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

                                   FORM 10-Q/A
                                 Amendment No. 1

(Mark One)

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

      For the quarterly period ended December 27, 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: 0-17072

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

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

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

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

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

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

Large accelerated filer |_|   Accelerated filer |_|   Non-accelerated filer |X|

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

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

The number of shares of Common Stock, par value $.0001, outstanding on January
27, 2006 was 33,571,215.

<PAGE>

                                EXPLANATORY NOTE

      This Amendment No.1 on Form 10-Q/A amends and restates certain disclosure
items, including financial statements, in our Quarterly Report on Form 10-Q for
the quarter ended December 27, 2005, which form was filed on February 8, 2006.
We are filing this Amendment No. 1 principally to revise the accounting for the
debt and equity instruments issued to Laurus Master Fund, Ltd. ("Laurus") in
connection with our transactions with them on June 30, 2005. Specifically, we
have applied derivative accounting to account for certain embedded derivatives,
whose recognition was required due to an insufficiency of authorized common
shares existing as of June 30, 2005 and continuing through September 30, 2006.
On September 29, 2006, we executed an Omnibus Amendment with Laurus amending the
terms of our agreements with Laurus (the "Omnibus Amendment") and pursuant
thereto issued to Laurus an amended and restated secured and convertible term
note (the "Amended Note"). By virtue of certain provisions in the Omnibus
Amendment and the Amended Note which significantly reduce the number of shares
potentially issuable to Laurus, as of September 29, 2006, and through the date
of the filing of this Amendment, we have a sufficient number of authorized
shares to issue in the event that all of the derivative securities issued by us
are exercised or converted. As a result, we believe that we will no longer have
to apply derivative accounting. We anticipate that in our Form 10-Q for the
three months ended September 30, 2006, the applicable derivative liability
balances will be credited to equity.

      Options and warrants issued to Laurus, which were previously recorded in
equity, after an allocation of the debt proceeds between such instruments and
the convertible note held by Laurus, have now been recorded as derivative
liabilities. In addition, we have recognized a derivative liability related to
the convertible note itself. The derivative liabilities, the calculation of
which required significant estimates and projections of future events, are being
marked to market based on the change in our common stock prices as well as other
complex factors. The accounting for these embedded derivatives is discussed in
the notes to the consolidated financial statements as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations in this
Form 10-Q/A-1.

      We identified the need for this amendment in connection with answering
responses to comment letters that we received from the Securities and Exchange
Commission relating to its review of our Registration Statement on Form S-1,
which we originally filed on October 3, 2005. We withdrew such Registration
Statement on July 7, 2006.

      In the process of preparing this amendment (as well as the second
amendment to our quarterly report for the previous quarterly period), we
discovered that we had not adopted Statement of Financial Accounting Standards
No. 123 (Revised), Share-Based Payments ("SFAS N0 123R") until the third quarter
of fiscal 2006. SFAS No. 123R was required to be adopted at the beginning of our
fiscal year. Such adoption reflects in the statement of operations for the
current year the pro-forma expense which was previously required to be disclosed
in the footnotes. Also, the amount now included in operations includes the cost
of employment-related options issued to our chief executive officer in the first
quarter. The previous pro-forma disclosure incorrectly omitted such cost. See
Note 3 to the consolidated financial statements.

      On October 5, 2006, we filed a Form 8-K disclosing that we would be
amending each of the three quarterly reports on Form 10-Q we filed for the
fiscal year ended June 30, 2006. Such Form 8-K included the relevant reasons for
the restatements and other related disclosures. The Form 8-K also describes the
Omnibus Amendment and the Amended Note.

      We are filing amended quarterly reports on Form 10-Q for the first and
third quarters of fiscal 2006.

      We have included as exhibits to this amendment new certifications of our
principal executive officer and principal financial officer and accounting
officer.

      The remaining items contained within this Amendment No. 1 consist of all
other items originally contained in our Quarterly Report on Form 10-Q for the
quarter ended December 27, 2005 substantially in the form filed with the
Securities and Exchange Commission on February 8, 2006. Therefore, you should
read this amendment together with other reports and documents that we have filed
with the Securities and Exchange Commission subsequent to the filing of that
form, bearing in mind however, that we recently withdrew our Registration
Statement on Form S-1. Except as expressly stated herein, this report continues
to speak as of the date of the original filing and we have not updated the
disclosures in this report to speak as of any later date. Information in those
other reports and documents updates and supersedes some of the information
contained in this Amendment. You should not deem the filing of this amendment to
be an admission that our Form 10-Q filed on February 8, 2006, when made,
included any known, untrue statement of material fact or knowingly omitted to
state a material fact necessary to make a statement in such filing not
misleading.


                                        2

<PAGE>

                         PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

                       WINDSWEPT ENVIRONMENTAL GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS
                       DECEMBER 27, 2005 AND JUNE 28, 2005

<TABLE>
<CAPTION>
                                                                                December 27,     June 28,
                                                                                    2005          2005
                                                                                ------------   ------------
                                                                                 (unaudited)    (restated)
                                                                                 (restated)
<S>                                                                             <C>            <C>
ASSETS:
CURRENT ASSETS:
  Cash                                                                          $  2,494,266   $    512,711
  Accounts receivable, net of allowance for doubtful accounts of $2,757,831
    and $1,507,831, Respectively                                                  13,182,621      6,755,338
  Inventory                                                                          202,950        146,079
  Costs and estimated earnings in excess of billings on uncompleted contracts        215,997         30,466
  Prepaid expenses and other current assets                                          394,773         47,253
                                                                                ------------   ------------
  Total current assets                                                            16,490,607      7,491,847
                                                                                ------------   ------------
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
  $6,739,039 and $6,386,731, respectively                                          2,986,156      2,242,645
                                                                                ------------   ------------
OTHER ASSETS
  Deferred financing costs                                                         2,966,840             --
  Other                                                                              170,000        322,046
                                                                                ------------   ------------
  Total other assets                                                               3,136,840        322,046
                                                                                ------------   ------------
TOTAL                                                                           $ 22,613,603   $ 10,056,538
                                                                                ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
  Embedded derivative liabilities                                               $  6,354,094   $         --
  Accounts payable                                                                 1,985,409      1,174,840
  Liability for repurchased accounts receivable                                      189,197             --
  Accrued expenses                                                                 1,575,391      1,611,256
  Secured note payable to a related party                                                 --      5,000,000
  Secured convertible note payable                                                 1,203,306             --
  Billings in excess of cost and estimated earnings on uncompleted contracts          62,350         83,316
  Accrued payroll and related fringe benefits                                        520,715        528,867
  Current maturities of long-term debt                                               207,805        169,612
  Income taxes payable                                                             4,140,361        138,579
  Other current liabilities                                                          686,809        489,468
                                                                                ------------   ------------
  Total current liabilities                                                       16,925,437      9,195,938
                                                                                ------------   ------------
LONG-TERM DEBT:
  Secured note payable                                                               500,000             --
  Other                                                                              216,118        197,400
                                                                                ------------   ------------
  Total long-term debt                                                               716,118        197,400
                                                                                ------------   ------------
COMMITMENTS AND CONTINGENCIES
  Redeemable Common Stock                                                                 --         76,089
                                                                                ------------   ------------
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $.01 par value; 1,300,000
  shares authorized and outstanding at December 27, 2005 and June 28, 2005         1,300,000      1,300,000
                                                                                ------------   ------------
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 December 27, 2005 and June 28, 2005                           --             --
  Common stock, $.0001 par value; 150,000,000 shares authorized; 33,571,215
    shares outstanding at December 27, 2005 and 77,936,358 shares outstanding
    at June 28, 2005.                                                                  3,357          7,794
  Additional paid-in-capital                                                      38,384,084     33,944,017
  Accumulated deficit                                                            (34,715,393)   (34,664,700)
                                                                                ------------   ------------
  Total stockholders' equity (deficit)                                             3,672,048       (712,889)
                                                                                ------------   ------------
TOTAL                                                                           $ 22,613,603   $ 10,056,538
                                                                                ============   ============
</TABLE>

                 See notes to consolidated financial statements.


                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                       Thirteen Weeks Ended         Twenty-Six Weeks Ended
                                                   ---------------------------   ---------------------------
                                                   December 27,   December 28,   December 27,   December 28,
                                                       2005           2004           2005           2004
                                                   ------------   ------------   ------------   ------------
                                                     Restated                      Restated
<S>                                                <C>             <C>           <C>             <C>
Revenues                                           $ 17,714,342    $ 7,359,279   $ 22,878,681    $12,837,785
Cost of revenues                                      8,190,710      4,369,867     12,575,980      8,731,991
                                                   ------------    -----------   ------------    -----------
Gross profit                                          9,523,632      2,989,412     10,302,701      4,105,794
                                                   ------------    -----------   ------------    -----------
Operating expenses:
Selling, general and administrative expenses          2,559,551      1,502,846      5,460,094      2,735,450
                                                   ------------    -----------   ------------    -----------
Income from operations                                6,964,081      1,486,566      4,842,607      1,370,344
                                                   ------------    -----------   ------------    -----------
Other expense (income):
  Mark-to-market gain on embedded derivative
    Liabilities                                     (22,191,192)            --     (1,191,633)            --
  Interest expense                                    1,032,437         55,352      2,445,217        120,610
  Purchase discounts and financing fees paid to
    related party                                            --             --             --        145,846
  Loss on partial extinguishment of embedded
    derivative option liability arising from
    exercise of options                                      --             --        449,850             --
  Other expense (income), net                               456           (755)        22,510         (1,322)
                                                   ------------    -----------   ------------    -----------
  Total other expense (income)                      (21,158,299)        54,597      1,725,944        265,134
                                                   ------------    -----------   ------------    -----------
Income before provision for income taxes             28,122,380      1,431,969      3,116,663      1,105,210
Provision for income taxes                            3,159,138         43,659      3,167,356         46,248
                                                   ------------    -----------   ------------    -----------
Net income (loss)                                    24,963,242      1,388,310        (50,693)     1,058,962
Dividends on preferred stock                             19,500         19,500         39,000         39,000
                                                   ------------    -----------   ------------    -----------
Net income (loss) attributable to common
  Shareholders                                     $ 24,943,742    $ 1,368,810   $    (89,693)   $ 1,019,962
                                                   ============    ===========   ============    ===========
Basic and diluted net income per common share:
Basic                                              $       0.74    $      0.02   $       0.00    $      0.01
                                                   ============    ===========   ============    ===========
Diluted                                            $       0.17    $      0.02   $       0.00    $      0.01
                                                   ============    ===========   ============    ===========
Weighted average number of common shares
  outstanding:
Basic                                                33,571,215     77,936,358     33,229,815     77,936,358
                                                   ============    ===========   ============    ===========
Diluted                                             150,000,000     77,961,149     33,229,815     77,980,720
                                                   ============    ===========   ============    ===========
</TABLE>

                 See notes to consolidated financial statements.


                                        4

<PAGE>

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

<TABLE>
<CAPTION>
                                                    Common Stock
                                              -----------------------    Additional
                                               Number of                  Paid-in      Accumulated
                                                 Shares     Par Value     Capital        Deficit        Total
                                              -----------   ---------   -----------   ------------   ----------
<S>                                           <C>             <C>       <C>           <C>            <C>
Balance at June 28, 2005                       77,936,358     $7,794    $33,944,017   $(34,664,700)  $ (712,889)
Spotless Transactions:
    Cancellation of Spotless
    shares, net of shares
    sold to Michael O'Reilly                  (45,865,143)    (4,587)         4,587             --           --
    Early extinguishment of
    Spotless Note, accrued
    interest and
    administrative fees (net
    of tax effect of $731,640)                         --         --      1,230,228             --    1,230,228
    Additional taxes
    attributable to
    cancellation of Spotless
    debt                                               --         --       (107,434)            --     (107,434)
    Surrender of Redemption
    Right with respect to
    Common Stock                                       --         --         76,089             --       76,089
    Value of Spotless shares
    sold to Michael O'Reilly
    less consideration                                 --         --      1,195,708             --    1,195,708
Options granted to preferred stockholders
  for forbearance of mandatory
  redemption and dividends                             --         --         44,650             --       44,650
Exercise of 1,500,000 options that had been
  included in embedded option derivative
  liability, recorded at market value at
  date of exercise                              1,500,000        150        584,850             --      585,000
Stock-based compensation                               --         --      1,450,389             --    1,450,389
Dividends on Series A preferred stock                  --         --        (39,000)            --      (39,000)
Net loss                                               --         --             --        (50,693)     (50,693)
                                              -----------     ------    -----------   ------------   ----------
Balance at December 27, 2005                   33,571,215     $3,357    $38,384,084   $(34,715,393)  $3,672,048
                                              ===========     ======    ===========   ============   ==========
</TABLE>

                 See notes to consolidated financial statements.


                                        5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Twenty-Six Weeks Ended
                                                                                   ---------------------------
                                                                                   December 27,   December 28,
                                                                                       2005           2004
                                                                                   ------------   ------------
                                                                                    (Restated)
<S>                                                                                 <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                                 $   (50,693)   $ 1,058,962
  Adjustments to reconcile to net cash provided by operating activities:
    Mark-to-market income on embedded derivative liabilities                         (1,191,633)            --
    Non-cash interest expense on convertible secured note                               902,506             --
    Loss on exercise of 1,500,000 options                                               449,850             --
    Depreciation and amortization                                                       352,308        331,053
    Provision for doubtful accounts, net                                              1,250,000        711,594
    Amortization of deferred financing cost                                             587,690             --
    Amortization of discount on secured convertible note                                631,517             --
    Stock-based compensation                                                          1,450,389             --
  Changes in operating assets and liabilities:
    Accounts receivable                                                              (7,488,086)    (4,175,461)
    Inventory                                                                           (56,871)        31,889
    Costs and estimated earnings in excess of billings on uncompleted contracts        (185,531)        48,003
    Income taxes payable/refunds receivable                                           3,140,989        641,795
    Prepaid expenses and other current assets                                          (347,520)        50,908
    Other assets                                                                        152,046         28,000
    Accounts payable and accrued expenses                                               886,573      1,379,494
    Accrued payroll and related fringe benefits                                          (8,152)       (19,326)
    Other current liabilities                                                           133,532        613,807
    Billings in excess of costs and estimated earnings on uncompleted contracts         (20,966)      (227,430)
                                                                                    -----------    -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                               587,948        473,288
                                                                                    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                  (938,756)       (56,011)
                                                                                    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments of long-term debt                                                 (100,152)      (134,508)
  Proceeds from long-term debt                                                          157,063             --
  Exercise of stock options                                                                 150             --
  Payments for deferred financing costs                                              (2,312,830)            --
  Repayment of secured note payable to a related party                               (2,761,868)            --
  Proceeds from secured notes payable                                                 7,350,000             --
                                                                                    -----------    -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                   2,332,363       (134,508)
                                                                                    -----------    -----------
NET INCREASE IN CASH                                                                  1,981,555        282,769
CASH - BEGINNING OF PERIOD                                                              512,711         63,562
                                                                                    -----------    -----------
CASH - END OF PERIOD                                                                $ 2,494,266    $   346,331
                                                                                    ===========    ===========
Cash paid during the period for:
  Interest                                                                          $    91,477    $   190,098
                                                                                    ===========    ===========
  Income taxes                                                                      $        --    $     2,250
                                                                                    ===========    ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
  Recognition of embedded derivative liabilities                                    $ 7,680,727    $        --
                                                                                    ===========    ===========
  Recognition of discount on secured convertible note                               $ 6,778,211    $        --
                                                                                    ===========    ===========
  Capitalized gain on extinguishment of secured note payable - related party        $ 1,122,794    $        --
                                                                                    ===========    ===========
  Financing cost for CEO guarantee remunerated through sale of discounted shares    $ 1,195,708    $        --
                                                                                    ===========    ===========
  Account receivable repurchased in connection with refinancing                     $   189,197    $        --
                                                                                    ===========    ===========
  Property and equipment acquired through financing                                 $   157,063    $        --
                                                                                    ===========    ===========
  Paid-in capital arising from reduction in derivative option liability on
    option exercise                                                                 $   135,000    $        --
                                                                                    ===========    ===========
  Capitalized cancellation of put right relating to redeemable common stock         $    76,089    $        --
                                                                                    ===========    ===========
  Financing cost related to issuance of options to preferred stockholders           $    44,650    $        --
                                                                                    ===========    ===========
</TABLE>

                 See notes to consolidated financial statements.


                                        6

<PAGE>

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

1.    BASIS FOR PRESENTATION - The accompanying unaudited consolidated financial
      statements include the accounts of Windswept Environmental Group, Inc.
      (the "Company") and its subsidiaries, Trade-Winds Environmental
      Restoration, Inc. ("Trade-Winds") and North Atlantic Laboratories, Inc.
      All intercompany accounts and transactions have been eliminated in
      consolidation. The unaudited consolidated financial statements have been
      prepared by the Company in accordance with accounting principles generally
      accepted in the United States of America ("generally accepted accounting
      principles") for interim financial statements and with the instructions to
      Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
      include all of the information and footnotes required by generally
      accepted accounting principles for complete financial statements. In the
      opinion of the Company, all adjustments (consisting of only normal and
      recurring accruals) considered necessary to present fairly the financial
      position of the Company and its subsidiaries on a consolidated basis as of
      December 27, 2005, the results of operations for the thirteen and
      twenty-six weeks ended December 27, 2005 and December 28, 2004 and cash
      flows for the twenty-six weeks ended December 27, 2005 and December 28,
      2004, have been included. Certain prior period amounts have been
      reclassified to conform to the December 27, 2005 presentation.

      The results for the thirteen and twenty-six weeks ended December 27, 2005
      are not necessarily indicative of the results for an entire year. These
      unaudited consolidated financial statements should be read in conjunction
      with the Company's audited consolidated financial statements and notes
      thereto included in the Company's Form 10-K for the fiscal year ended June
      28, 2005, as amended.

      The accompanying consolidated financial statements have been prepared
      assuming that the Company will continue as a going concern. The Company
      has incurred recurring losses from operations, has limited working capital
      and stockholders' equity, and is experiencing difficulty in generating
      sufficient cash flow to meet its obligations and sustain its operations,
      which raises substantial doubt about the Company's ability to continue as
      a going concern. Management's plans in regard to these matters are also
      described in Note 7. The consolidated financial statements do not include
      any adjustments that might result from the outcome of this uncertainty.

2.    RESTATEMENT - As more fully described in Note 7, on June 30, 2005, the
      Company entered into a financing transaction with Laurus Master Fund, Ltd.
      ("Laurus") pursuant to the terms of a securities purchase agreement and
      related documents, as subsequently amended. An integral part of the
      transaction, among others, was the issuance to Laurus of an option to
      purchase 30,395,179 shares of common stock, exercisable at $0.0001 per
      share, and a warrant to purchase 13,750,000 shares of common stock,
      exercisable at $0.10 per share.

      The Company initially recognized the value of these equity instruments in
      accordance with Accounting Principles Board Opinion No. 14 and Emerging
      Issues Task Force (EITF) Consensuses 98-5 and 00-27. Under such method,
      the intrinsic value of the options and the fair value of the warrant were
      calculated and the proportionate values of the resulting debt and equity
      components were recognized as debt discounts with equivalent credits to
      equity. The beneficial conversion features of the warrant, including the
      effective values under EITF 00-27, were also recognized. All of the
      discounts were initially being amortized over the life of the debt in
      accordance with the latter pronouncement.

      The Company has now determined that principally due to an insufficiency of
      authorized common shares existing at June 30, 2005 and continuing through
      September 29, 2006, as well as the nature of various terms in the secured
      convertible note and related agreements, the initial approach to the
      accounting for the equity instruments as well as the secured convertible
      note issued to Laurus itself was incorrect. In accordance with SFAS No.
      133, Accounting for Derivatives and Hedging Activities, and EITF Consensus
      05-2, such insufficiency of authorized common shares as well as the
      potential future actions by the lender/holder prohibits the recognition of
      the option and warrant in equity, thereby relegating them to liability
      classification with embedded derivatives. Further, the attributes of the
      secured convertible note, together with the authorized share
      insufficiency, requires application of derivative accounting to account
      for the resulting embedded derivative in the note as well as those
      embedded in the option and the warrant. These derivative liabilities, the
      measurement of which requires significant estimates and projections of
      future events, are being marked to market based on the change in the
      Company's common stock prices as well as other complex factors, discussed
      in Note 7.

      If the authorized share deficiency ceases to apply, the applicable
      derivative balances will be credited to equity. The Company believes that
      by virtue of the Omnibus Amendment, dated September 29, 2006, entered into
      between Laurus and the Company, as well as the amended and restated
      secured convertible term note issued to Laurus pursuant thereto, the
      authorized number of shares is sufficient. See Explanatory Note.


                                        7

<PAGE>

      The Company has also restated its financial statements to record $56,250
      and $1,450,389 of stock-based compensation expense, respectively, for the
      thirteen and twenty-six weeks ended December 27, 2005 reflecting both the
      adoption of SFAS No. 123R at the beginning of the current fiscal and the
      inclusion therein of employment-related stock options issued to the
      Company's chief executive officer. See Note 3.

      At December 27, 2005, the effects of the restatement on our balance sheet
      are as follows:

<TABLE>
<CAPTION>
                                      As Previously   Restatement    As Restated
Financial Statement Caption             Presented      Adjustment      Herein
-----------------------------------   -------------   -----------   ------------
                                                        Increase
                                                       (Decrease)
<S>                                    <C>            <C>           <C>
Balance Sheet
Current Assets                         $ 16,490,607   $        --   $ 16,490,607
                                       ------------   -----------   ------------
Total Assets                           $ 22,613,603   $        --   $ 22,613,603
                                       ============   ===========   ============
Current Liabilities:
  Embedded derivative liabilities      $         --   $ 6,354,094   $  6,354,094
  Secured convertible debenture             413,234       790,072      1,203,306
                                       ------------   -----------   ------------
Total Current Liabilities                 9,781,271     7,144,166     16,925,437
Long-Term Liabilities
  Secured convertible debenture             813,249      (813,249)            --
                                       ------------   -----------   ------------
Total Liabilities                        11,310,638     6,330,917     17,641,555
                                       ------------   -----------   ------------
Stockholders' Equity:
  Common stock                                3,375           (18)         3,357
  Additional paid-in capital             42,789,570    (4,405,486)    38,384,084
  Accumulated deficit                   (32,789,980)   (1,925,413)   (34,715,393)
                                       ------------   -----------   ------------
Total Stockholders' Equity               10,002,965    (6,330,917)     3,672,048
                                       ------------   -----------   ------------
Total Liabilities and Stockholders'
  Equity                               $ 22,613,603   $        --   $ 22,613,603
                                       ============   ===========   ============
</TABLE>

      For the thirteen weeks ended December 27, 2005, the effects of the
      restatement on our statement of operations are as follows:

<TABLE>
<S>                                        <C>            <C>             <C>
Statement of Operations
Revenue                                    $ 17,714,342   $          --   $ 17,714,342
                                           ------------   -------------   ------------
Gross profit                                  9,523,632              --      9,523,632
                                           ------------   -------------   ------------
Total operating expenses                      2,503,301          56,250      2,559,551
                                           ------------   -------------   ------------
Income from operations                        7,020,331         (56,250)     6,964,081
                                           ------------   -------------   ------------
Other expense (income):
  Mark-to-market gain on embedded
    derivative liabilities                           --     (22,191,192)   (22,191,192)
  Interest expense                              664,576         367,861      1,032,437
                                           ------------   -------------   ------------
Total other expense (income)                    665,032     (21,823,331)   (21,158,299)
                                           ------------   -------------   ------------
Income before provision for income taxes      6,355,299      21,767,081     28,122,830
                                           ------------   -------------   ------------
Net income                                 $  3,196,161   $  21,767,081   $ 24,963,242
                                           ============   =============   ============
Net income available to common
  stockholders                             $  3,176,661   $  21,767,081   $ 24,943,742
                                           ============   =============   ============
Basic income per share                     $       0.09   $        0.65   $       0.74
                                           ============   =============   ============
Diluted income per share                   $       0.02   $        0.15   $       0.17
                                           ============   =============   ============
Weighted average shares outstanding
  Basic                                      33,755,620        (184,405)    33,571,215
                                           ============   =============   ============
  Diluted                                   184,368,852    (34,368,852)    150,000,000
                                           ============   =============   ============
</TABLE>

      The net effect of the restatement was to increase net income for the
      thirteen week period by $21,767,081, principally due to the mark-to-market
      gain of $22,191,192 on the embedded derivative liabilities. For further
      information on the assumptions, estimates and methods used to measure the
      derivative liabilities, see Note 7.


                                        8

<PAGE>

      As restated, diluted weighted average shares outstanding are limited to
      150,000,000, the maximum number of authorized shares. See Note 4.

      For the twenty-six weeks ended December 27, 2005, the effects of the
      restatement on our statement of operations are as follows:

<TABLE>
<CAPTION>
                                           As Previously    Restatement    As Restated
Financial Statement Caption                  Presented       Adjustment       Herein
----------------------------------------   -------------   -------------   -----------
                                                              Increase
                                                             (Decrease)
<S>                                         <C>            <C>             <C>
Statement of Operations
Revenues                                    $ 22,878,681   $          --   $22,878,681
                                            ------------   -------------   -----------
Gross profit                                  10,302,701              --    10,302,701
                                            ------------   -------------   -----------
Total operating expenses                       4,009,705       1,450,389     5,460,094
                                            ------------   -------------   -----------
Income from operations                         6,292,996       1,450,389     4,842,607
                                            ------------   -------------   -----------
Other expense (income):
  Mark-to-market gain on embedded
    derivative liabilities                            --      (1,191,633)   (1,191,633)
  Interest expense                             1,228,410       1,216,807     2,445,217
  Loss on partial extinguishment of
    embedded derivative option liability
    arising from exercise of options                  --         449,850       449,850
                                            ------------   -------------   -----------
Total other expense (income)                   1,250,920         475,024     1,725,944
                                            ------------   -------------   -----------
Income before provision for income taxes       5,042,076      (1,925,413)    3,116,663
                                            ------------   -------------   -----------
Net income (loss)                           $  1,874,720   $  (1,925,413)  $   (50,693)
                                            ============   =============   ===========
Net income (loss) attributable to
  common stockholders                       $  1,835,720   $  (1,925,413)  $   (89,693)
                                            ============   =============   ===========
Basic and diluted income (loss)
  per share:
Basic                                       $       0.05   $       (0.05)  $      0.00
                                            ============   =============   ===========
Diluted                                     $       0.01   $       (0.01)  $      0.00
                                            ============   =============   ===========
Weighted average number of common
  shares outstanding:
Basic                                         33,593,275        (363,460)   33,229,815
                                            ============   =============   ===========
Diluted                                      184,206,507    (150,976,692)   33,229,815
                                            ============   =============   ===========
</TABLE>

      The net effect of the restatement was to add net expense for the
      twenty-six week period of $1,925,413, resulting in a net loss for the
      period of $50,693 as shown above. The mark-to-market income recorded in
      the second quarter exceeded the amount of the mark-to-market loss in the
      first quarter by $1,191,633. For further information on the assumptions,
      estimates and methods used to measure the derivative liabilities, see Note
      7.

      For the twenty-six weeks ended December 27, 2005, outstanding convertible
      debt, preferred stock and common stock purchase options and warrants are
      anti-dilutive. See Note 4.

3.    STOCK-BASED COMPENSATION - The Company's three stock option plans, which
      are shareholder approved, permit the grant of share options to its
      employees for up to 5,150,000 shares of common stock as stock
      compensation. All stock options under the plans are granted at the fair
      market value of the common stock at the grant date. Employee stock options
      vest immediately and generally expire 10 years from the grant date.

      The Company has restated its financial statements for the thirteen and
      twenty-six weeks ended December 27, 2005 to reflect the adoption, as of
      June 29, 2005, of Financial Accounting Standard No. 123 (Revised) "Share
      Based Payment" ("SFAS 123R"). This statement requires the Company to
      expense the cost of employee services received in exchange for an award of
      equity instruments using the fair-value-based method. The new standard
      replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
      supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
      for Stock Issued to Employees, and related interpretations.


                                        9

<PAGE>

      In addition, the Company adheres to the guidance set forth within
      Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
      ("SAB") No. 107, which provides the Staff's views regarding the
      interaction between SFAS No. 123(R) and certain SEC rules and regulations
      and provides interpretations with respect to the valuation of share-based
      payments for public companies.

      In adopting this standard, the Company is utilizing the modified
      prospective method, under which the provisions are applied to new awards
      and to awards modified, repurchased or cancelled after the required
      effective date. Additionally, compensation cost for the portion of awards
      for which the requisite service has not been rendered that are outstanding
      as of the required effective date are recognized as the requisite service
      is rendered on or after the required effective date. The compensation cost
      for that portion of awards is based on the grant-date fair value of those
      awards. For the applicable periods which precede the standard's effective
      date, a pro-forma presentation is provided, similar to the disclosure
      required under the prior reporting standards.

      Prior to June 29, 2005, the Company accounted for similar transactions in
      accordance with APB No. 25 which employed the intrinsic value method of
      measuring compensation cost. Accordingly, no compensation cost was
      recognized in the consolidated statements of operations. In accordance
      with SFAS No. 123, the Company disclosed certain pro-forma amounts as if
      the fair value approach of SFAS No. 123 had been applied. The Company
      complied with these disclosure requirements for all applicable periods
      prior to June 29, 2005.

      Stock option compensation expense in fiscal 2006 is the estimated fair
      value of options granted amortized on a straight-line basis over the
      requisite vesting period for entire portion of the award. The following
      table addresses the additional disclosure requirements of SFAS 123(R) in
      the period of adoption. The table illustrates the effect on net income and
      earnings per share as if the fair value recognition provisions of SFAS No.
      123R had been applied to all outstanding and unvested awards in the prior
      year comparable period. For comparison purposes, the current period, which
      reflects the adoption of the standard, is also shown:

<TABLE>
<CAPTION>
                                   Thirteen Weeks Ended         Twenty-Six Weeks Ended
                               ---------------------------   ---------------------------
                               December 27,   December 28,   December 27,   December 28,
                                   2005           2004           2005           2004
                               ------------   ------------   ------------   ------------
                                (Restated)                    (Restated)
<S>                             <C>            <C>             <C>           <C>
Net income (loss)
  attributable to common
  shareholders as
  reported (including stock-
  stock-based compensation
  of $56,250 for the 2005
  quarter and $1,450,389 for
  the 2005 year to date)        $24,943,742    $1,368,810      $(89,693)     $1,019,962
Deduct: Stock-based
  employee compensation
  in 2004 determined under
  the fair value method, net
  of related tax effects                 --        25,935            --          51,870
                                -----------    ----------      --------      ----------
Net income (loss)
  attributable to common
  shareholders
  (2004 - pro-forma)            $24,943,742    $1,342,875      $(89,693)     $  968,092
                                ===========    ==========      ========      ==========
Net income per share:
  Basic - as reported           $      0.74    $     0.02      $   0.00      $      .01
                                ===========    ==========      ========      ==========
  Basic - pro forma                     N/A    $     0.02           N/A      $      .01
                                ===========    ==========      ========      ==========
  Diluted - as reported         $      0.02    $     0.02      $   0.00      $      .01
                                ===========    ==========      ========      ==========
  Diluted - pro forma                   N/A    $     0.02           N/A      $      .01
                                ===========    ==========      ========      ==========
</TABLE>

      The amount of $1,450,389 noted parenthetically above for 2005 exceeds the
      amount previously disclosed as pro-forma expense by $1,337,889, due to the
      prior inadvertent omission of 15,469,964 common stock purchase options
      that had been issued to the Company's chief executive officer on June 30,
      2005, the second day of the current fiscal year. The fair value of these
      options, determined in accordance with SFAS No. 123R, is now included in
      operations. See Note 7. The effect of the correction was to reduce basic
      and diluted income per share by $0.04 and $0.02, respectively, for the
      twenty-six weeks ended December 27, 2005.


                                       10

<PAGE>

4.    NET INCOME PER COMMON SHARE -The calculation of basic and diluted income
      (loss) per common share was calculated for all periods in accordance with
      the requirements of Statement of Financial Accounting Standards No. 128,
      "Earnings per Share."

      The following table sets forth the computation of the basic and diluted
      net income per share for the thirteen and twenty-six weeks ended December
      27, 2005 and December 28, 2004, respectively:

<TABLE>
<CAPTION>
                                        Thirteen Weeks Ended         Twenty-Six Weeks Ended
                                    ---------------------------   ---------------------------
                                    December 27,   December 28,   December 27,   December 28,
                                        2005           2004           2005           2004
                                    ------------   ------------   ------------   ------------
                                     (Restated)                    (Restated)
<S>                                 <C>             <C>            <C>            <C>
Numerator:
Net income (loss) attributable to
  common shareholders               $ 24,943,742    $ 1,368,810    $   (89,693)   $ 1,019,962
Add/(Deduct):
  Mark-to-market gain                (22,191,192)            --            N/A             --
  Interest on convertible debt           780,743             --            N/A             --
  Income tax effect                      (60,613)            --             --             --
  Dividends on preferred stock            19,500         19,500            N/A            N/A
                                    ------------    -----------    -----------    -----------
  Net income (loss) attributable
    to common shareholders
    and assumed conversion          $  3,492,180    $ 1,388,310    $   (89,693)   $ 1,019,962
                                    ============    ===========    ===========    ===========
Denominator:
  Share reconciliation:
  Shares used for basic
    income per share                  33,571,215     77,936,358     33,229,815     77,936,358
  Effect of dilutive items:
    Stock options/warrants            48,142,277         24,791            N/A         44,362
  Convertible debt                    80,183,150             --            N/A             --
  Interest on convertible debt         4,897,998             --            N/A             --
  Series A Convertible
    Preferred Stock                    1,300,000      1,300,000            N/A            N/A
                                    ------------    -----------    -----------    -----------
  Sub-total before share
    limitation                       168,094,640     79,261,149     33,229,815     77,980,720
                                    ------------    -----------    -----------    -----------
  Limitation to authorized shares    (18,094,640)            --             --             --
                                    ------------    -----------    -----------    -----------
  Shares used for dilutive
    Income (loss) per share          150,000,000     79,261,149     33,229,815     77,980,720
                                    ============    ===========    ===========    ===========
Net income per share:
  Basic                             $        .74    $       .02    $       .00    $       .01
  Diluted                           $        .17    $       .02    $       .00    $       .01
</TABLE>

      Dilutive shares used in the per share computation for the thirteen weeks
      ended December 27, 2005 are limited by the 150,000,000 shares authorized.
      In order to reflect maximum dilution, the 18,094,640 limitation may be
      assumed to reduce the number of shares issuable upon exercise of stock
      options by 13,281,785, and from the conversion of preferred stock by
      1,300,000. The effect of the reduction of the remaining 3,512,855 shares
      to instruments issued to Laurus would be anti-dilutive and is ignored. On
      a pro-forma basis, if there were no share limitation, diluted income per
      share for the current quarter would nevertheless be unchanged at $0.02.

      The dilutive net income per share computations for the thirteen and
      twenty-six week periods ended December 27, 2005 each exclude 1,700,000
      shares, respectively, related to out-of-the-money stock options because
      the effect of including them would be anti-dilutive. The dilutive net
      income per share computations for the thirteen week and twenty-six week
      periods ended December 28, 2004 exclude 3,910,309 and 3,710,309 shares,
      respectively, related to out-of-the-money stock options and warrants
      because the effect of including them would be anti-dilutive. For the
      twenty-six weeks ended December 28, 2004, 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.


                                       11

<PAGE>

5.    PROVISION FOR INCOME TAXES - The provision for income taxes for the
      thirteen and twenty-six weeks ended December 27, 2005 and December 28,
      2004 consists of the following:

                        Thirteen Weeks Ended         Twenty-Six Weeks Ended
                    ---------------------------   ---------------------------
                    December 27,   December 28,   December 27,   December 28,
                        2005           2004           2005           2004
                    ------------   ------------   ------------   ------------
Federal - current    $2,235,624       $41,070      $2,235,624       $41,070
State - current         923,514         2,589         931,732         5,178
                     ----------       -------      ----------       -------
Total                $3,159,138       $43,659      $3,167,356       $46,248
                     ==========       =======      ==========       =======

      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.

6.    CONTINGENCIES - On August 5, 2004, the Company commenced an action in the
      New York State Supreme Court, County of New York, seeking to collect
      approximately $1,255,000 of contractual billings relating to a large roof
      tar removal project. On October 15, 2004, the Economic Development
      Corporation filed an answer, denying the Company's claims. On November 4,
      2004, the Economic Development Corporation filed an amended answer denying
      the Company's claims and asserting counterclaims in unspecified amounts
      seeking liquidated damages, reimbursement for consultant's fees and breach
      of contract. The case is currently in pre-trial discovery. This aggregate
      amount of $1,255,000 was recorded when billed as revenues of $32,561,
      $726,257 and $496,182 during the Company's fiscal years ended July 2,
      2002, July 1, 2003 and June 29, 2004, respectively, and is included in the
      Company's accounts receivable because management believes that the
      realization of the full amount thereof is probable.

      In April 2003, the Company commenced a remediation project in New York
      City for a local utility 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 it
      understood to exist with the customer. The additional costs incurred to
      remove this matter were approximately $1,600,000. As of June 28, 2005, the
      Company recognized revenue of approximately $1,700,000 with respect to the
      original scope of this project. All amounts due under the original
      contract have been paid. The Company has not recognized the revenue
      associated with its claim because the amount thereof is not presently
      reliably estimable. The project has been completed and the customer has
      refused to acknowledge its liability for these additional charges billed.
      On October 22, 2004, the Company commenced an action against a local
      utility company in the New York State Supreme Court, County of New York,
      claiming that it is entitled to approximately $2,000,000 of contractual
      billings and related damages in connection with this matter. On December
      6, 2004, the local utility company filed an answer, denying its claims.
      The case is currently in pre-trial discovery.

      The Company is a plaintiff in approximately 18 lawsuits, including those
      described above, claiming an aggregate of approximately $5,000,000
      pursuant to which it is seeking to collect amounts it believes owed to it
      by customers that are included in its accounts receivable, primarily with
      respect to changed work orders or other modifications to its scope of
      work. The defendants in these actions have asserted counterclaims for an
      aggregate of approximately $500,000.

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

7.    FINANCING AND RELATED PARTY TRANSACTIONS - As of June 28, 2005, the
      Company owed its parent company, Spotless Plastics (USA) Inc., $5,000,000,
      collateralized by all of the Company's assets. Also at that date, Spotless
      was due payment from third parties for accounts receivable in the amount
      of $158,469 purchased under its accounts receivable agreement with the
      Company, dated February 5, 2004. As of such date, Spotless had purchased
      from the Company an aggregate amount of its accounts receivable equaling
      $4,991,252 at an aggregate purchase discount of $911,202, for an aggregate
      purchase price of $4,080,050. Pursuant to the accounts receivable finance
      agreement, Spotless was able to purchase certain of the Company's accounts
      receivable without recourse for cash, subject to certain terms and
      conditions.

      Pursuant to an administrative services arrangement, Spotless also provided
      the Company with certain administrative services including the services of
      its former vice president of finance and administration. During the fiscal
      2005, Spotless charged the Company an administrative fee of $84,138, which
      was unpaid and included in accrued expenses at June 28, 2005. On June 30,
      2005, Spotless agreed to forgive the $84,138 in administrative fees that
      was outstanding.


                                       12

<PAGE>

      As discussed below, on June 30, 2005, the Company borrowed $5,000,000 from
      Laurus. From the loan proceeds, $2,750,000 was repaid to Spotless. The
      Company also issued a subordinated secured promissory note to Spotless in
      the principal amount of $500,000, bearing interest at LIBOR plus 1%. This
      note requires payments of principal and interest of $50,000 commencing
      July 1, 2007 until all amounts due thereunder are fully paid, so long as
      the Company is not in default on the Laurus note. The note the Company
      issued to Spotless, together with the $2,750,000 payment to Spotless
      referred to above, fully satisfied all of the Company's financial
      obligations to Spotless.

      In connection with this financing transaction, the Company, along with
      Spotless, terminated the account receivable finance agreement between
      them, except with respect to the Company's obligation to continue to
      collect and remit payment of accounts receivable that Spotless purchased
      under the agreement. As part of the transactions, Spotless assigned to the
      Company an account receivable with a balance of $189,197 and to the
      Company agreed to pay this amount to Spotless no later than June 30, 2006.

      On June 30, 2005, the Company entered into the financing transaction with
      Laurus, pursuant to a securities purchase agreement, as amended, and
      related documents. Under the terms of the transaction, the Company issued
      to Laurus:

            o     a three-year secured convertible term note, dated June 30,
                  2005, in the principal amount of $5,000,000. The note bears
                  interest at the prime rate as published in the Wall St.
                  Journal plus 2% (but not to less than 7.25%), decreasing by 2%
                  (but to not less than 0%) for every 25% increase in the market
                  price (as defined therein) of the Company's common stock above
                  the fixed conversion price of $.09 following the effective
                  date(s) of the registration statement or registration
                  statements covering the shares of the Company's common stock
                  underlying the note and the warrant issued to Laurus;

            o     pursuant to the terms of an option agreement, dated June 30,
                  2005, a twenty-year option to purchase 30,395,179 shares of
                  the Company's common stock at a purchase price of $0.0001 per
                  share; and

            o     pursuant to the terms of a common stock purchase warrant,
                  dated June 30, 2005, a seven-year common stock purchase
                  warrant to purchase 13,750,000 shares of the Company's common
                  stock at a purchase price of $0.10 per share.

            o     Under the accounting methodology initially employed, as
                  discussed in Note 2, recognition of actual and effective
                  beneficial conversion features under EITF Consensuses 98-5 and
                  00-27 aggregating $4,401,854 resulted in the $5,000,000 note
                  being recorded at $598,146.

      After consummating the transaction on June 30, 2005 and prior to December
      27, 2005, Laurus subsequently provided additional financing to the Company
      on the same terms and conditions as follows:

            o     On July 13, 2005, Laurus loaned the Company an additional
                  $350,000, and the Company amended and restated the note, to be
                  in the principal amount of $5,350,000. The shares issuable
                  upon conversion of the face value of this amended and restated
                  Note were initially recorded with a beneficial conversion
                  feature valued at $38,889, which was credited to additional
                  paid-in capital. The remaining $311,111 was initially added to
                  the carrying value of the Note on the Company's balance sheet.

            o     On September 9, 2005, Laurus loaned the Company an additional
                  $650,000, and the Company further amended and restated the
                  Note to be in the principal amount of $6,000,000. The shares
                  issuable upon conversion of the additional face value of this
                  amended and restated Note were initially recorded with a
                  beneficial conversion feature amounting to $650,000, which was
                  credited to additional paid-in capital. As a result, the
                  initial carrying value thereof was $0.

      Under the accounting methodology originally employed, the three tranches
      of the $6,000,000 note, issued in the first quarter of fiscal 2006, were
      recorded at an aggregate value of $909,257. The aggregate discount of
      $5,090,743 was being amortized over the three-year note term. As discussed
      in Note 2 and below, the accounting for the note has been changed and the
      financial statements as of and for the periods ended December 27, 2005
      restated herein to reflect the embedded derivatives related to the
      financing and derivative accounting under SFAS No. 133 and EITF 00-27 has
      been applied.

      On October 6, 2005, Laurus loaned the Company an additional $1,350,000,
      and the Company further amended and restated the Note to be in the
      principal amount of $7,350,000. Under the previous accounting, the shares
      issuable upon conversion of the face value of this last tranche were
      recorded with a beneficial conversion feature amounting to $1,350,000,
      which was credited to additional paid-in capital. As a result, the initial
      carrying value of the fourth tranche, recorded in the second fiscal
      quarter of 2006, was $0. As noted in the previous paragraph, this
      accounting has been changed to reflect the embedded derivatives related to
      the financing.


                                       13

<PAGE>

      The convertible note, in the principal amount of $7,350,000 as of December
      27, 2005, is the only note issued to Laurus by the Company that is
      currently outstanding. As a result of applying the derivative accounting
      referred to above, embedded derivative liabilities related to the note,
      the option and the warrant were recognized in the initial aggregate amount
      of $7,680,727. Also, an aggregate discount in the amount of $6,778,211
      related to the $7,350,000 note was recorded. Principal repayments on the
      note were due to commence starting November 1, 2005 but, in November 2005,
      Laurus agreed to defer the initial repayment date until January 1, 2006.
      The principal monthly payments due November 1, 2005 and December 1, 2005
      in the aggregate amount of $459,375 were deferred until June 30, 2008.
      Interest is payable monthly and started to accrue on August 1, 2005. In
      conjunction with the Laurus transactions, the Company entered into a
      registration rights agreement, as amended, which obligated it, among other
      things, to file its initial registration statement on Form S-1 with the
      SEC on or before November 22, 2005 or be subject to a liquidated damages
      claim. Laurus waived the liquidated damages during the periods covered by
      this Form 10-Q.

      During the quarter ended September 27, 2005, Laurus exercised a portion of
      its option and purchased 1,500,000 shares of common stock of the Company
      at $0.0001 per share, when the market value of the Company's common stock
      was $0.39 per share. This exercise reduced the embedded derivative
      liability related to the option by $135,000 (the fair value of the stock
      at the date the option were issued) and also resulted in a loss on the
      exercise in the amount of $449,850 or $0.2999 per share (the difference
      between the fair value at the date of exercise and issuance, less the
      $0.0001 per share exercise price).

      For the thirteen and twenty-six weeks ended December 27, 2005, application
      of derivative accounting resulted in a mark-to-market gains of $22,191,192
      and $1,191,633, respectively. Total embedded derivative liabilities at
      December 27, 2005 were $6,354,094 as follows:

Convertible note, convertible at $0.09 per share   $2,089,576
Options, exercisable at $0.0001 per share           2,889,518
Warrants, exercisable at $0.10 per share            1,375,000
                                                   ----------
Total                                              $6,354,094
                                                   ==========

      In addition to the loss on the option exercise (applicable to the first
      quarter and the year-to-date period) and the mark-to-market gains on the
      embedded derivative liabilities, the Company recognized additional
      interest expense of $367,861 and $1,216,807 for the thirteen and
      twenty-six week periods in 2005. The net result of the restatement related
      to derivative accounting was a net increase in other income for the
      quarter of $21,823,331, or $0.65 per share and an increase in other
      expense for the year to date period of $475,024, or $0.00 per share.

      In calculating the derivative liabilities, the following factors were
      projected over various periods through the June 30, 2008 maturity date of
      the note:

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

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

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

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

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

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

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

            o     the weighted average reset price projected at $0.0899

      On June 30, 2005, Messrs. Peter Wilson, John Bongiorno, Ronald Evans and
      Brian Blythe, who were nominees of Spotless, resigned as directors of the
      Company, and Mr. Charles L. Kelly, Jr., also a Spotless nominee, resigned
      as the Company's chief financial officer and as a director. In addition,
      Mr. Joseph Murphy, an employee of Spotless, resigned as the Company's
      secretary and vice president of finance and administration. Pursuant to a
      transition services agreement, Spotless agreed to provide the services of
      Mr. Murphy to the Company, in the following areas:

            o     administration;

            o     accounting, finance and risk management; and

            o     assisting in the preparation and review of its reports filed
                  with the SEC

      Such agreement provided for a six-month transitional period, with a fee of
      $5,000 per month and a payment of $25,000 to Mr. Murphy at the end of such
      period.


                                       14

<PAGE>

      On June 30, 2005, Spotless, through one of its wholly owned subsidiaries,
      sold 15,469,964 shares of common stock of the Company to Michael O'Reilly,
      the Company's president and chief executive officer, in consideration for
      a non-recourse ten-year balloon promissory note in the principal amount of
      $120,500 issued by Mr. O'Reilly to Spotless, bearing interest at LIBOR
      plus 1%. Spotless also surrendered its remaining 45,865,143 shares to the
      Company for cancellation, resulting in a credit of $4,587 to additional
      paid-in capital.

      Mr. O'Reilly issued a personal guaranty to Laurus for $3,250,000 of the
      note due to it.

      In addition, the Company issued a ten-year option, exercisable at $.09 per
      share to Mr. O'Reilly to purchase 15,469,964 shares of common stock in
      connection with his:

            o     agreement to a new employment agreement, which (a) does not
                  include a put right that existed in his old employment
                  agreement requiring the Company, under certain circumstances,
                  to buy his shares of common stock and shares underlying his
                  options, and (b) calls for a base salary of $285,000 per year
                  and a bonus equal to 2.5% of the Company's pre-tax income, as
                  defined in the employment agreement; and

            o     agreement to personally guarantee the Company's bonding
                  obligations, each of the above was a condition precedent to
                  the consummation of the financing transaction with Laurus.

      The accompanying financial statements have been restated to include in
      operations for the year to date period the $1,337,889 fair value of the
      employment-related option to purchase 15,469,964 shares, calculated in
      accordance with SFAS No.123R. See Note 3. No portion of this option was
      allocated to Mr. O'Reilly's guaranty to Laurus.

      On May 24, 2005, the Company issued to Michael O'Reilly non-plan five-year
      options, exercisable at $.1875 and $0.01 per share to purchase 250,000 and
      2.000,000 shares of common stock, respectively. These options, issued in
      connection with his employment as the Company's president and chief
      executive officer, were recorded based on their intrinsic value. The
      Company recognized a related expense of $100,000 pursuant to APB No. 25,
      which was still in effect at the date these options were granted.

      On June 30, 2005, the Company issued ten-year options, exercisable at $.09
      per share, to its series A convertible stock preferred stockholders,
      including Dr. Kevin Phillips, one of its directors, to purchase an
      aggregate of 500,000 shares of its common stock. The fair value of these
      options, $44,650, was recorded as deferred financing costs and a credit to
      additional paid-in capital. The Company also agreed to pay out of legally
      available funds accrued and unpaid dividends in an aggregate of (i)
      $35,000 to the series A convertible preferred stockholders, on each June
      30, 2005, September 30, 2005 and December 30, 2005 and (ii) $50,000 to the
      series A convertible preferred stockholders on February 28, 2007. In the
      aggregate, this was in consideration for their agreement to:

            o     propose and vote in favor of an amendment to the Company's
                  certificate of incorporation in order to accommodate the full
                  issuance of the shares of common stock underlying the secured
                  convertible note, the option and warrant the Company issued to
                  Laurus;

            o     postpone their right, upon six months' notice after February
                  2007, to require the Company to redeem their series A
                  convertible preferred stock, until the earlier of six months
                  after repayment of the note or June 30, 2010;

            o     defer receipt of dividend payments on the series A convertible
                  preferred stock due after June 30, 2005, until the earlier of
                  six months after repayment of the note or June 30, 2010; and

            o     forbear from appointing a second director until the earlier of
                  (a) June 30, 2008 or (b) the repayment in full of the note.

      On June 30, 2005, Michael O'Reilly and the series A convertible preferred
      stock stockholders, including Dr. Kevin Phillips, a director, agreed,
      pursuant to a forbearance and deferral agreement to which the Company is a
      party, to propose and vote in favor of, at the Company's next annual
      shareholders meeting to be held by a specified date, an amendment to the
      Company's certificate of incorporation in order to accommodate the full
      issuance of the shares of common stock underlying the note, the option and
      warrant the Company issued to Laurus. In addition, Mr. O'Reilly, the
      series A convertible preferred stock stockholders and Anthony P. Towell, a
      director, entered into lock-up agreements with Laurus that prohibit a
      disposition of their shares of common stock and any and all related
      derivative securities until the earlier of (a) the repayment in full of
      the note the Company issued to Laurus or (b) June 30, 2010.


                                       15

<PAGE>

      As a result of these transactions, the Company has recorded deferred
      financing costs as follows:

                Item                   Amount
----------------------------------   ----------
Transactional, insurance costs       $2,314,172
  and professional fees
Deemed cost to the Company
  of the 15,469,964 shares of
  common stock sold by Spotless
  to the Company's CEO                1,195,708
Options granted to preferred
  stockholders for forbearance of
  redemption and other rights            44,650
                                     ----------
Total recognized                     $3,554,530
Amortization of deferred costs for
  the twenty-six weeks ended
  December 27, 2005                     587,690
                                     ----------
Deferred financing costs, net        $2,966,840
                                     ==========

      On May 24, 2005, the Company issued a non-plan ten-year option,
      exercisable at $0.06 per share, to Anthony P. Towell to purchase 250,000
      shares in connection with his service on the then-existing special
      committee of the Company. On December 6, 2004, the Company issued a
      ten-year option exercisable at $0.035 per share to Mr. Towell under its
      2001 Equity Incentive Plan in connection with his service as a director of
      the Company.

      On December 6, 2004, the Company issued a ten-year option, exercisable at
      $0.035 per share, to Dr. Kevin Phillips to purchase 100,000 shares under
      the Company's 2001 Equity Incentive Plan in connection with his services
      as director.

      On December 16, 1998, the Company entered into an operating lease
      agreement with Michael O'Reilly, its president and chief executive
      officer. Pursuant to the terms of the arrangement that expired in December
      2002 and has continued on a month-to-month basis thereafter, the Company
      leases a forty-two foot custom Topaz boat for monthly rental payments of
      $5,000. The leasing arrangement was necessitated by a marine assistance
      contract that expired on December 31, 2000, although the arrangement
      continues to provide the Company with its largest floating vessel capable
      of handling specialty equipment and facilitating an offshore support crew.
      The Company is responsible for all taxes, insurance and repairs pertaining
      to this boat.

      The Company had an oral understanding with Michael O'Reilly pursuant to
      which the Company paid the full carrying costs, including mortgage
      payments, of a condominium that he beneficially owned and that the Company
      used for marketing and employee-relations purposes. The full carrying
      costs during the Company's fiscal years ended June 28, 2005 and June 29,
      2004 were approximately $7,150 and $17,800, respectively. In connection
      with this arrangement, the Company also provided mitigation and
      restoration goods and services to Mr. O'Reilly in connection with severe
      water damage caused by a failed water heater at the condominium that he
      beneficially owned and which he allowed the Company to use for marketing
      and employee-relations purposes. In connection with these services, the
      Company's entire direct costs and allocated overhead, without a markup,
      equaled approximately $56,780.

      In February 1997, the Company issued 650,000 shares of redeemable
      convertible preferred stock to Dr. Kevin Phillips, a director and an
      additional 650,000 shares of redeemable convertible preferred stock to a
      business partner of Dr. Phillips. Preferred stock dividends of $19,500 are
      accrued quarterly, but no dividends have been paid subsequent to fiscal
      2004.

      The Company believes that all transactions it has entered into with its
      officers, directors and principal stockholders, except its provision of
      mitigation and restoration services to its president and chief executive
      officer as discussed above, have been on terms no less favorable to the
      Company than those available from unrelated third parties.

8.    SUBSEQUENT EVENTS - On January 13, 2006, Laurus agreed to (a) postpone the
      date by which the Company must have the Form S-1 declared effective and
      (b) postpone the date by which the Company must increase its authorized
      capital.


                                       16

<PAGE>

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

      OVERVIEW

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

Our revenues are derived primarily from providing emergency response,
remediation and disaster restoration services to new and repeat customers on
time and materials basis or pursuant to fixed-price contracts, including in
connection with sudden catastrophes, such as in connection with the services
that we are providing in the aftermath of Hurricanes Katrina and Wilma. In the
thirteen and twenty-six week periods ended December 27, 2005 and fiscal 2005,
substantially all of our revenues were derived from time and materials
contracts. Under our fixed-price contracts, we assess the scope of work to be
done and contract to perform a specified scope of work for a fixed price,
subject to adjustment for work outside such scope of work, upon prior approval
by our customers. Because most of our projects consist of emergency or disaster
responses, which do not permit a definitive prior assessment of the full scope
of work entailed and require immediate attention in order to mitigate loss and
maximize recovery, most of our projects are performed on a time and materials
basis. Under our time and materials contracts, we charge our customers for
labor, equipment usage, allocated overhead and a markup relating thereto. Our
cost of revenues consists primarily of labor and labor-related costs, insurance,
benefits and insurance, travel and entertainment, repairs, maintenance,
equipment rental, materials and supplies, disposal costs and depreciation of
capital equipment. Our selling, general, and administrative expenses primarily
consist of expenses related to provisions for doubtful accounts, legal fees,
sales salaries, marketing and consulting.

We currently are engaged on various projects within our customary scope of
services for private sector commercial and residential customers in the gulf
coast and Florida regions. Under time and materials contracts or other
arrangements, we have billed in excess of $9.8 million of work that we have
completed in connection with these projects through January 31, 2006. We have
also billed in excess of $8.9 million for projects in these areas that are still
in progress. As of January 1, 2006, we have billed an aggregate of over $20
million of time and materials projects during our fiscal 2006. Management
believes that we will be engaged to perform additional projects in this region
in the near term; however, no assurance can be given in this regard until
contracts relating to these projects have been executed.

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

      o     customers refusing to pay prior to receiving insurance
            reimbursements;

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

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

In an effort to enhance our cash flows from operations, beginning in our 2005
fiscal year, we began implementing improvements in our billing and invoicing
procedures as follows:

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

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

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

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

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

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

Because some of these are relatively new changes, no assurances can be given
that they will be successful in improving our collections and cash flows.
Further, approximately 5% of our current projects are performed under procedures
that predate these improvements.

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

On June 30, 2005, we issued to Laurus a three-year secured convertible term note
in the principal amount of $5,000,000. During the first quarter of fiscal 2006,
Laurus loaned us an additional $1,000,000 and early in the second quarter,
Laurus loaned us an additional $1,350,000. After each loan we amended and
restated the note accordingly. As of December 27, 2005, the principal amount of
the Laurus note outstanding was $7,350,000. On November 10, 2005, Laurus agreed
to defer the principal monthly payments due in November and December 2005 in the
aggregate amount of $459,375 until June 30, 2008, the maturity date of the note,
in order to facilitate financing of our gulf coast and Florida operations.


                                       17

<PAGE>

RESTATEMENT

The accompanying financial statements have been restated to correct the
accounting in two principal areas as follows:

      o     to apply derivative accounting applicable to the Laurus financing
            entered into on June 30, 2005, which had the net effect of
            increasing our reported loss by $22,298,355 for the thirteen weeks
            ended September 27, 2005 and increasing our reported income by
            $21,767,081 for the thirteen weeks ended December 27, 2005,
            resulting in a net decrease to our reported income for the year to
            date attributable to the application of derivative accounting in the
            amount of $531,274. At December 27, 2005, the effect on our balance
            sheet is an increase in our liabilities of $6,330,917, with an
            equivalent decrease in our stockholders equity, resulting in a
            reduction therein to $3,672,048. Specifically, we have recognized
            embedded derivative liabilities, related to the convertible note as
            well as the common stock purchase options and warrants issued to
            Laurus. The recognition of these embedded derivative liabilities was
            required due to an insufficiency of authorized common shares
            existing as of June 30, 2005 and, continuing through September 29,
            2006. See Explanatory Note. The large fluctuation in our restated
            results for the first two quarters of fiscal 2006 is principally
            related to the mark-to-market accounting for the embedded derivative
            liabilities - a loss of $20,999,559 in the first quarter and a gain
            of $22,191,192 in the second quarter. This mark-to-market accounting
            is based on complex variables, including our stock price, which is
            highly volatile; accordingly these large fluctuations may be
            expected to continue through the final two quarters of the fiscal
            year ended June 30, 2006.

      o     to adopt SFAS No. 123R at the beginning of the current year, as well
            as to include in the accounting for stock-based compensation, an
            option to purchase 15,469,964 shares of common stock, with a fair
            value of $1,337,889, issued to our chief executive officer on the
            second day of the current fiscal year. The omission of this amount
            in the pro-forma disclosures previously presented was inadvertent.
            In addition to the effect of these options, adoption of the standard
            resulted in the recognition of an additional $56,250 of stock-based
            compensation in each of the first two quarters of fiscal 2006. These
            increases in reported general and administrative expenses and net
            loss had no effect on reported assets, liabilities or equity, as the
            charge was offset by an equivalent credit to additional paid-in
            capital.

The net effect of the restatement on our financial statements was as follows:

o     First quarter: Increase in net loss and loss per share of $23,692,494 and
      $0.72, respectively

o     Second quarter: Increase in net income and income per share of $21,767,081
      and $0.65, respectively

o     Year to date: Net change from net income to net loss of $1,925,413 ($0.05
      per share).

o     At December 27, 2005: Increase liabilities and decrease equity by
      $6,330,917.

For further details on these adjustments to our financial statements, see Notes
2, 3 and 7 as well as elsewhere in this discussion.

We identified the need for this amendment in connection with answering responses
to comment letters that we received from the Securities and Exchange Commission
relating to its review of our Registration Statement on Form S-1, which we
originally filed on October 3, 2005. We withdrew such Registration Statement on
July 7, 2006.

Ability to Continue as a Going Concern

Our independent auditors raised a concern in their report on our financial
statements for our 2005 fiscal year about our ability to continue as a going
concern. Due to our recurring losses from operations, working capital deficit,
limited stockholders' equity and difficulty in generating sufficient cash flow
to meet our obligations and sustain our operations, there is substantial doubt
about our ability to continue as a going concern. Although we had a net profit
of $53,066 for our 2005 fiscal year, the recognition of significant embedded
derivative liabilities together with the uncertainty about our ability to
continue as a going concern may limit our ability to access certain types of
financing, or may prevent us from obtaining financing on acceptable terms.


                                       18

<PAGE>

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of our financial position and results of
operations is based upon our audited consolidated financial statements for our
fiscal year ended June 28, 2005, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, and
our unaudited interim consolidated financial statements as restated for our
fiscal quarter ended December 27, 2005. The preparation of these consolidated
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. We believe that the critical accounting policies
and areas that require the most significant judgments and estimates to be used
in the preparation of our consolidated financial statements are accounting for
embedded derivative liabilities, stock based transactions, contracts, allowance
for doubtful accounts and the valuation allowance related to deferred tax
assets.

Embedded Derivative Liabilities- In order to calculate the derivative
liabilities, we have projected the following factors over various periods
through the June 30, 2008 maturity date of the note:

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

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

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

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

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

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

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

            o     the weighted average reset price projected at $0.0899

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

In addition, at such time we achieve sufficient authorized common shares, the
existing derivative liabilities will be credited to equity at their then
measured values. We believe that, by virtue of the Omnibus Amendment entered
into with Laurus on September 29, 2006, together with the amended and restated
note issued to Laurus pursuant thereto, we achieved having sufficient authorized
shares as of that date. See Explanatory Note.

Stock Based Transactions - We consummated various transactions where we paid the
consideration primarily in options or warrants to purchase our common stock.
These transactions include financing transactions and providing incentives to
attract, retain and motivate employees, officers and directors.

When options or warrants to purchase our common stock are used as incentives for
employees, officers or directors, we now use the fair value method as required
by SFAS No.123R. The accompanying restated financial statements reflect the
adoption of this pronouncement as of the beginning of fiscal 2006, as required.
Prior to the restatement reported herein, we had continued to disclose the
pro-forma effects of adopting the predecessor standard, SFAS No. 123 that was
previously allowed. Such disclosure inadvertently excluded the 15,469,964
options that we issued to our chief executive officer on June 30, 2005.

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

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

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

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

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

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


                                       19

<PAGE>

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

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

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

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

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

      o     Costs associated with the claims are identifiable; and

      o     The evidence supporting the claims is objective and verifiable.

Revenue from 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.

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 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. Revenue from claims, such as claims relating to
disputed change orders, is recognized when realization is profitable and the
amount can be reliably estimated, based upon meeting the following conditions:

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

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

      o     Costs associated with the claims are identifiable; and

      o     The evidence supporting the claims is objective and verifiable.

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 - We maintain an allowance for doubtful trade
accounts receivable for estimated losses resulting from the inability of our
customers to make required payments. In determining collectibility, we review
available customer account and financial information, including public filings
and credit reports, current trends, credit policy, and accounts receivable aging
and may also consult legal counsel when appropriate. A considerable amount of
judgment is required when we assess the likelihood of our realization of
accounts receivables, including assessing the probability of collection and the
current credit worthiness of each customer. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, an additional provision for doubtful accounts could be required.
When it is deemed probable that a specific customer account is uncollectible,
that balance is included in the reserve calculation. Actual results could differ
from these estimates.

Deferred Tax Asset Valuation Allowance - We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be
realized. Due to our history of losses, we have recorded a full valuation
allowance against our net deferred tax assets as of June 28, 2005 and December
27, 2005. We currently provide for income taxes only to the extent that we
expect to pay cash taxes on current income. When we are profitable at levels
which cause management to conclude that it is more likely than not that we will
realize all or a portion of our deferred tax assets, we record the estimated net
realizable value of our deferred tax assets at that time and provide for income
taxes at our combined federal and state effective rates.


                                       20

<PAGE>

RESULTS OF OPERATIONS

Thirteen weeks ended December 27, 2005 and December 28, 2004

Revenue

Total revenues for the thirteen weeks ended December 27, 2005 increased by
$10,355,063, or 140.7%, to $17,714,342 from $7,359,279 for the thirteen weeks
ended December 28, 2004. This increase in revenue was primarily attributable to
$14,108,400 of revenues from work relating to Hurricane Katrina and $1,320,769
of revenues from work relating to Hurricane Wilma, and was partially offset by a
$573,968 decrease in spill related work.

Cost of Revenues

Cost of revenues increased $3,820,843, or 87.4%, to $8,190,710 for the thirteen
weeks ended December 27, 2005 as compared to $4,369,867 for the thirteen weeks
ended December 28, 2004. This increase was primarily attributable to labor and
other costs relating to our work in connection with Hurricanes Katrina and
Wilma. Our cost of revenues consists primarily of labor and labor-related costs,
payroll taxes, benefits, training, job-related insurance costs, travel and
travel-related costs, repairs, maintenance and rental of job equipment,
materials and supplies, testing and sampling, transportation, disposal, and
depreciation of capital equipment.

Gross Profit

Gross profit increased by $6,534,220, or 218.6%, to $9,523,632, or 53.7%, of
total revenues for the thirteen weeks ended December 27, 2005 as compared to
$2,989,412, or 40.6%, of total revenues for the thirteen weeks ended December
28, 2004. This increase in gross profit was due primarily to a higher percentage
of higher margin equipment usage in connection with our hurricane-related
projects. Higher margins on equipment used on hurricane and other
catastrophic-related projects are necessary to compensate us for the fact that
this equipment is used less often, or may not be utilized at all, as compared to
equipment utilized for more routine projects.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $1,056,705, or 66.6%,
to $2,559,551 for the thirteen weeks ended December 27, 2005 from $1,502,846 for
the thirteen weeks ended December 28, 2004 and constituted approximately 14.1%
and 20.4% of revenues in such periods, respectively. This increase was primarily
attributable to an increased provision of $500,000 to our allowance for doubtful
accounts, increased accounting and legal fees of $71,628, and a $15,090 increase
in marketing expenses. Also, $56,250 of this increase was due to the recognition
on the income statement of stock-based compensation under SFAS No. 123R, as
discussed above under Restatement. In the prior year fiscal quarter, the
comparable measurement of stock-based compensation was disclosed for pro-forma
purposes only. The increases detailed in this paragraph were partially offset by
a decrease of $25,314 in management fees. Our selling, general, and
administrative expenses primarily consist of expenses related to provisions for
doubtful accounts, salaries and related benefits, professional fees, insurance,
marketing and all other office and administrative-related expenses.

Interest Expense (Restated)

Interest expense (restated) increased by $977,085, or 1765%, to $1,032,437 for
the thirteen weeks ended December 27, 2005 from $55,352 for the thirteen weeks
ended December 28, 2004. Substantially all of the increase was due to the Laurus
financing and the application of derivative accounting. The significant
components of the increase were interest expense recorded on the Laurus note and
the related derivative liabilities of $209,555, amortization of the note
discount of $340,265, and the amortization of deferred financing costs relating
to the Laurus transaction of $341,095. These increases were offset by reductions
in interest incurred on obligations due to Spotless.

Mark-to-Market Gain on Embedded Derivative Liabilities

Application of derivative accounting for the thirteen weeks ended December 27,
2005 resulted in a mark-to-market gain on the embedded derivative liabilities
aggregating $22,191,192, principally driven by a decrease in our stock price
from $0.33 to $0.10. At the end of the period, such derivative liabilities
totaled $6,354,094. These liabilities must be marked to market at the end of
each quarter, based on facts and assumptions then applicable. Subsequent
decreases or increases in our stock price and changes in other factors will have
corresponding effects on our results of operations and reported liabilities. We
had no derivative liabilities in the 2005 fiscal quarter. (See Explanatory Note
and Liquidity and Capital Resources).

Provision for Income Taxes

The provision for income taxes for the thirteen weeks ended December 27, 2005
was $3,159,138 as compared to $43,659 for the thirteen weeks ended December 28,
2004. This increase was the result of higher taxable income for the thirteen
weeks ended December 27, 2005, primarily attributable to our hurricane-related
work in that period.


                                       21

<PAGE>

Net Income (Restated)

Our previously reported net income increased by $21,767,081, comprised of the
derivative accounting related effects noted above offset slightly by the $56,250
of stock-based compensation expense recorded upon adoption of SFAS No.123R. As
restated, our net income for the quarter ended December 2005 was $24,963,242 as
compared to the quarter ended December 2004 net gain of $1,388,310. Income
available for common stockholders was decreased in each quarter by preferred
stock dividends of $19,500. Basic income per share in the current quarter
increased from $0.17 to $0.74 due to the restatement compared to $0.00 for the
prior year. On a diluted basis, income per share was unchanged at $0.02. See
Note 4 to the consolidated financial statements.

Twenty-six weeks ended December 27, 2005 and December 28, 2004

Revenue

Total revenues for the twenty-six weeks ended December 27, 2005 increased by
$10,040,896, or 78.2%, to $22,878,681 from $12,837,785 for the twenty-six weeks
ended December 28, 2004. This increase in revenue was primarily attributable to
$15,070,747 of revenues from work relating to Hurricane Katrina and $1,320,769
of revenues from work relating to Hurricane Wilma. This increase was partially
offset by a $1,063,799 decrease in spill related work.

Cost of Revenues

Cost of revenues increased $3,843,989 or 44.0%, to $12,575,980 for the
twenty-six weeks ended December 27, 2005 as compared to $8,731,991 for the
twenty-six weeks ended December 28, 2004. This increase was primarily
attributable to labor and other costs relating to our work in connection with
Hurricanes Katrina and Wilma. Our cost of revenues consists primarily of labor
and labor-related costs, payroll taxes, benefits, training, job-related
insurance costs, travel and travel-related costs, repairs, maintenance and
rental of job equipment, materials and supplies, testing and sampling,
transportation, disposal, and depreciation of capital equipment.

Gross Profit

Gross profit increased by $6,196,907, or 150.9%, to $10,302,701, or 45.0%, of
total revenues for the twenty-six weeks ended December 27, 2005 as compared to
$4,105,794, or 32.0%, of total revenues for the twenty-six weeks ended December
28, 2004. This increase in gross profit was due primarily to a higher percentage
of higher margin equipment usage in connection with our hurricane-related
projects.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by $2,724,644, or 99.6%,
to $5,460,094 for the twenty-six weeks ended December 27, 2005 from $2,735,450
for the twenty-six weeks ended December 28, 2004 and constituted approximately
23.9% and 21.3% of revenues in such periods, respectively. This increase was
almost entirely due to:

      (i)   the adoption of SFAS No. 123R, and the related inclusion in
            operating expenses of $1,450,389, the fair value of options vesting
            during the quarter. All but $56,250 of this unusually large amount
            of option expense arose from the employment-related option to
            purchase 15,469,964 shares granted to our chief executive officer,
            which grant of options was a required condition of the Laurus
            financing; and

      (ii)  an increased provision of $538,000 to our allowance for doubtful
            accounts.

Other changes in this account grouping are increased accounting and legal fees
of $303,726, and a $40,256 increase in marketing expenses. Partially offsetting
the increases was a decrease of $114,316 in consulting fees.

Our selling, general, and administrative expenses primarily consist of expenses
related to provisions for doubtful accounts, professional fees, salaries and
related benefits, including stock-based compensation, insurance, marketing and
all other office- and administrative-related expenses.


                                       22

<PAGE>

Mark-to-Market Gain on Embedded Derivative Liabilities

Application of derivative accounting in the year to date period resulted in a
mark-to-market gain on the embedded derivative liabilities aggregating
$1,191,633, principally reflecting an increase in our stock price from $0.09 to
$0.10. At the end of the period, such derivative liabilities totaled $6,354,094.
These liabilities must be marked to market at the end of each quarter, based on
facts and assumptions then applicable. Subsequent decreases or increases in our
stock price and changes in other factors will have corresponding effects on our
results of operations and reported liabilities. We had no derivative liabilities
in the fiscal 2005 quarter. (See Explanatory Note, Restatement and Liquidity and
Capital Resources).

Interest Expense (Restated)

Interest expense (restated) increased by $2,324,607, or 1,927%, to $2,445,217
for the twenty-six weeks ended December 2005 from $120,610 for the corresponding
period ended December 2004. Substantially all of the increase was due to the
Laurus financing and the application of derivative accounting. The significant
components of the increase were interest expense recorded on the Laurus note and
the related derivative liabilities of $902,506, amortization of the note
discount of $631,517, and the amortization of deferred financing costs relating
to the Laurus transaction of $587,690. These increases were offset by reductions
in interest incurred on obligations due to Spotless.

Purchase discounts and financing fees paid to a related party decreased from
$145,846 to zero, due to the termination of the accounts receivable financing
agreement with Spotless.

Loss on Exercise of Options

After recognition of an embedded derivative liability related to the option
exercisable by Laurus at $0.0001 per share, we are also required to recognize
gain or loss on the extinguishment of the related liability when options are
exercised. During the quarter ended September 27, 2005, Laurus exercised a
portion of its option and purchased 1,500,000 shares at $0.0001 per share, when
the market value of the Company's common stock was $0.39 per share. This
exercise reduced the derivative liability related to the option by $135,000 (the
$0.09 fair value of the stock at the date the options were issued) and also
resulted in a loss on the exercise in the amount of $449,850 or $0.2999 per
share (the difference between the fair value at the date of exercise and
issuance ($0.39 and $0.09, respectively)) less the $0.0001 per share exercise
price.

As a result of applying derivative accounting, we recognized a total increase in
other expenses of $475,024.

Provision for Income Taxes

The provision for income taxes for the twenty-six weeks ended December 27, 2005
was $3,167,356 as compared to $46,248 for the twenty-six weeks ended December
28, 2004. This increase was the result of higher taxable income for the
twenty-six weeks ended December 27, 2005, primarily attributable to
hurricane-related work in that period.

Net Income (Loss)

Previously we reported net income of $1,874,720 and net income available to
common stockholders of $1,835,720, for the twenty-six weeks ended December 27,
2005, as compared to net income of $1,058,962 and net income available to common
stockholders of $1,019,962 earned for the twenty-six weeks ended December 28,
2004. As a result of the increases in other expense of $475,024 and stock-based
compensation of $1,450,389, as discussed above, we had a restated net loss of
$50,693 and a restated loss attributable to common stockholders of $89,693. The
per share effect of the restatement was $0.05, resulting in a loss per share of
$0.00 for the twenty-six weeks ended December 2005 as compared to per share
income of $0.01 for the twenty-six seeks ended December 2004.

Liquidity and Capital Resources

As of December 27, 2005, we had a cash balance of $2,494,266, a working capital
deficit of $434,830 and stockholders' equity of $3,672,048. Although the
derivative liabilities are reported as current, we reasonably expect that we
will not have to expend our working capital to pay them. We believe that by
virtue of the Omnibus Amendment, dated September 29, 2006, entered into between
Laurus and us, as well as the amended and restated secured convertible term note
issued to Laurus pursuant thereto, the derivative liabilities will be credited
to capital. See Explanatory Note. As of June 28, 2005, we had a cash balance of
$512,711, a working capital deficit of $1,704,091 and a stockholders' deficit of
$712,889. We incurred a net loss of $50,693 for the twenty-six weeks ended
December 2005.


                                       23

<PAGE>

Accounts receivable, net of allowance for doubtful accounts at December 27, 2005
and June 28, 2005 were $13,182,621 and $6,755,338, respectively. For these
periods, approximately $3,080,000 and $1,976,000, respectively, of these amounts
were disputed claims subject to collection litigation, primarily related to
disputes over changed work orders or other modifications of our work. We do not
believe that the disputed receivables and a material effect on liquidity for the
periods presented.

Net cash provided by operating activities was $587,948 for the twenty-six weeks
ended December 27, 2005, as compared to the net cash provided by operations of
$473,288 for the twenty-six weeks ended December 28, 2004. Neither of the
restatement adjustments had any effect on our cash balances. Accounts receivable
increased by $3,065,948, or 30.3%, as of December 27, 2005 to $13,182,621, from
$10,116,673 as of December 28, 2004, primarily as a result of work performed in
connection with Hurricanes Katrina and Wilma. Accounts payable and accrued
expenses decreased by $1,079,526, or 22.4%, as of December 27, 2005 to
$3,749,997, from $4,829,523 as of December 28, 2004, primarily as a result of
accelerated payments to our venders as a result of our favorable cash position.
Net cash provided by financing activities for the twenty-six weeks ended
December 27, 2005 was $2,332,363, as compared to cash used by financing
activities of $134,508 for the twenty-six weeks ended December 28, 2004,
primarily as a direct result of $7,350,000 received in connection with our
borrowings from Laurus, the proceeds of which borrowings were used to pay
related transaction and other expenses in the amount of $2,314,172 and repay
indebtedness to Spotless in the amount of $2,650,000. These transactions
resulted in a net increase of $2,350,000 in borrowings and the cancellation of
$1,230,228 of our previous secured note payable to Spotless. The balance of the
proceeds, in the amount of $2,053,011, was used to fund working capital and our
initial Hurricane Katrina mobilization costs. Financing activities for the
twenty-six weeks ended December 28, 2004 used net cash of $134,508 for long-term
debt repayment.

Cash used for capital expenditures increased to $938,756, during the twenty-six
weeks ended December 27, 2005, as compared to $56,011 for the twenty-six weeks
ended December 28, 2004, due to the cost of equipment purchased to perform the
work in the Gulf Coast region. At this time, we do not have any other material
commitments or plans for capital expenditures. We intend, however, to make
additional capital expenditures, to the extent our financial condition permits,
as may be required in connection with rendering our services in the future.

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

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

      o     Obtain profitable environmental or related construction contracts.
            So long as we have sufficient working capital, we anticipate
            continued revenue growth in new and existing service areas and to
            continue to bid on large projects, though there can be no assurance
            that any of our bids will be accepted or that we will have
            sufficient working capital. We currently are engaged on various
            projects within our customary scope of services for private sector
            commercial and residential customers in the gulf coast and Florida
            regions in connection with the aftermath of Hurricanes Katrina and
            Wilma. Under time and materials contracts or other arrangements, we
            have billed in excess of $9.8 million of work that we have completed
            in connection with these projects through January 31, 2006. We have
            also billed in excess of $8.9 million for projects in these areas
            that are still in progress. As of January 1, 2006, we have billed an
            aggregate of over $20 million of time and materials projects during
            our fiscal 2006. In this connection, we also intend to focus on
            procuring time and materials contracts, which have historically
            generated higher gross margins. We also intend to continue our
            marketing campaign, including radio and newspaper advertising and a
            public relations program, to inform residents of New Orleans and the
            surrounding gulf areas about our services. Our management believes
            that we will be engaged to perform additional projects in this
            region for the foreseeable future; however, no assurance can be
            given in this regard until contracts relating to these projects have
            been executed.

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


                                       24

<PAGE>

      o     Raise additional capital or obtain additional financing. Management
            has preliminarily explored additional funding sources, but has been
            unable to attract additional debt or equity capital. Laurus
            indicated to us that it did not intend to provide any additional
            financing at the time that it loaned an additional $1,350,000 to us
            in October 2005. In addition, the existence of the Laurus and
            Spotless security interests may impair our ability to raise
            additional debt capital. No assurance can be given that we will be
            able to obtain additional debt or equity capital, although our
            management expects to continue seeking any such favorable
            opportunities.

      o     Generate positive cash flow from operations. We seek to obtain
            profitable contracts that generate gross profits more than
            sufficient to pay our expenses. Our plans for our 2006 fiscal year
            include concentrating our efforts in the gulf coast and Florida
            regions in connection with the aftermath of Hurricanes Katrina and
            Wilma and addressing our difficulty with cash collections and slow
            cash flow.

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

      o     customers refusing to pay prior to receiving insurance
            reimbursements;

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

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

In an effort to enhance our cash flows from operations, beginning in our 2005
fiscal year, we began implementing and are continuing to implement improvements
in our billing and invoicing procedures as follows:

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

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

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

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

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

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

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

Because some of these are relatively new changes, no assurances can be given
that they will be successful in improving our collections and cash flows.
Further, approximately 5% of our current projects are performed under procedures
that predate these improvements.

On June 30, 2005, we issued to Laurus Master Fund, Ltd. a three-year secured
convertible term note in the principal amount of $5,000,000. Subsequently,
Laurus loaned us an additional $2,350,000, and we amended and restated the note
accordingly. As of February 2, 2006, the principal amount of the Note, as a
result of repayments, outstanding equaled $6,890,625. On November 10, 2005,
Laurus agreed to defer the principal monthly payments due in November and
December 2005 in the aggregate amount of $459,375 until June 30, 2008, the
maturity date of the Note.

Laurus holds a senior security interest in our and our subsidiaries' assets
collateralizing the Note, including a pledge of the stock of our subsidiaries.
In addition, Spotless holds a subordinated security interest collateralizing our
$500,000 note issued to Spotless, which bears interest at a rate of LIBOR plus
1% per annum and is required to be repaid at a rate of $50,000 per month
commencing July 1, 2007. The existence of these security interests may impair
our ability to raise additional debt capital.

Under the terms of the Note, which matures on June 30, 2008, we are required to
make monthly repayments of principal, on the first of each month, to Laurus in
the amount of $229,687.50, which commended as of January 1, 2006. Principal
repayments were originally due to commence starting November 1, 2005 but, in
November 2005, Laurus agreed to defer the initial repayment date until January
1, 2006. The principal monthly payments due November 1, 2005 and December 1,
2005 in the aggregate amount of $459,375 have been deferred until June 30, 2008.
Interest is payable monthly and started to accrue on August 1, 2005. All
required interest payments as of the date of this report have been made. We are
required to pay such amounts in shares of our common stock should all of the
following conditions be satisfied:

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


                                       25

<PAGE>

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

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

      o     Laurus' aggregate beneficial ownership of our shares of common stock
            does not and would not by virtue thereof exceed 4.99%; and

      o     we are not in default of the note.

If any of these conditions are not satisfied, we will be required to make
payments in cash in an amount equal to 103% of the principal amount, plus
accrued interest, then due. Should we be required to pay cash, this may have an
adverse effect on our cash flow and liquidity.

The Laurus note may be redeemed by us in cash by paying the holder of the note
120% of the principal amount, plus accrued interest. As discussed below, the
holder of the note may convert all or a portion of the note, together with
related interest and fees, into fully paid shares of our common stock at any
time. The number of shares to be issued shall equal the total amount of the note
to be converted, divided by an initial fixed conversion price of $.09. The
conversion price of the note may be adjusted pursuant to customary anti-dilution
provisions, such as if we pay a stock dividend, reclassify our capital stock or
subdivide or combine our outstanding shares of common stock into a greater or
lesser number of shares.

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

Laurus has contractually agreed to restrict its ability to convert the note
and/or exercise its warrant and option if such conversion and/or exercise would
cause its beneficial ownership of shares of our common stock to exceed 4.99% of
the outstanding shares of our common stock. The 4.99% limitation is null and
void without notice to us upon the occurrence and during the continuance of an
event of default or upon 75 days' prior written notice to us. As of December 27,
2005, Laurus beneficially owns 1,500,000 shares of our common stock, or
approximately 4.46% of our outstanding common stock. As a result, Laurus could
only acquire up to approximately 184,405 additional shares, which would
constitute a conversion of approximately $16,596 of the principal amount of the
note, while remaining in compliance with the 4.99% limitation. Because Laurus is
irrevocably prohibited from waiving this 4.99% limitation, except as described
above, even if the other conditions allowing us to pay in shares of common stock
have been satisfied, if Laurus cannot or does not reduce its ownership of our
common stock at a time when such reduction would be necessary to allow us to
make a payment in shares of common stock, we would be required to pay Laurus in
cash. This may have an adverse effect on our cash flow and liquidity.

In the event we default on the note, we will be required to pay 120% of the
outstanding principal amount of the note, plus accrued but unpaid interest. Upon
the occurrence of an event of default, the interest rate charged will be
increased by 2% per month until the default is cured. The note is secured by a
lien on substantially all of our assets, including the stock of our
subsidiaries, all cash, cash equivalents, accounts receivable, deposit accounts,
inventory, equipment, goods, fixtures, documents, instruments, including
promissory notes, contract rights and general intangibles, including payment
intangibles. The Master Security Agreement, dated June 30, 2005, between us and
Laurus contains no specific financial covenants. The Master Security Agreement
and the note define the circumstances under which they can be declared in
default and subject to termination, including:

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


                                       26

<PAGE>

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

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

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

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

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

      o     an SEC stop trade order or principal market trading suspension of
            our common stock is in effect for 5 consecutive trading days or 5
            days during a period of 10 consecutive trading days, if we are not
            able to cure such trading suspension within 30 days of receiving
            notice or are not able to list our common stock on another principal
            market within 60 days of such notice;

      o     a failure to have authorized and reserved shares of our common stock
            for issuance on or before January 31, 2006 (subject to extensions
            granted by Laurus) sufficient to provide for the full conversion of
            the note, and full exercise of the option and warrant issued by us
            to Laurus;

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

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

Pursuant to the terms of a Registration Rights Agreement, dated June 30, 2005,
and amended, we were obligated to file a registration statement with the
Securities and Exchange Commission registering the resale of shares of our
common stock issuable upon a conversion of the Note and upon the exercise of the
option and warrant issued to Laurus. We filed the registration statement on
October 3, 2005 and are in the process of responding to a comment letter from
the Securities and Exchange Commission dated October 31, 2005. If the
registration statement is not declared effective by March 1, 2006 (subject to
extensions granted by Laurus) by the Securities and Exchange Commission, then we
will be required to pay to Laurus the following amounts:

      o     1.5% of the principal outstanding on the note, for the first thirty
            days, prorated for partial periods, which equals $3,445 per day
            based upon the $6,890,625 principal amount of the note currently
            outstanding; and

      o     2.0% of the principal outstanding on the note, for each thirty day
            period, prorated for partial periods, which equals $4,594 per day

The proceeds we received in connection with the financing transaction and
subsequent borrowings from Laurus were used to pay the amounts set forth below
to the persons or for the purposes set forth below:

      Spotless Debt
      o     Former majority stockholder and senior secured lender
            (Spotless), consisting of approximately $2,650,000 in
            settlement of the principal and $100,000 in interest      $2,750,000
                                                                      ----------
      Transaction Expenses
      o     Laurus transaction fee                                     1,750,000
      o     Laurus Capital Management, LLC management and due
            diligence fees                                               262,900
      o     Loeb & Loeb escrow fee                                         2,000
      o     Insurance premiums                                            37,500
      o     Legal fees                                                   146,773
      o     Special committee and advisor fees                            61,136
      o     Payments to series A preferred stockholders               $   35,000
                                                                      ----------
            Sub-total                                                 $2,295,309
                                                                      ----------
      Other Payments
      o     Audit fees                                                    50,000
      o     Insurance premiums                                           276,711
      o     Initial Hurricane Katrina mobilization costs                 238,173
      o     Working capital                                            1,739,807
                                                                      ----------
            Sub-total                                                 $2,304,691
                                                                      ----------
      Total                                                           $7,350,000
                                                                      ==========


                                  27

<PAGE>

The table below summarizes contractual obligations and commitments as
of December 27, 2005, including principal and interest payments on our
debt(1):

<TABLE>
<CAPTION>
                                    Total        1 Year      2-3 Years   4-5 Years
                                 -----------   ----------   ----------   ---------
<S>                              <C>           <C>          <C>           <C>
Operating Leases                 $   953,727   $  692,009   $  261,718    $    --
Capitalized Leases - Principal
                                     423,923      207,806      196,087     20,030
Capitalized Leases - Interest
                                      44,769       27,330       16,907        532
Laurus Note -
Principal                          7,350,000    1,378,128    5,971,872         --
Laurus Note
Interest Expense - Cash              888,623      538,496      350,127         --
Spotless Note - Principal            500,000           --      500,000         --
Spotless Note -
Interest Expense                      13,828           --       13,828         --
                                 -----------   ----------   ----------    -------
Total                            $10,174,870   $2,843,769   $7,310,539    $20,562
</TABLE>

--------
(1)   This table reflects the effectiveness of Laurus' agreement to defer the
      initial monthly amortization repayment in the amount of $229,688 from
      November 1, 2005 until January 1, 2006.

These amounts are based on assumed interest payments reflecting:

      o     the Laurus note at a rate of 8.75% per annum;

      o     the Spotless note at a rate of 5.86% per annum; and

      o     an aggregate of $423,923 of other long-term debt with maturities
            ranging from 3 months to 54 months for financed trucks and vehicles
            with interest rates ranging from 3.95% to 13.99%.

Off-Balance Sheet Arrangements

Although we do not have any financing arrangements that have not been recorded
in our financial statements, our transaction with Laurus resulted in a
significant discount that reduced the carrying value on our balance sheet of our
debt obligation to Laurus. As of December 27, 2005, the note had a principal
balance of $7,350,000 with a corresponding discount of $6,146,694, resulting in
a carrying amount of $1,203,306 on our balance sheet. As a consequence of
applying derivative accounting, the entire note is reported as a current
liability.

Effect of Inflation

Although inflation did not have a material impact on our operations
during fiscal years ended June 28, 2005, June 29, 2004 and July 1,
2003, we did experience an average increase of 10% in fuel costs
during the each of the first two quarters of this year due to
increased oil prices, including the effect of Hurricane Katrina on
fuel prices.


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<PAGE>

Seasonality

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

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

      o     the timing of catastrophes; and

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

                      FORWARD-LOOKING STATEMENTS

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

      o     fluctuations in our stock price and the related effects on
            mark-to-market derivative accounting;

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

      o     our success in increasing revenues and reducing expenses;

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

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

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

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

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

      o     our ability to raise or access capital;

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

      o     our dependence on key personnel;

      o     our ability to timely collect our accounts receivable;

      o     our ability to attract and retain qualified personnel; and

      o     the other factors and information disclosed and discussed in other
            sections of this quarterly report on Form 10-Q and in our report on
            Form 10-K for the fiscal year ended June 28, 2005.

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

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

The foregoing discussion and analysis provides information which management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
appearing in Item 1 and with the consolidated financial statements included in
our annual report on Form 10-K for the period ended June 28, 2005.


                                  29

<PAGE>

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Equity Price Risk - Our primary market risk exposure relates to the shares of
common stock issuable upon conversion of the Laurus note, which we originally
issued to Laurus in June 2005 as well as shares issuable upon exercise of the
related option and warrant (30,395,179 and 13,750,000 shares, respectively). On
September 12, 2005, we issued 1,500,000 shares of our common stock to Laurus in
connection with its partial exercise of its option. We have restated our
financial statements as reported herein to recognize the fair values of the
embedded derivative liabilities in the securities issued to Laurus. The fair
values of these embedded derivatives are then re-measured at the end of every
quarter. While the measurement of these embedded derivatives is most affected by
changes in our stock price (as well as the volatility thereof), they are also
affected by changes in the prime interest rate and to a lesser extent by other
(non-market) risk factors. The volatility of the mark-to-market gains and
losses, such as those reported in the accompanying restated financial
statements, although deemed to be non-operating, could have an adverse effect on
our stock price in the future. However, the mark-to-market accounting is not
expected to have any direct effect on our cash flows; the scheduled maturities
are set forth in the table of our future commitments presented above. However,
the Laurus note indirectly exposes us to risks relating to our own common stock
because if Laurus is unable to convert the loan into common stock due to low
prices or low trading volumes in the market, we then must repay the loan in cash
at a 3% premium. (See Explanatory Note, Restatement, Management's Discussion and
Analysis as well as Notes 2 and 7 to the consolidated financial statements).

Interest Rate Sensitivity - Interest rate risk is the risk that interest rates
on our debt are fully dependent upon the volatility of these rates. We do not
use derivative financial instruments to manage interest rate risk. The Laurus
note bears interest at the prime rate as published in the Wall St. Journal plus
2% (but not to less than 7.25%), decreasing by 2% (but not to less than 0%) for
every 25% increase in the Market Price (as defined therein) of our common stock
above the fixed conversion price of $.09 following the effective date of the
registration statement covering the common stock issuable upon conversion.
Should the price of our common stock maintain a price equal to 125% of $.09 for
a twelve month period and if our registration statement registering the shares
of our common stock underlying the note and the warrant issued to Laurus has
been declared effective by the Securities and Exchange Commission, we would
benefit from a reduced interest rate of 2% on the outstanding principal amount
for that twelve-month period. On June 30, 2005, we also issued a variable
interest rate secured promissory note in the principal amount of $500,000 to
Spotless Plastics (USA), Inc., bearing interest at LIBOR plus 1%. We also have
various other debt with maturities ranging from 3 months to 54 months
aggregating to $423,923 for financed trucks and vehicles. A hypothetical 1%
increase in the interest rate applicable to the outstanding amounts of the
Laurus and Spotless notes along with the various other debt for financed trucks
and vehicles would increase our interest expense by approximately $70,000
annually. This hypothetical calculation reflects the assumed interest payments
for the:

      o     Note at a rate of 8.75% per annum;

      o     Spotless note at a rate of 5.86% per annum; and

      o     various other debt for financed trucks and vehicles with maturities
            ranging from 3 months to 54 months with interest rates ranging from
            3.95% to 13.99%.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure. As
required by Rule 13a-15(b) of the Securities Exchange Act of 1934, an evaluation
was performed under the supervision and with the participation of our chief
executive officer and the chief financial officer of the effectiveness of the
design and operation of our "disclosure controls and procedures" (as defined
under Rule 13a-15(e) and Rule 15d-15(e)) as of the end of the period covered by
this quarterly report on Form 10-Q filed with the SEC. Based upon that
evaluation and in connection with their determination that the matters described
immediately below relating to changes to our internal control over financial
reporting were not material, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures, as of December
27, 2005, were effective in timely alerting them to material company information
required to be included in our periodic filings with the Securities and Exchange
Commission.

Our chief executive officer and our chief financial officer reviewed with
members of our audit committee whether our need to restate our financial results
for our fiscal quarter ended December 27, 2005 affected their conclusions that
our disclosure controls and procedures, as of December 27, 2005, were effective
in timely alerting them to material company information required to be included
in our periodic filings with the Securities and Exchange Commission. In
connection with their review, our chief executive officer and chief financial
officer noted that our decision to restate our financial results did not call
into question whether the relevant information was recorded, processed,
summarized or reported within the time periods specified in the SEC's rules and
forms. It also did not involve any issue about whether information required to
be disclosed in the Form 10-Q we filed under the Securities Exchange Act was
accumulated and communicated to our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Rather, the restatements resulted from reconsideration in connection with
preparing responses to a comment letter that we received from the Securities and
Exchange Commission in relation to its review of our registration statement on
Form S-1 filed on October 3, 2005 of a decision made by management to record in
equity the common stock purchase option and warrant issued to Laurus in
connection with the refinancing. After extended correspondence with the
Securities and Exchange Commission and further analysis, management determined
that derivative accounting applied to these instruments and the convertible note
as they contained embedded derivative liabilities. (See Notes 2 and 7 to the
consolidated financial statements). Our chief executive officer and chief
financial officer did not find that management's subsequent decision to restate
for the derivative accounting called into question whether our disclosure
controls and procedures were effective to ensure that required information was
disclosed to them as appropriate to allow timely decisions regarding required
disclosure. Therefore, based on that review, our chief executive officer and our
chief financial officer determined that their prior conclusions, that our
disclosure controls and procedures were effective as of December 27, 2005, had
not changed.


                                  30

<PAGE>

Our chief executive officer and our chief financial officer reached a similar
conclusion with respect to our restatement of stock-based compensation expense.
As noted in this report, we did not previously adopt SFAS No.123R in the first
quarter as required, and we excluded from the previous pro-forma disclosure the
cost related to the employment-related options issued to our chief executive
officer. Our chief executive officer and our chief financial officer view this
as an inadvertent omission, but do not attribute it to non-effective disclosure
controls and procedures, particularly since the issuance of the options was
disclosed. Rather, it is viewed as a one-time error, and highly unusual in that
it was overlooked by all of the parties associated with the Company's financial
reporting during this period. The Company believes the error was partly due to
the issuance of the options being in the first few days of the fiscal period for
which SFAS No.123R became effective (based on the Company's fiscal year-end) as
well as the focus of the Company and its accounting professionals on answering
the comments received from the Securities and Exchange Commission staff.

Changes in internal control over financial reporting

There were no changes in the quarter ended December 27, 2005 that materially
effected, or are reasonably likely to materially effect, our internal control
over financial reporting.

In connection with our first quarter fiscal 2006 review, we identified issues
arising in connection with a change in our accounting staff during such period
regarding the timing and related processing of cash receipts and allocation of
costs associated with our contract and billing procedures and have or are in the
process of implementing the following measures:

      o     We have modified our calendar quarterly period end dates in our
            computer system to correspond with our actual quarterly period
            ending dates in order to enhance the accurate and timely processing
            of our cash receipts for each quarterly report. We have also
            emphasized to our accounting staff that they need to record
            transactions on the dates that they occur instead of batching such
            transactions for processing at the end of one of our monthly,
            quarterly or annual periods.

      o     We are in the process of modifying the way in which we allocate our
            costs to specific projects in an effort to more precisely record our
            project costs.

We are assigning a high priority to the short-term and long-term correction of
our internal controls over financial reporting and will continue to evaluate the
effectiveness of such internal controls on an on-going basis and will take
further action as might be appropriate.


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<PAGE>

PART 2 - OTHER INFORMATION

      Item 1. Legal Proceedings

            On August 5, 2004, we commenced an action in the New York State
            Supreme Court, County of New York, seeking to collect approximately
            $1,255,000 of contractual billings relating to a large roof tar
            removal project. On October 15, 2004, the Economic Development
            Corporation filed an answer, denying our claims. On November 4,
            2004, the Economic Development Corporation filed an amended answer
            denying our claims and asserting counterclaims. The case is
            currently in pre-trial discovery.

            In April 2003, we commenced a remediation project in New York City
            for a local utility 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.
            We 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 were approximately $1,600,000.
            As of June 28, 2005, we recognized revenue of approximately
            $1,700,000 with respect to the original scope of this project. All
            amounts due under the original contract have been paid. We have not
            recognized the revenue associated with its claim. The project has
            been completed and the customer has refused to acknowledge its
            liability for these additional charges billed. On October 22, 2004,
            we commenced an action against a local utility company in the New
            York State Supreme Court, County of New York, claiming that we are
            entitled to approximately $2,000,000 of contractual billings and
            related damages in connection with this matter. On December 6, 2004,
            the local utility company filed an answer, denying our claims. The
            case is currently in pre-trial discovery.

            We are a plaintiff in approximately 18 lawsuits claiming an
            aggregate of approximately $5,000,000 pursuant to which we are
            seeking to collect amounts we believe are owed to us by customers
            that are included in our accounts receivable, primarily with respect
            to changed work orders or other modifications to our scope of work.
            The defendants in these actions have asserted counterclaims for an
            aggregate of approximately $500,000.

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

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

            Not applicable.

      Item 3. Defaults upon Senior Securities

            Not applicable.

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

            Note applicable.

      Item 5. Other Information

            Not applicable.


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<PAGE>

      Item 6. Exhibits and Reports on Form 8-K

            The following exhibits are included as part of this
            report:

                  10.1    Amendment and Deferral Agreement, dated November 10,
                          2005, by and between Windswept and Laurus
                          (Incorporated by reference to Exhibit 10.1 of
                          Windswept's Current Report on Form 8-K (Date of
                          Report: November 10, 2005) filed with the SEC on
                          November 14, 2005).

                  10.2    Amendment and Deferral Agreement, dated November 23,
                          2005, by and between Windswept and Laurus
                          (Incorporated by reference to Exhibit 10.1 of
                          Windswept's Current Report on Form 8-K (Date of
                          Report: November 23, 2005) filed with the SEC on
                          November 29, 2005).

                  10.3    Amendment and Fee Waiver Agreement, dated January 13,
                          2006, by and between Windswept and Laurus
                          (Incorporated by reference to Exhibit 10.1 of
                          Windswept's Current Report on Form 8-K (Date of
                          Report: January 13, 2006) filed with the SEC on
                          January 18, 2006).

                  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.

Reports on Form 8-K:

During the thirteen weeks ended December 27, 2005, the Company filed reports on
Forms 8-K dated October 6, November 18, November 29 and December 23. The first
three of these filings related principally to the Laurus financing and
amendments to related agreements; the last filing on Form 8-K announced the
Company's decision to restate its financial statements for the thirteen weeks
ended September 27, 2005.


                                       33

<PAGE>

                                   SIGNATURES

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

                                       WINDSWEPT ENVIRONMENTAL GROUP, INC.


Date: October 19, 2006                 By: /s/ Michael O'Reilly
                                           ------------------------------------
                                           MICHAEL O'REILLY,
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)


Date: October 19, 2006                 By: /s/ Arthur Wasserspring
                                           ------------------------------------
                                           ARTHUR WASSERSPRING
                                           Chief Financial Officer
                                          (Principal Financial Officer)


                                       34