outstanding            
|Nondesignated preferred stock, no par value; 8,650,000 shares authorized; 0 shares outstanding at   
|March 29, 2005 and June 29, 2004                                                                    
|Common stock, $.0001 par value; 150,000,000 shares authorized; 77,936,358 shares                    
|outstanding at March 29, 2005 and June 29, 2004                                                     
|Additional paid-in-capital                                                                          
|Accumulated deficit                                                                                 
|Total stockholders equity (defitit)                                                                
|TOTAL                                                                                               
|See notes to consolidated financial statements                                                      

2

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

|                                                                                 
|---------------------------------------------------------------------------------
|                                                                                 
|                                                                                 
|Revenues                                                                         
|Cost of revenues                                                                 
|Gross profit (loss)                                                              
|Operating expenses (income):                                                     
|Selling, general and administrative expenses                                     
|Expense (benefit) related to variable accounting    treatment for officer options
|Total operating expenses                                                         
|Income (loss) from operations                                                    
|Other expense (income):                                                          
|Interest expense                                                                 
|Other, net                                                                       
|Total other expense                                                              
|Income (loss) before provision (benefit) for income                              
|taxes                                                                            
|Provision (benefit) for income taxes                                             
|Net income (loss)                                                                
|Dividends On preferred stock                                                     
|Net income (loss) attributable to common                                         
|shareholders                                                                     
|Basic and diluted net income (loss) per common share:                            
|Basic                                                                            
|Diluted                                                                          
|Weighted average number of common shares                                         
|outstanding:                                                                     
|Basic                                                                            
|Diluted                                                                          
|See notes to consolidated financial statements                                   

3

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WINDSWEPT ENVIRONMENTAL GROUP, INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)(UNAUDITED)

|                                               |       |         |            
|---------------------------------------------- | ----- | ------- | -----------
|Number of                                      | Par   | Paid-in | Accumulated
|Shares                                         | Value | Capital | Deficit    
|Balance at June 30, 2004                       |       |         |            
|Dividends on Series A preferred stock          |       |         |            
|Net income                                     |       |         |            
|Balance at March 29, 2005                      |       |         |            
|See notes to consolidated financial statements |       |        

4

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

|                                                                            
|----------------------------------------------------------------------------
|March 29,                                                                   
|2005                                                                        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       
|Net income (loss)                                                           
|Adjustments to reconcile net income (loss) to net cash provided by (used in)
|operating activities:                                                       
|Depreciation and amortization                                               
|Provision for doubtful accounts, net                                        
|Benefit related to officer options and redeemable common stock              
|Changes in operating assets and liabilities:                                
|Accounts receivable                                                         
|Inventory                                                                   
|Costs and estimated earnings in excess of billings on uncompleted contracts 
|Refundable income taxes                                                     
|Prepaid expenses and other current assets                                   
|Other assets                                                                
|Accounts payable and accrued expenses                                       
|Accrued payroll and related fringe benefits                                 
|Other current liabilities                                                   
|Billings in excess of costs and estimated earnings on uncompleted contracts 
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                         
|                                                                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       
|Purchases of property and equipment                                         
|NET CASH USED IN INVESTING ACTIVITIES                                       
|                                                                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       
|Principal payments of long-term debt                                        
|Proceeds from long-term debt                                                
|Payment of preferred stock dividends                                        
|Proceeds from short-term notes payable to a related party                   
|NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                         
|                                                                            
|NET INCREASE IN CASH                                                        
|CASH - BEGINNING OF PERIOD                                                  
|                                                                            
|CASH - END OF PERIOD                                                        
|                                                                            
|Cash paid during the period for:                                            
|Interest                                                                    
|Income taxes                                                                
|                                                                            
|See notes to consolidated financial statements                              

5

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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 wholly-owned subsidiaries, Trade-Winds
          Environmental Restoration Inc. (Trade-Winds) and North Atlantic
          Laboratories, Inc. 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 March 29, 2005, the results of
          operations for the thirteen and thirty-nine weeks ended March 29, 2005 and March
          30, 2004 and cash flows for the thirty-nine weeks ended March 29, 2005 and March
          30, 2004, have been included. Certain prior period amounts have been
          reclassified to conform to the March 29, 2005 presentation.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
results for the thirteen and thirty-nine weeks ended March 29, 2005 and March 30, 2004 are
not necessarily indicative of the results for the 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 29, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | STOCK OPTIONS  In December 2002, the Financial Accounting Standards Board
          (FASB) issued Statement of Financial Accounting Standards
          (SFAS) No. 148, Accounting for Stock-Based
          Compensation-Transition and Disclosure  an amendment of FASB Statement No.
          123 ( SFAS 148). SFAS No. 148 amends SFAS No. 123, Accounting
          for Stock-Based Compensation (SFAS 123), to provide
          alternative methods of transition for a voluntary change to the fair value based
          method of accounting for stock-based employee compensation and does not permit
          the use of the original SFAS No. 123 prospective method of transition in fiscal
          years beginning after December 15, 2003. In addition, SFAS No. 148 amends the
          disclosure requirements of SFAS No. 123 to require prominent disclosures in both
          annual and interim financial statements about the method of accounting for
          stock-based employee compensation and the effect of the method used on reported
          results, regardless of whether, when, or how an entity adopts the preferable,
          fair value based method of accounting. SFAS No. 148 improves the prominence and
          clarity of the pro forma disclosures required by SFAS No. 123 by prescribing a
          specific tabular format and by requiring disclosure in the Summary of
          Significant Accounting Policies or its equivalent and improves the
          timeliness of those disclosures by requiring their inclusion in financial
          reports for interim periods. The Company has adopted the disclosure requirements
          of SFAS No. 148. The Company will continue to account for stock-based employee
          compensation under APB Opinion No. 25 and its related interpretations.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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| | The
following table illustrates the effect on net income (loss) and net income (loss) per
share if the Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation
for all periods:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |           |          
|-------------------------- | --------- | ---------
|March 29,                  | March 30, | March 29,
|2005                       | 2004      | 2005     
|Net income (loss)          |           |          
|attributable to common     |           |          
|shareholders as reported   |           |          
|Less: Stock-Based          |           |          
|employee compensation      |           |          
|cost determined under      |           |          
|the fair value method,     |           |          
|net of related tax effects |           |          
|Pro forma net income       |           |          
|(loss) attributable to     |           |          
|common shareholders        |           |          
|Net income (loss) per      |           |          
|share:                     |           |          
|Basic - as reported        |           |          
|Basic - pro forma          |           |          
|Diluted - as reported      |           |          
|Diluted - pro forma        |           |          

| | 3. | NET INCOME (LOSS) PER COMMON SHARE The calculation of basic and diluted
          net 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 net income (loss) per
share for the thirteen and thirty-nine weeks ended March 29, 2005 and March 30, 2004,
respectively:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |           |          
|------------------------- | --------- | ---------
|March 29,                 | March 30, | March 29,
|2005                      | 2004      | 2005     
|Numerator:                |           |          
|Net income (loss)         |           |          
|attributable to common    |           |          
|shareholders              |           |          
|Denominator:              |           |          
|Share reconciliation:     |           |          
|Shares used for basic     |           |          
|income (loss) per share   |           |          
|Effect of dilutive items: |           |          
|Stock options             |           |          
|Shares used for dilutive  |           |          
|income (loss) per share   |           |          
|                          |           |          
|Net income (loss) per     |           |          
|share:                    |           |          
|Basic                     |           |          
|Diluted                   |           |          
|                          |           |          

7

---

| | The dilutive net income per share computation for the thirteen and thirty-nine week periods
ended March 29, 2005 excludes 8,136,309 shares related to stock options because the effect
of including them would be anti-dilutive. The dilutive net loss per share computation for
the thirteen week and thirty-nine week periods ended March 30, 2004 excludes 9,246,618 and
3,560,309 shares, respectively, related to stock options and warrants because the effect
of including them would be anti-dilutive. For all periods presented, 1,300,000 shares of
common stock issuable upon the exercise of the Series A Redeemable Convertible Preferred
Stock were excluded from diluted earnings per share because the effect of including them
would be anti-dilutive.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | PROVISION (BENEFIT) FOR INCOME TAXES  The provision (benefit) for income
          taxes for the thirteen and thirty-nine weeks ended March 29, 2005 and March 30,
          2004 consists of the following:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |           |          
|----------------- | --------- | ---------
|                  | March 29, | March 30,
|                  | 2005      | 2004     
|Federal - current |           |          
|State - current   |           |          
|Total             |           |          

| | The effective rate for income taxes differs from the statutory rate primarily as a result of
the utilization of federal and state net operating losses. 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  On August 5, 2004, Trade-Winds commenced an action against
          the New York City Economic Development Corporation (the EDC) in the
          New York State Supreme Court, County of New York, claiming that Trade-Winds is
          entitled to approximately $1,255,000 of contractual billings relating to a large
          roof tar removal project. On October 15, 2004, the EDC filed an answer, denying
          Trade-Winds claims. On November 4, 2004, the EDC filed an amended answer
          denying Trade-Winds claims and asserting counterclaims. The case is
          currently in pre-trial discovery.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On October 22, 2004, Trade-Winds commenced an action against Consolidated Edison Company in
the New York State Supreme Court, County of New York, claiming that Trade-Winds is
entitled to approximately $2,000,000 of contractual billings and related damages with
respect to its removal of sediment from an oil storage tank. On December 6, 2004,
Consolidated Edison Company filed an answer, denying Trade-Winds claims. The case is
currently in pre-trial discovery.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In April 2005, the Company received a settlement offer of $40,000 from the New York
Department of Labor in relation to an administrative proceeding in which it is claimed
that the Company improperly used its subsidiary North Atlantic Laboratories, Inc. as the
testing laboratory on the same job for which the Company acted as remediation contractor.
The maximum penalty is $89,000 and a possible revocation of the Companys
subsidiaries asbestos handling licenses. The Company has not determined whether it
will contest this proceeding or settle.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company is a party to litigation matters and claims that are in the ordinary 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
material adverse effect on the Companys consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | RELATED PARTY TRANSACTIONS  As of March 29, 2005, the Company owed
          Spotless Plastics (USA), Inc. (Spotless), a company that owns 79% of
          the common stock of the Company, $5,000,000, which bears interest at the rate of
          LIBOR (3.24% at March 29, 2005) plus 1% per annum and is payable on demand. As
          of March 29, 2005, interest of $75,316 was accrued and unpaid on these
          borrowings. The Company has increased its liquidity by entering into an Account
          Receivable Finance Agreement (ARFA) dated as of February 5, 2004
          with Spotless pursuant to which Spotless may purchase certain of the
          Companys accounts receivable without recourse for cash, subject to certain
          terms and conditions. The Company accounts for its transfers of accounts
          receivable to Spotless
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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| | as sales under Statement of Financial Standards No. 140,
          Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities. Under the ARFA, Spotless may, but is not
          obligated to, purchase one or more of the Companys accounts receivable
          that are approved by Spotless in its sole discretion, in respect of the
          particular debtor, invoices and related credit. As part of the agreement,
          Spotless may purchase any accounts receivable at a 15% discount to invoice
          prices, which the Company believes is at least as favorable to it as would be
          available from an unaffiliated third-party, based upon a good-faith estimate of
          an applicable discount negotiated at arms length, as may be adjusted by
          Spotless in its sole discretion. In addition, the Company pays varying monthly
          discount fees on any purchased accounts receivable based upon invoice prices.
          All discounts and fees under the ARFA are characterized as interest expense in
          the consolidated statements of operations. Further, the Company (a) manages any
          accounts receivable that it sells to Spotless while remitting to Spotless any
          proceeds received and (b) bears any related litigation costs. For the thirteen
          and thirty-nine weeks ended March 29, 2005, the Company sold approximately $0
          and $972,000, respectively, of accounts receivable to Spotless and incurred
          approximately $0 and $146,000, respectively, of discounts and fees associated
          with these sales. For both the thirteen and thirty-nine weeks ended March 29,
          2004, the Company sold approximately $1,179,000 of accounts receivable to
          Spotless and incurred approximately $208,000 of discounts and fees associated
          with those sales.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | NEW ACCOUNTING PRONOUNCEMENTS  In December 2004, the Financial Accounting
          Standards board (FASB) issued Statement of Financial Accounting
          Standard (SFAS) No. 123 (revised 2004), Share-Based
          Payment (SFAS No. 123 (R)) which revises SFAS No. 123 and
          supersedes APB No. 25. SFAS No. 123 (R) requires all share-based payments to
          employees, including grants of employee stock options, to be valued at fair
          value on the date of grant, and to be expensed over the applicable vesting
          period. Pro forma disclosure of the income statement effects of share-based
          payments is no longer an alternative. SFAS No. 123 (R) is effective for fiscal
          years beginning after June 15, 2005, which for the Company is June 28, 2005 (the
          Effective Date). Beginning on the Effective Date, the Company must
          (i) expense all options granted after the Effective Date over the applicable
          vesting period, and (ii) expense the non-vested portions of existing option
          grants going forward over their remaining vesting period.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensation expense for the non-vested portions of existing option grants as of the Effective
Date will be recorded based upon the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. If
the Company applied the fair value recognition provisions of SFAS No. 123 (R), net income
for the thirteen and thirty-nine weeks ended March 29, 2005 would have been lower by
$25,937 and $77,807, respectively, and the net loss for the thirteen and thirty-nine weeks
ended March 29, 2004 would have been greater by $41,433 and $124,116, respectively, using
a Black-Scholes model (see Note 2).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Item 2.  Management Discussion and Analysis of Financial Condition and Rusults of OperationsOVERVIEWThe
Company, through its wholly-owned subsidiaries, provides a full array of emergency
response, remediation and disaster restoration services to a broad range of clients. The
Company has expertise in areas of hazardous materials remediation, microbial remediation,
testing, toxicology, training, wetlands restoration, wildlife and natural resources
rehabilitation, technical advisory, restoration and site renovation services.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Companys revenues are derived primarily from providing emergency response,
remediation and disaster restoration services, and its cost of revenues consists primarily
of labor and labor related costs, insurance, benefits and job-related insurance, repairs,
maintenance, equipment rental, materials and supplies, disposal costs and depreciation of
capital equipment. The Companys selling, general, and administrative expenses
primarily consist of expenses related to provisions for doubtful accounts, legal fees,
sales salaries, marketing, consulting, insurance and travel and entertainment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

| | In April 2003, the Company commenced a remediation project in New York City for Consolidated
Edison Company to remove sediment from an oil storage tank. During the course of the
project, the sediment in the tank was found to be substantially different than the
sediment that the customer represented to be in the tank prior to the inception of the
project. The Company continued to work on the project so as not to default on the terms
which it understood to exist with the customer. The additional costs incurred to remove
this matter in the amount of approximately $1,600,000 were billed to the customer.
However, the collectibility of such monies cannot be assured. Accordingly, the Company has
not recognized the revenue associated with this claim. The project has been substantially
completed and the customer has refused to acknowledge its liability for the additional
charges billed by the Company. On October 22, 2004, Trade-Winds commenced an action
against Consolidated Edison Company in the New York State Supreme Court, County of New
York, claiming that Trade-Winds is entitled to approximately $2,000,000 of contractual
billings and related damages with respect to its removal of sediment from an oil storage
tank. On December 6, 2004, Consolidated Edison Company filed an answer, denying
Trade-Winds claims. The case is currently in pre-trial discovery. As of August 30,
2004, all amounts due under the original contract had been paid to the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company has encountered slow collections of certain of its accounts receivable, and its
liquidity was severely adversely affected by its unrecouped costs incurred in connection
with the aforementioned oil storage tank project. Accordingly, the Company needed to
borrow increased amounts from Spotless. As a result of the additional borrowings, the
amount outstanding from Spotless was $5,000,000 as of March 29, 2005. The Company has
considered various alternatives to increase its liquidity. In this connection, the Company
increased its liquidity by entering into the ARFA, dated as of February 5, 2004, with
Spotless pursuant to which Spotless has purchased certain of the Companys accounts
receivable without recourse for cash, subject to certain terms and conditions. Through
September 24, 2004, the date of the last accounts receivable purchase, Spotless had
purchased an aggregate amount of our accounts receivable equaling $4,991,252 for an
aggregate purchase price of $4,080,050.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the opinion of management, the Company expects to have sufficient working capital to fund
its current operations as long as it does not encounter further difficulty collecting its
accounts receivable or experience significant growth.  However, market conditions and
their effect on the Companys liquidity may restrict the Companys use of cash.
In the event that sufficient positive cash flow from operations is not generated, the
Company may need to seek additional financing in addition to the financing contemplated by
the ARFA or otherwise. Spotless is under no contractual obligation to provide any funds.
Currently, the Company has no credit facility for additional borrowing.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spotless has informed the Company in a letter dated September 29, 2004, that, at that time, it
intended to provide only an additional $150,000 in financing to the Company pursuant to
the ARFA. Spotless has also indicated that it does not intend to provide any additional
debt or equity financing to the Company. The Company is assessing the impact, if any, of
this situation. The Companys board of directors appointed a special committee
consisting of independent director Anthony P. Towell to investigate its financing and
strategic alternatives. The special committee currently is considering available
alternatives, including a possible convertible loan from an unaffiliated third-party
investor. No assurance can be given that this transaction, or any other transaction, will
be consummated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ability to Continue as a Going Concern
The Companys accompanying consolidated financial statements have been prepared assuming
that it will continue as a going concern. They do not include any adjustments that might
result should the Company be unable to continue as a going concern, and no assurance can
be given that it will continue as a going concern.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

| | CRITICAL ACCOUNTING POLICIES
Managements discussion and analysis of its financial position and results of operations are based upon
the Companys unaudited consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of
America. The preparation of these unaudited 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. Management believes that the critical
accounting policies and areas that require the most significant judgments and estimates to
be used in the preparation of the unaudited financial statements are accounting for
contracts, allowance for doubtful accounts and the valuation allowance against deferred
tax assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Contract Accounting  Revenue derived from services provided to customers over periods of less
than one month is recognized at the completion of the related contracts. Revenue from firm
fixed price contracts that extend over periods of one month or more is recognized using
the percentage-of-completion method, measured by the percentage of costs incurred to date
compared to estimated total costs for each contract. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined. Changes
in job performance, job conditions, estimated profitability, the effect of contract
penalty provisions and final contract settlements may result in revisions to estimates of
costs and income and are recognized in the period in which the revisions are determined.
Revenues from time and material contracts that extend over a period of more than one month
are recognized as services are performed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allowance for Doubtful Accounts  The Company maintains an allowance for doubtful trade
accounts receivable for estimated losses resulting from the inability of its customers to
make required payments. In determining collectibility, the Company reviews available
customer financial information including public filings and credit reports and also
consults legal counsel to assist in determining collectibility. 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 under different assumptions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred Tax Asset Valuation Allowance  The Company records a valuation allowance to reduce
its deferred tax assets to the amount that is more likely than not to be realized. Due to
the Companys prior history of losses, the Company has recorded a full valuation
allowance against its net deferred tax assets as of March 29, 2005. The Company currently
provides for income taxes only to the extent that it expects to pay cash taxes for current
income. Should the Company be profitable in the future at levels which cause management to
conclude that it is more likely than not that it will realize all or a portion of the
deferred tax assets, the Company would record the estimated net realizable value of the
deferred tax assets at that time and would then provide for income taxes at its combined
federal and state effective rates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123 (R)) which revises SFAS No. 123
and supersedes APB No. 25. SFAS No. 123 (R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair value on the
date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure
of the income statement effects of share-based payments is no longer an alternative. SFAS
No. 123 (R) is effective for fiscal years beginning after June 15, 2005, which for the
Company is June 28, 2005 (the Effective Date). Beginning on the Effective
Date, the Company must (i) expense all options granted after the Effective Date over the
applicable vesting period, and (ii) expense the non-vested portions of existing option
grants going forward over their remaining vesting period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Compensation expense for the non-vested portions of existing option grants as of the Effective Date
will be recorded based upon the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. If
the Company applied the fair value recognition provisions of SFAS No. 123 (R), net income
for the thirteen and thirty-nine weeks ended March 29, 2005 would have been lower by
$25,937 and $77,807, respectively, and the net loss for the thirteen and thirty-nine weeks
ended March 29, 2004 would have been greater by $41,433 and $124,116, respectively, using
a Black-Scholes model (see Note 2).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | RESULTS OF OPERATIONSThirteen weeks ended March 29, 2005 and March 30, 2004
Total revenues for the thirteen weeks ended March 29, 2005 increased by $1,775,649, or 59%, to
$4,801,832 from $3,026,183 for the thirteen weeks ended March 30, 2004. This increase was
primarily attributable to increased emergency response work associated with hurricanes in
Florida.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost of Revenues
Cost of revenues decreased $1,217,258 or 26%, to $3,433,054 for the thirteen weeks ended March
29, 2005 as compared to $4,650,312 for the thirteen weeks ended March 30, 2004, primarily
due to a greater proportion of emergency response work related to hurricanes in Florida
and equipment-intensive projects with higher gross margins and a corresponding reduction
in labor costs as well as a reduction in cost overruns incurred on an oil storage tank
project in 2004 (See Note 5). Gross profit increased $2,992,907 to $1,368,778 for the
thirteen weeks ended March 29, 2005 from a gross loss of ($1,624,129) for the thirteen
weeks ended March 30, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $310,438, or 20%, to $1,210,884 for the
thirteen weeks ended March 29, 2005 from $1,521,322 for the thirteen weeks ended March 30,
2004 and constituted approximately 25% and 50%, respectively, of revenues in each period.
This decrease was primarily attributable to decreases in consulting expenses of
approximately $108,000, sales salaries of approximately $104,000 and marketing expenses of
approximately $121,000. All of these decreases were a result of management reductions in
staff and discretionary spending.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expense (Benefit) Related to Variable Accounting Treatment for Officer Options
Under the terms of an employment agreement with the Company and a separate agreement with
Spotless, the Companys President and Chief Executive Officer may sell to the
Company, or in certain circumstances to Spotless, all shares of common stock of the
Company held by him and all shares of common stock underlying vested options to purchase
shares of common stock of the Company held by him upon the occurrence of certain events.
The expense related to variable accounting treatment for officer options was $103,896 for
the thirteen weeks ended March 30, 2004. There was no benefit or expense required to be
recorded in the thirteen weeks ended March 29, 2005 due to the low market price of the
Companys common stock. The expense in the thirteen weeks ended March 30, 2004 was
due to an increase in the market price of the Companys common stock and/or a change
in the number of options outstanding that are vested. Due to the terms of the options,
changes in the market price of the Companys common stock, in either direction,
result in a corresponding expense or benefit.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest Expense
Interest expense decreased by $199,104 to $53,577 for the thirteen weeks ended March 29, 2005 from
$252,681 for the thirteen weeks ended March 30, 2004. The decrease in interest expense was
primarily attributable to decreased sales of accounts receivable to Spotless under the
ARFA.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision (Benefit) for Income Taxes
The provision for income taxes for the thirteen weeks ended March 29, 2005 was $5,449 compared
to a benefit of ($928,637) for the thirteen weeks ended March 30, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net Income
Net income of $128,759 was generated for the thirteen weeks ended March 29, 2005 as compared
to net loss of ($2,567,984) incurred for the thirteen weeks ended March 30, 2004. The
change was the result of the factors discussed above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

| | Thirty-nine weeks ended March 29, 2005 and March 30, 2004
Revenue
Total revenues for the thirty-nine weeks ended March 29, 2005 increased by $2,830,035, or 19%,
to $17,639,617 from $14,809,582 for the thirty-nine weeks ended March 30, 2004. This
increase was primarily attributable to increased emergency response work associated with
hurricanes in Florida.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost of Revenues
Cost of revenues decreased $1,324,920 or 10%, to $12,165,045 for the thirty-nine weeks ended
March 29, 2005 as compared to $13,489,965 for the thirty-nine weeks ended March 30, 2004,
primarily due to a greater proportion of emergency response work related to the hurricanes
in Florida and equipment-intensive projects with higher gross margins and a corresponding
reduction in labor costs as well as a reduction in cost overruns incurred on an oil
storage tank project in 2004 (See Note 5). Gross profit increased $4,154,955 to $5,474,572
for the thirty-nine weeks ended March 29, 2005 from $1,319,617 for the thirty-nine weeks
ended March 30, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $18,553, or 0%, to $3,946,334 for the
thirty-nine weeks ended March 29, 2005 from $3,927,781 for the thirty-nine weeks ended
March 30, 2004 and constituted approximately 22% and 27%, respectively, of revenues in
each period. This increase was primarily attributable to increases in bad debt expense of
approximately $550,000 and legal expenses of approximately $228,000, offset by decreases
in sales salaries and sales travel and entertainment of approximately $356,000, marketing
expenses of approximately $235,000 and consulting expenses of approximately $168,000. All
of these decreases were a result of management reductions in staff and discretionary
spending.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Benefit Related to Variable Accounting Treatment for Officer Options
Under the terms of an employment agreement with the Company and a separate agreement with
Spotless, the Companys President and Chief Executive Officer may sell to the
Company, or in certain circumstances to Spotless, all shares of common stock of the
Company held by him and all shares of common stock underlying vested options to purchase
shares of common stock of the Company held by him upon the occurrence of certain events.
The benefit related to variable accounting treatment for officer options was $244,729 for
the thirty-nine weeks ended March 30, 2004. There was no benefit or expense required to be
recorded in the thirty-nine weeks ended March 29, 2005 due to the low market price of the
Companys common stock. The benefit in the thirty-nine weeks ended March 30, 2004 was
due to a decrease in the market price of the Companys common stock and/or a change
in the number of options outstanding that are vested. Due to the terms of the options,
changes in the market price of the Companys common stock, in either direction,
result in a corresponding expense or benefit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest Expense
Interest expense increased by $7,705 to $320,033 for the thirty-nine weeks ended March 29, 2005
from $312,328 for the thirty-nine weeks ended March 30, 2004. The increase in interest
expense was primarily attributable to greater amounts of debt
outstanding resulting from increased borrowings from Spotless for working capital. For the
thirty-nine weeks ended March 29, 2005 and March 30, 2004, the Company incurred
approximately $146,000 and $208,000, respectively, of discounts and fees associated with
the sale of accounts receivable under the ARFA.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision (Benefit) for Income Taxes
The provision for income taxes for the thirty-nine weeks ended March 29, 2005 was $51,697
compared to a benefit of $750,000 for the thirty-nine weeks ended March 30, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

| | Net Income
Net income of $1,187,953 was incurred for the thirty-nine weeks ended March 29, 2005 as
compared to net loss of $1,896,396 incurred for the thirty-nine weeks ended March 30,
2004. The change was the result of the factors discussed above.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | LIQUIDITY AND CAPITAL RESOURCES
As of March 29, 2005, the Company had a cash balance of $791,699, working capital deficit of
$(629,012) and stockholders equity of $341,498. As of June 29, 2004, the Company had
a cash balance of $63,562, working capital deficit of $(2,103,971) and stockholders
deficit of $(787,955). Historically, the Company has financed its operations primarily
through issuance of debt and equity securities, through short-term borrowings from its
majority shareholder, Spotless, and through cash generated from operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the opinion of management, the Company expects to have sufficient working capital to fund
its current operations as long as it does not encounter further difficulty collecting its
accounts receivable or experience significant growth.  However, market conditions and
their effect on the Companys liquidity may restrict the Companys use of cash.
In the event that sufficient positive cash flow from operations is not generated, the
Company may need to seek additional financing in addition to the financing contemplated by
the ARFA or otherwise. Spotless is under no contractual obligation to provide any funds.
Currently, the Company has no credit facility for additional borrowing.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Spotless has informed the Company in a letter dated September 29, 2004, that, at that time, it
intended to provide only an additional $150,000 in financing to the Company pursuant to
the ARFA. Spotless has also indicated that it does not intend to provide any additional
debt or equity financing to the Company. The Company is assessing the impact, if any, of
this situation. The Companys board of directors appointed a special committee
consisting of independent director Anthony P. Towell to investigate its financing and
strategic alternatives. The special committee currently is considering available
alternatives, including a possible convertible loan from an unaffiliated third-party
investor. No assurance can be given that this transaction, or any other transaction, will
be consummated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under the ARFA, Spotless may, but is not obligated to, purchase one or more of the
Companys accounts receivable that are approved by Spotless in its sole discretion,
in respect of the particular debtor, invoices and related credit. As part of the
agreement, Spotless may purchase any accounts receivable at a 15% discount to invoice
prices, which the Company believes is at least as favorable to it as would be available
from an unaffiliated third-party, based upon a good-faith estimate of an applicable
discount negotiated at arms length, as may be adjusted by Spotless in its sole
discretion. In this regards, all of Spotless purchases have been made at 15%
discount except one made in April 2004 for the amount of $711,450 in relation to an
account receivable balance of $1,028,194, which constituted a 31% discount. In addition,
the Company pays varying monthly discount fees on any purchased accounts receivable based
upon invoice prices. All discounts and fees under the ARFA are characterized as interest
expense. For the thirty-nine weeks ended March 29, 2005, the Company has incurred
approximately $169,000 of such discounts and fees. Further, the Company (a) manages any
accounts receivable that it sells to Spotless while remitting to Spotless any proceeds
received and (b) bears any related litigation costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As of March 29, 2005, the Company owed Spotless $5,000,000 in short-term loans to fund
working capital. During the thirty-nine weeks ended March 29, 2005, the Company did not
make any repayments to Spotless. All current borrowings from Spotless bear interest at the
London Interbank Offering Rate (LIBOR) plus 1 percent (3.24% at March 29,
2005) and are secured by all of the Companys assets. As of March 29, 2005, interest
of $75,316 was accrued and unpaid on these borrowings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

| | Net cash provided by operating activities was $1,042,559 for the thirty-nine weeks ended March
29, 2005 as compared to net cash used in operations of $2,429,973 for the thirty-nine
weeks ended March 30, 2004. Accounts receivable increased by $1,441,666 for the
thirty-nine weeks ended March 29, 2005 as a result of increased revenues primarily related
to the hurricanes in Florida. Accounts receivable increased by $2,338,466 for the
thirty-nine weeks ended March 30, 2004 due to hurricane-related work and difficulties with
cash collections. Refundable income taxes decreased by $641,795 and $330,186 for the
thirty-nine weeks ended March 29, 2005 and March 30, 2004, respectively, due to the
receipt of federal income tax refunds. Accounts payable and accrued expenses decreased by
$715,309 for the thirty-nine weeks ended March 29, 2005 as a result of increased cash
collections from customers which allowed for repayment of outstanding vendor balances.
Accounts payable and accrued expenses increased by $396,273 for the thirty-nine weeks ended
March 30, 2004 as a result of the Companys cash collections difficulties which
resulted in slower payments to vendors.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
used for capital expenditures was $83,303 during the thirty-nine weeks ended March 29,
2005 as compared to $714,701 for the thirty-nine weeks ended March 30, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financing
activities for the thirty-nine weeks ended March 29, 2005 used net cash of $231,119 for
repayments of long-term debt. Financing activities for the thirty-nine weeks ended March
30, 2004 provided net cash of $3,249,764. This amount included repayments of long-term
debt of $323,769, proceeds from long-term debt borrowings of $312,533, proceeds from
borrowings from Spotless of $3,300,000 and payments of preferred stock dividends of
$39,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys liquidity was severely adversely affected by its unrecouped costs incurred
in connection with an oil storage tank project. The Company believes that it will be
successful in collecting for this project, but no assurance can be given as to the timing
or amount of any such recovery. Management believes the Company will require positive cash
flow from operations to meet its working capital needs over the next twelve months unless
the Company successfully obtains debt or equity financing from a third party. In the event
that positive cash flow from operations is not generated, the Company may be required to
seek additional financing to meet its working capital needs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | So
long as the Company has sufficient working capital, it anticipates continued revenue
growth in new and existing service areas and continues to bid on large projects, though
there can be no assurance that any of the Companys bids will be accepted or that it
will have sufficient working capital. The Company is striving to improve its gross margin
and control its selling, general and administrative expenses. In this regard, in fiscal
2005 the Company has reduced its expenses, including those relating to marketing, at an
annualized rate of approximately $2 million. There can be no assurance, however, that
changes in the Companys plans or other events affecting the Companys
operations will not result in accelerated or unexpected cash requirements, or that it will
continue to be successful in achieving positive cash flow from operations or in obtaining
additional financing. The Companys future cash requirements are expected to depend
on numerous factors, including, but not limited to: (a) the ability to obtain
environmental or related construction contracts, (b) the ability to generate positive cash
flow from operations, and the extent thereof, (c) the ability to raise additional capital
or obtain additional financing, and (d) economic conditions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
table below summarizes contractual obligations and commitments as of March 29, 2005:

|                               
|-------------------------------
|Operating leases               
|Long-term debt                 
|Series A redeemable convertible
|preferred stock                
|Short-term notes payable to    
|related party                  
|                               

| | Excludes interest expense associated with the short-term notes payable because such notes are due
on demand. Interest rate is LIBOR plus 1% (3.24% at March 29, 2005).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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| | OFF-BALANCE SHEET ARRANGEMENTSINFLATIONInflation
has not had a material impact on the Companys operations over the past three fiscal
years or during the thirty-nine weeks ended March 29, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SEASONALITYSince
the Company and its subsidiaries are able to perform their services throughout the year,
the business is not considered seasonal in nature. However, it is affected by the timing
of large contracts in certain of its service areas, i.e., asbestos and mold abatement and
construction, as well as the timing of catastrophes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FORWARD-LOOKING STATEMENTSStatements
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 Exchange Act.
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 the Companys best estimates of
future results, performance or achievement, based upon current conditions and the most
recent results of operations. Forward-looking statements may be identified by the use of
forward-looking terminology such as may, will, expect,
believe, estimate, anticipate, continue or
similar terms, variations of those terms or the negative of those terms. Potential risks
and uncertainties include, among other things, such factors as:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |     the market acceptance and amount of sales of the Companys services,
   the Companys success in increasing revenues and reducing expenses,
   the frequency and magnitude of environmental disasters or disruptions resulting in the need for the types
 of services     the Company provides,
   the extent of the enactment, enforcement and strict interpretations of laws relating to environmental
remediation,
   the competitive environment within the industries in which the Company operates,
   the Companys ability to raise additional capital, 
   the Companys ability to continue as a going concern, 
   the Companys ability to effectively implement and maintain its internal controls and procedures, 
   the Companys ability to attract and retain qualified personnel, and 
   the other factors and information disclosed and discussed in other sections of this Quarterly Report on Form 10-K
for the     fiscal year ended June 29, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investors
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. The Company undertakes 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 the Companys 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 the Companys annual report on Form
10-K for the period ended June 29, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| | Item 3. Quantitative and Qualitative Disclosure about Market RiskThe
Company is exposed to potential loss from market risks that may occur as a result of
changes in the market price of the Companys common stock (with respect to the
variable accounting treatment of a put option for shares of common stock and common stock
options held by an officer of the Company) and as a result of changes in interest rates
(primarily with respect to its debt obligations to Spotless). There have been no material
changes to the nature of Companys market risks since the Companys Annual
Report on Form 10-K for the period ended June 29, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Item 4. Controls and ProceduresAs
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 the Companys principal
executive and financial officers of the effectiveness of the design and operation of the
Companys 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. During the thirteen week period ended September 28, 2004, in order to
address recurring issues relating to revenue recognition and allocation of expenses
associated with the Companys contract and billing procedures which include, but are
not limited to, direct participation by the Companys chief executive officer in
customer invoice preparation and the evaluation of the accuracy of vendor invoices, the
audit committee appointed a task force to assist management in addressing these matters,
and the Company continues to implement changes to its internal controls and procedures
under the supervision of the chief executive officer. In connection with the preparation
of this report, the Company became aware of the existence of a contract that had not been
properly reported internally as prescribed by the Company's internal disclosure controls
and procedures guidelines.  Upon review of the contract, management concluded that it did not
relate to a material transaction.  The audit committee assessed this matter and took remedial
action, which included a request to its task force to address issues associated with
facilitating compliance with the Company's internal disclosure controls ad procedures.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company continues to assign high priority to the short-term and long-term correction of
its internal control weaknesses, and will continue to evaluate the effectiveness of its
internal controls and procedures on an on-going basis and will take further action as
might be appropriate. Other than implementing the improvements discussed above, there were
no significant changes in internal controls or other factors that could significantly
affect these internal controls.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the foregoing, the Companys principal executive and financial
officers have concluded that, except as noted above, and subject to the inherent
limitations in all control systems, the Companys current disclosure controls and
procedures were effective as of the end of the period covered by this quarterly report to
ensure that information that is required to be disclosed in the reports the Company files
or submits 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 the Company is 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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# PART 2  OTHER
INFORMATION

Item 1.
                   
               Legal Proceedings

| | On
August 5, 2004, Trade-Winds commenced an action against the New York City Economic
Development Corporation (the EDC) in the New York State Supreme Court, County
of New York, claiming that Trade-Winds is entitled to approximately $1,255,000 of
contractual billings relating to a large roof tar removal project. On October 15, 2004,
the EDC filed an answer, denying Trade-Winds claims. On November 4, 2004, the EDC
filed an amended answer denying Trade-Winds claims and asserting counterclaims. The
case is currently in pre-trial discovery.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 22, 2004, Trade-Winds commenced an action against Consolidated Edison Company in
the New York State Supreme Court, County of New York, claiming that Trade-Winds is
entitled to approximately $2,000,000 of contractual billings and related damages with
respect to its removal of sediment from an oil storage tank. On December 6, 2004,
Consolidated Edison Company filed an answer, denying Trade-Winds claims. The case is
currently in pre-trial discovery.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item
2.                 
              
     Unregistered Sales of Equity Securities and Use of Proceeds
                       
                 
                   
              Not applicable.

Item 3.                  
                    Defaults upon Senior Securities

| | The
Company is required to pay quarterly dividends on its Series A Convertible Preferred
Stock, par value $.01 per share (the Series A Preferred), which dividends
accrue from the initial date of issuance of the Series A
Preferred, are cumulative and, if not paid when due, bear interest on the
unpaid amount of the past due dividends at the prime rate published in The Wall
Street Journal on the date the dividend was payable, plus 3%. The Company is
currently in arrears on its Series A Preferred dividend payments and interest thereon
in the aggregate amount of approximately $102,000 due to a lack of available cash. Under
the terms of the Companys Certificate of Designations of the Series A Preferred, if
the Company fails to make any four consecutive quarterly dividend payments on the Series A
Preferred, the majority in interest of the holders of the Series A Preferred have the
right to elect a second director to the Companys board of directors, to
serve as a director until such accrued and unpaid dividends have been paid in full. The
Company failed to pay its fifth consecutive quarterly dividend payment on March 15, 2005
to the holders of the Series A Preferred. The majority in interest of the holders of the
Series A Preferred has not exercised the right to elect a second director to the
Companys board of directors. There can be no assurance when or if the Company will
make any Series A Preferred dividend payments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 4.        
          
           
      Submission of Matters to a Vote of Security Holders
                       
                 
                   
                Not applicable.

Item 5.        
          
           
      Other Information
                       
                 
                   
               Not applicable.

18

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Item 6.        
          
           
Exhibits
                       
                 
                   
         The following exhibits are included as part of this report:                       
                 
                   
         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.

19

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# 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: May 13, 2005 | By:/s/ Michael O'Reilly
|------------------ | -----------------------

| | MICHAEL O'REILLY
| | ----------------

| | President and Chief Executive Officer
| | -------------------------------------

| | (Principal Executive Officer)
| | -----------------------------

|Date: May 13, 2005 | By:/s/ Charles Kelly, Jr.
|------------------ | -------------------------

| | CHARLES KELLY, JR.
| | ------------------

| | Chief Financial Officer
| | -----------------------

| | (Principal Financial Officer)
| | -----------------------------