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

                                    Form 10-K

  X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-----   ACT OF 1934

                   For the fiscal year ended December 31, 2005

                                       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 No. 001-14217

                              ENGlobal Corporation
                              --------------------
             (Exact name of registrant as specified in its charter)

                    Nevada                                88-0322261
                    ------                                ----------
       (State or other jurisdiction of       (I.R.S Employer Identification No.)
        incorporation or organization)

654 North Sam Houston Parkway East, Suite 400             77060-5914
---------------------------------------------             ----------
  (Address of principal executive offices)                (Zip code)

       Registrant's telephone number, including area code: (281) 878-1000

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

      Title of each class              Name of each exchange on which registered
      -------------------              -----------------------------------------
Common Stock, $0.001 par value                  American Stock Exchange

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                                      None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
                                                                  Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Act
                                                                  Yes [ ] No [X]

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shortened 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
                                                                  Yes [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
     Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

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

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on June 30, 2005 was $42,561,564 (based upon
the closing price for shares of common stock as reported by the American Stock
Exchange on that date).

                                       1
<PAGE>

The number of shares outstanding of the registrant's common stock on March 23,
2006 is as follows:

      $0.001 Par Value Common Stock                     26,352,781 shares

DOCUMENTS INCORPORATED BY REFERENCE
Responses to Items 10, 11, 12, 13 and 14 of Part III of this report are
incorporated herein by reference to certain information contained in the
Company's definitive proxy statement for its 2006 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission on or before April 30,
2006.





















                                        2
<PAGE>

                              ENGlobal Corporation
                         2005 ANNUAL REPORT ON FORM 10-K


                                TABLE OF CONTENTS
                                -----------------



                                     PART I
                                     ------
                                                                            PAGE
                                                                            ----
ITEM 1.   BUSINESS                                                            5

ITEM 1A.  RISK FACTORS                                                        16

ITEM 1B.  UNRESOLVED STAFF COMMENTS                                           19

ITEM 2.   PROPERTIES                                                          19

ITEM 3.   LEGAL PROCEEDINGS                                                   21

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                 21


                                     PART II
                                     -------
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
             MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES                22

ITEM 6.   SELECTED FINANCIAL DATA                                             24

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATION                                         26

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK          38

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                         38

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE                                         69

ITEM 9A.  CONTROLS AND PROCEDURES                                             69


                                    PART III
                                    --------
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                  70

ITEM 11.  EXECUTIVE COMPENSATION                                              70

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT AND RELATED STOCKHOLDER MATTERS                       70

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                      70

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES                              70

                                     PART IV
                                     -------
ITEM 15.  EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES                        71


                                   SIGNATURES
                                   ----------
          SIGNATURES                                                          78


                                        3
<PAGE>

                                     PART I
                                     ------

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS



This Annual Report on Form 10-K ("Report"), including "Management's Discussion
and Analysis of Financial Condition and Results of Operations," as well as oral
statements made by the Company and its officers, directors or employees,
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements are based on Management's beliefs, current
expectations, estimates and projections about the industries that the Company
and its subsidiaries serve, the economy and the Company in general. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify such forward-looking statements;
however, this Report also contains other forward-looking statements in addition
to historical information. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, such forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to differ materially from historical results or
from any results expressed or implied by such forward-looking statements. The
Company cautions readers that the following important factors and the risks
described in the section of this report entitled "Risk Factors", among others,
could cause the Company's actual results to differ materially from the
forward-looking statements contained in this Report: (i) the effect of changes
in laws and regulations with which the Company must comply, and the associated
costs of compliance with such laws and regulations, either currently or in the
future, as applicable; (ii) the effect of changes in accounting policies and
practices as may be adopted by regulatory agencies, as well as by the Financial
Accounting Standards Board; (iii) the effect of changes in the Company's
organization, compensation and benefit plans; (iv) the effect on the Company's
competitive position within its market area of the increasing consolidation
within its services industries, including the increased competition from larger
regional and out-of-state engineering services organizations; (v) the effect of
increases and decreases in oil prices; (vi) the availability of parts from
vendors; (vii) our ability to increase or renew our line of credit; (viii) our
ability to identify attractive acquisition candidates, consummate acquisitions
on terms that are favorable to the Company and integrate the acquired businesses
into the Company's operations; (ix) the ability to hire and retain qualified
personnel; (x) the ability to retain existing customers and get new customers
and (xi) the effect of changes in the business cycle and downturns in local,
regional and national economies. The Company cautions that the foregoing list of
important factors is not exclusive. We are under no duty and have no plans to
update any of the forward-looking statements after the date of this Report to
conform such statements to actual results.



                                        4
<PAGE>

ITEM 1.     BUSINESS

     General
     -------
     ENGlobal Corporation (which may be referred to as "ENGlobal," the
     "Company," "we," "us" or "our") is a leading provider of engineering
     services and systems principally to the petroleum refining, petrochemical,
     pipeline, production and process industries throughout the United States
     and internationally. The services provided by our multi-disciplined staff
     span the lifecycle of a project and include feasibility studies, design,
     procurement and construction management. We also supply automation, control
     and instrumentation systems to our clients worldwide.

     The Company was incorporated as Industrial Data Systems Corporation in the
     State of Nevada in June 1994. In December 2001, we merged with Petrocon
     Engineering, Inc. ("Petrocon") and in June 2002, we changed the name of the
     Company from Industrial Data Systems Corporation to ENGlobal Corporation.
     Effective June 16, 2002, the Company's trading symbol for its common stock,
     traded on the American Stock Exchange, changed from "IDS" to "ENG".

     In the last five years, the Company's net revenue from continuing
     operations has grown from $17.8 million in 2001 to $233.6 million in 2005,
     a compounded annual growth rate of approximately 90.3%. Since the merger
     with Petrocon, the Company's net revenue from continuous operations has
     grown from $89.1 million in 2002, a compounded annual growth rate of
     approximately 37.9%. We have accomplished this growth by expanding our
     engineering and systems services and geographic presence through internal
     growth, including new initiatives and to a lesser extent, through a series
     of strategic acquisitions. We now have more than 1,700 full-time equivalent
     employees in offices strategically located in Houston, Beaumont, Freeport,
     Midland and Dallas, Texas; Baton Rouge and Lake Charles, Louisiana; and
     Tulsa, Cleveland and Blackwell, Oklahoma and Calgary, Alberta, Canada.

     Available Information
     ---------------------
     We file annual, quarterly and current reports, proxy statements and other
     information with the Securities and Exchange Commission ("SEC"). You can
     read and copy any materials filed with the SEC at its Public Reference Room
     at 100 F. Street, N.E., Washington, D.C. 20549. You can obtain information
     about the operations from the SEC Public Reference Room by calling the SEC
     at 1-800-SEC-0330. The SEC also maintains a website, which contains
     information we file electronically with the SEC, which can be accessed over
     the Internet at www.sec.gov. Our common stock is listed on the American
     Stock Exchange (AMEX: ENG), and you can obtain information about ENGlobal
     at the offices of the American Stock Exchange, 86 Trinity Place, New York,
     New York 10006-1872 or at their website www.amex.com.

     ENGlobal Website
     ----------------
     You can find financial and other information about ENGlobal at the
     Company's website at the URL address www.englobal.com. Copies of our annual
     reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
     Form 8-K, and amendments to those reports filed or furnished pursuant to
     Section 13(a) or 15(d) of the Exchange Act are provided free of charge
     through the Company's website and are available as soon as reasonably
     practicable after filing electronically or otherwise furnishing reports to
     the SEC.

     Information relating to corporate governance at ENGlobal, including: (i)
     our Code of Business Conduct and Ethics for all of our employees, including
     our Chief Executive Officer and Chief Financial Officer; (ii) our Code of
     Ethics for our Chief Executive Officer and Senior Financial Officers; (iii)
     information concerning our Directors, and our Board Committees, including
     Committee charters, and (iv) information concerning transactions in
     ENGlobal securities by Directors and officers, is available on our website
     under the Investor Relations link. Our website and the information
     contained therein or connected thereto are not intended to be incorporated
     into this Annual Report on Form 10-K. We will provide any of the foregoing
     information without charge upon written request to Investor Relations
     Officer, ENGlobal Corporation, 654 North Sam Houston Parkway East, Suite
     400, Houston, Texas 77060-5914.

                                        5
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Business Segments
     -----------------
     During 2005, we operated two business segments: engineering and systems.
     The respective contributions to our total sales in 2005, 2004 and 2003 for
     the engineering and the systems segments are summarized below.

                                         Percentage of Revenues
                                ----------------------------------------
          Segment (1)              2005           2004            2003
                                ---------      ---------       ---------
              Engineering            92.3%          89.8%           87.6%
              Systems                 7.7%          10.2%           12.4%
                                ---------      ---------       ---------
                                    100.0%         100.0%          100.0%
                                =========      =========       =========

     (1)  Does not include manufacturing segment, which was sold in December
          2003.

     The shift in the percentage of revenue between the engineering and systems
     business segments highlights the growth of the engineering segment over the
     last three years. Revenues from the systems segment remained constant from
     2003 to 2004, and increased 17.2% from 2004 to 2005. Engineering revenues
     increased 23.3% and 61.4%, respectively, from 2003 to 2004 and 2004 to
     2005.

     Engineering Segment
     -------------------

                                          ------------------------------
                                            2005       2004       2003
                                          ------------------------------
                                              (Amounts in thousands)
                                          ------------------------------
       Revenues from external customers   $215,698   $133,630   $108,380
       Operating profit                   $ 17,752   $ 10,512   $ 10,716
       Total assets                       $ 54,342   $ 46,122   $ 35,531


     General
     -------
     Our engineering segment offers engineering consulting services to clients
     in the petroleum refining, petrochemical, pipeline, production and process
     industries for the development, management and turnkey execution of
     engineering projects and provides inspection services throughout the United
     States. The engineering segment is currently comprised of the following
     wholly-owned subsidiaries of ENGlobal Corporation: ENGlobal Engineering,
     Inc. ("EEI"), RPM Engineering, Inc. d/b/a ENGlobal Engineering, Inc.
     ("RPM"), ENGlobal Construction Resources, Inc. ("ECR"), ENGlobal Technical
     Services, Inc. ("ETS"), ENGlobal Automation Group, Inc. ("EAG") and
     ENGlobal Canada ULC ("ENGlobal Canada"). EEI and RPM focus primarily on
     providing services to the downstream petroleum refining and petrochemical
     industry, including refineries and processing plants, upstream and
     midstream pipeline companies and gas processing plants. ECR primarily
     provides inspection services to industrial plants throughout the United
     States. ETS primarily provides Automated Fuel Handling Systems and services
     to branches of the U.S. military and public sector companies. EAG and
     ENGlobal Canada provide engineering services relating to the implementation
     of process controls, instrumentation, advanced automation and information
     technology projects. The engineering segment derives revenues primarily
     from fees charged for professional and technical services. As a service
     company, we are more labor than capital intensive. Our income results from
     our ability to generate revenues and collect cash under contracts for our
     employees' time in excess of any subcontract, pass-thru materials and
     equipment, non-labor costs and our selling, general and administrative
     (SG&A) expenses.

     The engineering segment has approximately 104 existing blanket service
     contracts pursuant to which it provides clients either with services on a
     time and materials basis or with services on a fixed fee, turnkey basis.
     Our engineering segment operates out of offices in Baton Rouge and Lake
     Charles, Louisiana; Beaumont, Dallas, Houston, Midland and Freeport, Texas;
     Tulsa, Cleveland and Blackwell, Oklahoma; and Calgary, Alberta. Our
     engineering segment also provides unique, custom-designed process related
     fabricated systems, designed to customer specifications.

                                        6
<PAGE>

ITEM 1.     BUSINESS (Continued)

     During 2003, as part of our plan to extend our geographical range and to
     serve the downstream petrochemical industries, such as the petroleum
     refining, petrochemical and process industries in the Freeport, Texas area,
     we acquired selected assets of Petro-Chem Engineering, Inc. ("Petro-Chem").
     Petro-Chem had a staff of 55 engineers, designers, inspectors and support
     personnel engaged on contract projects with several Freeport area clients.
     This acquisition allowed us to expand into the Freeport area with
     experienced staff that has an established reputation. The Freeport office
     currently provides on-site engineering, design and support personnel to a
     leading chemical client that has facilities in Freeport and Port Arthur,
     Texas and in Geismar, Louisiana.

     During 2004, the engineering segment continued its geographical expansion
     with new offices in Dallas and Midland, Texas and Cleveland, Oklahoma, plus
     an additional office in Tulsa, Oklahoma. In January, through ETS, we
     acquired certain assets of Engineering Design Group, Inc. ("EDGI") located
     in Tulsa, Oklahoma. As a result of this acquisition, ETS now provides
     design, installation and maintenance services for various government and
     public sector facilities, the most active sector being Automated Fuel
     Handling Systems serving the U.S. military. In August 2005, we announced
     the expansion of EEI's operation in the sulfur recovery business in Dallas,
     Texas. In September, through ECR, we acquired certain assets of AmTech
     Inspection located in Midland, Texas. The new division's revenues are
     derived primarily from providing inspectors for regional refining and
     pipeline operations. In October, again through ECR, we acquired certain
     assets of Cleveland Inspection Services, Inc. ("CIS") located in Cleveland,
     Oklahoma. As a result of this acquisition, we now provide inspection and
     construction management services in support of the oil and gas, utility and
     pipeline industries.

     In March 2005, ENGlobal Engineering formed ENGlobal Automation Group, Inc.
     ("EAG") to provide services relating to the implementation of process
     control, advance automation and information technology projects providing
     our clients with a full range of services, including but not limited to,
     front-end engineering feasibility studies and the execution of turnkey
     engineering, procurement, and construction projects. By focusing on
     large-scope projects, EAG intends to pursue distributed control systems
     (DCS) conversion and new installation projects by utilizing its own
     resources as well as resources from both ENGlobal Engineering and ENGlobal
     Systems. EAG will promote our proven capabilities for plant automation
     services and products to respond to an industry progression toward
     replacing obsolete technology with newer DCS.

     In June 2005, we formed ENGlobal Canada, based in Calgary, Alberta, Canada.
     ENGlobal Canada is a wholly-owned subsidiary of EAG.

     Our engineering segment offers its expertise to a broad range of industrial
     clients. We participate in projects involving both the modification of
     existing facilities and construction of new facilities. Our predominant
     type of contract is a blanket services contract that typically provides our
     clients with engineering, procurement and project management services on a
     time and materials basis. We also enter into contracts to complete capital
     projects on a full service, turnkey basis. The engineering staff has the
     capability of developing a project from the initial planning stages through
     detailed design and construction management. The engineering services that
     we provide include:

          o    conceptual studies;
          o    project definition;
          o    cost estimating;
          o    engineering design;
          o    inspection;
          o    material procurement; and
          o    project and construction management.

                                        7
<PAGE>

ITEM 1.     BUSINESS (Continued)

     We provide services for major energy-related firms at facilities such as
     chemical plants, crude oil refineries, electric power generation
     facilities, cross-country pipelines, pipeline facilities and production
     processing facilities.

     The engineering segment offers a wide range of services from a single
     source provider. The segment uses an internal virtual private network so
     that employees in one location can work on projects based in other offices.
     This "work sharing" capability allows us to provide a greater depth and
     breadth of expertise to our clients and helps stabilize the workload in our
     various offices.

     Competition
     -----------
     Our engineering segment competes with a large number of firms of various
     sizes, ranging from the industry's largest firms, which operate on a
     worldwide basis, to much smaller regional and local firms. Many of our
     competitors are larger than we are and have significantly greater financial
     and other resources available to them than we do.

     Competition is primarily centered on performance and the ability to provide
     the engineering, planning and project execution skills required to complete
     projects in a timely and cost efficient manner. The technical expertise of
     our management team and technical personnel and the timeliness and quality
     of our support services, are key competitive factors. Larger projects,
     especially international work, typically include pricing alternatives
     designed to shift risk to the service provider, or at least to cause the
     service provider to share a portion of the risks associated with cost
     overruns in service delivery. These alternatives include fixed-price,
     guaranteed maximum price, incentive fee, competitive bidding and other
     "value based" pricing arrangements.







                                        8
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Systems Segment
     ---------------

                                         ------------------------------
                                           2005       2004       2003
                                         ------------------------------
                                             (Amounts in thousands)
                                         ------------------------------
        Revenues to external customers   $ 17,887   $ 15,258   $ 15,339
        Operating profit (loss)          $    309   $    585   $    (38)
        Total assets                     $  6,159   $  7,806   $  3,913

     General
     -------
     Our systems segment designs, assembles, programs, installs, integrates and
     services control and instrumentation systems for specific applications in
     the energy and processing related industries. The systems segment currently
     consists of ENGlobal Systems, Inc. ("ESI"). Beginning in 2005, the
     operations of ENGlobal Constant Power, ENGlobal Technologies, Inc. and
     Senftleber & Associates, LP were merged into ESI. The systems segment
     derives revenues primarily from fees on contracts for the design and
     assembly of control and instrumentation systems. Income from the systems
     segment is derived from our ability to generate revenues and collect cash
     on fixed price contracts in excess of our costs for labor, materials and
     equipment and transportation costs, plus our SG&A expenses.

     ESI's control and instrumentation systems are custom designed and include
     both conventional pneumatic and hydraulic control systems, as well as
     electronic, microprocessor-based controls employing programmable logic.
     Typical applications for control and instrumentation systems include oil
     and gas production safety systems; refinery, petrochemical and chemical
     plant controls; online process; analyzer packaging; fire and gas detection
     systems; pipeline facility controls; data acquisition systems; and control
     systems for various processing equipment. We perform all facets of control
     and instrumentation system design, engineering, assembly and testing
     in-house. Field installation and technical staff perform start-up and
     commissioning services, modification to existing systems, on-site training
     and routine maintenance procedures for client operating personnel.

     ESI previously provided products and services supporting the advanced
     automation and environmental technology fields. Advanced automation
     services provided by ESI included automation technology audits, consulting,
     advanced process controls and process computer services, multivariable
     control, optimization (on-line and off-line), neural net applications,
     operator training simulators, expert systems and on-site support. In
     January 2006, EAG assumed responsibility for the provision of these
     services.

     In January 2006 ESI acquired certain assets of Analyzer Technology
     International, Inc. ("ATI"), a Houston-based analyzer systems provider of
     online process analyzer systems. ATI will relocate its operation to ESI's
     Houston facility, which the Company expects will enable ESI's clients to
     perform a more efficient factory adaptable test by temporarily connecting
     both control and analyzer systems onsite prior to delivery. The addition of
     ATI will provide ESI with a greater presence in the process analyzer
     sector, especially for larger downstream opportunities of foreign
     grassroots projects.

     Competition
     -----------
     The systems segment has been impacted by price variations attributable to
     cyclical conditions in the oil and gas, petroleum and processing
     industries. In addition, during 2005, a large percentage of ESI's revenues
     were derived from fabrication, which has a lower profit margin than other
     services. ESI's control systems and modular facilities compete with similar
     systems built by other companies, most of which compete primarily on the
     basis of pricing.

     We believe that pricing, technical competence and ability to provide
     superior service are the primary bases of competition.

                                        9
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Acquisitions and Sales
     ----------------------
     We have grown our business over the past several years through both
     internal initiatives and through strategic mergers and acquisitions. These
     mergers and acquisitions have allowed us to (i) expand our client base and
     the range of services that we provide to our clients; and (ii) gain access
     to new geographic areas. We expect to continue evaluating and assessing
     acquisition opportunities that will either complement our existing business
     base or that will provide the Company with additional capabilities or
     geographical coverage. We believe that strategic acquisitions will enable
     us to more efficiently serve the technical needs of national and
     international clients and strengthen our financial performance. The
     following table lists the businesses we have acquired during the three-year
     period ended December 31, 2005.
<TABLE>
<CAPTION>
<S>                                             <C>                <C>
         Name/Location/Business Unit            Date Acquired            Primary Services
         ---------------------------            -------------            ----------------

            Petro-Chem Engineering                July 2003        Onsite Design and Engineering
                 Freeport, TX
        Operates as a Division of ECR

        Senftleber & Associates, L.P.           October 2003            Onsite Programmers
                Washington, TX
        Operates as a Division of EAG

        Engineering Design Group, Inc.          January 2004      Automated Fuel Handling & Tank
                  Tulsa, OK                                               Gauging Systems
        Operates as ETS, formerly EDG

            AmTech Inspection, LLC             September 2004       Onsite Inspection and Plant
                 Midland, TX                                            Process Safety Mgt
        Operates as a Division of ECR

     Cleveland Inspection Services, Inc.        October 2004        Onsite Pipeline Inspection
                Cleveland, OK
        Operates as a Division of ECR

       Instrument Services Company, LLC         November 2004          Onsite Instrument and
                  Tulsa, OK                                           Electrical Technicians
        Operates as a Division of ETS

          InfoTech Engineering, LLC             December 2004       Advanced Automation System
               Baton Rouge, LA                                                Design
        Operates as a Division of EAG
</TABLE>

     Business Strategy
     -----------------
     Our objective is to strengthen the Company's position as a leading
     engineering and consulting services provider while enhancing the services
     we offer and expanding our geographic presence. To achieve this objective,
     we have developed a strategy comprised of the following key elements:

          o    Continue to Recruit and Retain Qualified Personnel. We believe
               recruiting and retaining qualified, skilled professionals is
               crucial to our success and growth. As a result, we have dedicated
               staff focused on recruiting personnel with experience in the
               energy industry. We have also used inter-company recruiting to
               retain key personnel.

                                       10
<PAGE>

ITEM 1.     BUSINESS (Continued)

          o    Improve Utilization of Resources. We have developed a
               work-sharing program through the use of an internal virtual
               private network that gives our clients access to technical
               resources located in any of our offices and allows for higher
               utilization of our resources. We believe the work-sharing program
               has reduced employee turnover and provides for a more stable work
               environment. We are also moving toward standardization of
               engineering processes and procedures among our offices, which we
               believe will enhance our work-sharing ability and provide our
               clients with more consistent and higher quality services.

          o    Pursue Foreign Technical Resources. Our engineering operations
               continue to test the use of offshore technical resources to
               establish longer-term access to professional engineering and
               design work in lower cost countries such as Mexico, India and the
               Far East. If these tests are ultimately successful, it will allow
               us to lower our contract bid prices and enhance our competitive
               position.

          o    Enhance and Strengthen Our Ability to Perform Engineering,
               Procurement and Construction Projects. We rely heavily on repeat
               business and referrals from existing customers, industry members
               and manufacturing representatives. The engineering segment's
               strategy is to increase revenues by developing and marketing its
               ability to perform full service turnkey projects, also called EPC
               (Engineering, Procurement and Construction) projects. The
               engineering segment has traditionally been responsible only for
               the engineering portion of its projects, which usually represents
               between five to fifteen percent of a project's total installed
               cost.

          o    Maintain High Quality Service. To maintain high quality service,
               we focus on being responsive to our customers, working diligently
               and responsibly, and maintaining schedules and budgets. The
               Company has a quality control and assurance program to maintain
               standards and procedures for performance and documentation and to
               audit and monitor compliance with procedures and quality
               standards.

          o    Expand and Enhance Technical Capabilities. We believe that it is
               important to develop our capabilities in advanced computer-aided
               process simulation, design and drafting. To achieve this
               objective, we have purchased computer hardware and software from
               several suppliers in order to have the latest platforms for the
               design of plant systems. This initiative should enhance our
               marketing position with many of our customers who are currently
               utilizing these design platforms.

          o    Pursue Balanced Growth. We continue to pursue balanced growth for
               our business, utilizing both external acquisitions as well as
               internal measures as a means of future growth. The internal
               measures will include an active business development program,
               together with initiatives to start new business operations. We
               also pursue acquisitions that will allow us to offer expanded
               engineering and control system services to a broad energy
               complex, increase our technical capabilities, grow our business
               geographically and improve our market share.

          o    Continue to Increase Name Recognition. We intend to continue to
               present a more cohesive image and continue to increase name
               recognition. All of ENGlobal's operating subsidiaries have
               adopted "ENGlobal" as part of their name, and newly acquired
               entities will adopt ENGlobal as a part of their name within 12 to
               18 months of their acquisition.

                                       11
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Sales and Marketing
     -------------------
     Our various subsidiaries derive revenues primarily from two sources: (1)
     in-house direct sales and (2) referrals from existing customers and
     industry members and manufacturing representatives. Our in-house sales
     managers are assigned to industry segments and territories within the
     United States. Management believes that this method of selling should
     result in increased account penetration and enhanced customer service,
     which should, in turn, create and maintain the foundation for long-term
     customer relationships. Our growth depends in large measure on our ability
     to attract and retain qualified sales representatives and sales management
     personnel. Management believes that in-house marketing allows for more
     accountability and control, thus increasing profitability.

     Products and services are also promoted through general and trade
     advertising, participation in trade shows and through on-line Internet
     communication via our corporate home page at www.englobal.com. The ENGlobal
     site provides information about both of our operating segments. We use
     in-house resources to maintain and update our website and our subsidiaries'
     web sites on an ongoing basis. Through the ENGlobal website, we seek to
     provide visitors with a single point of contact for obtaining information
     on the services and products offered by the ENGlobal family of companies.

     Our business development department focuses on building long-term
     relationships with customers and providing customers with product
     application, engineering and after-the-sale services. Additionally, we seek
     to capitalize on cross-selling opportunities between our various
     subsidiaries. Sales leads are often jointly developed and pursued by the
     sales personnel from a number of these subsidiaries.

     Much of our business is repeat business and we are introduced to new
     customers in most cases by referrals from existing customers and industry
     members. The Company believes that our acquisition program, although small,
     has the benefit of expanding our existing customer base.

     We currently employ 17 full-time professional in-house marketers in our
     business development department who concentrate on the engineering services
     segment, and 6 full-time professional in-house marketers in our systems
     segment. We have retained business development agents in the Middle East
     and the United Kingdom. We have also formed alliances, which include
     marketing activities, with other engineering and construction firms in
     Mexico City and South America.

     Customers
     ---------
     Our customer base consists primarily of Fortune 500 companies representing
     a variety of industries in the United States. While we do not have
     continuing dependence on any single client or a limited group of clients,
     one or a few clients may contribute a substantial portion of our revenues
     in any given year or over a period of several consecutive years due to
     major engineering projects. For example, during 2005, 37% of our total
     revenues were attributable to a large EPC project completed by our
     engineering segment and our systems segment for one major refining and
     petrochemical client and its subsidiaries.

     We have had success undertaking new projects for prior clients and
     providing ongoing services to clients following the completion of the
     projects.

     Nevertheless, in order to generate revenues in future years, we must
     continue efforts to obtain new engineering projects. Historically, we have
     not generated significant revenues from government clients. We hope that
     our 2004 acquisition of Engineering Design Group, Inc. will allow us to
     increase revenues from the government market beyond the $2.0 million in
     revenue that we generated in 2005.

                                       12
<PAGE>

ITEM 1.     BUSINESS (Continued)

     In recent years, the continuing trend among engineering clients and their
     industry counterparts has been toward outsourcing and sole sourcing. This
     trend has fostered the development of ongoing, longer-term arrangements
     with clients, rather than one-time limited engagements. These arrangements
     are often referred to as partnering relationships, alliances or sole source
     contracts, and vary in scope, duration and degree of commitment. For
     example, engagements may provide for:

          o    a minimum number of work man-hours over a specified period;
          o    the provision of at least a designated percentage of the client's
               requirements;
          o    the designation of the Company as the client's sole source of
               engineering at specific locations; or
          o    a non-binding preference or intent, or a general contractual
               framework, for what the parties expect will be an ongoing
               relationship.

     Despite their variety, we believe that these partnering relationships have
     a stabilizing influence on our service revenues. At present, we maintain
     some form of partnering or alliance arrangement with 16 major oil and
     chemical companies. Most of our projects are specific in nature and we
     generally have multiple projects with the same clients. If we were to lose
     one or more of our significant clients and were unable to replace them with
     other customers or other projects, our business would be materially
     adversely affected.

     In the systems segment, our clients include end-users and operators of
     facilities relating to oil and gas products, pipelines, refineries,
     chemical companies and processing plants. Other clients include equipment
     manufacturers, construction contractors and other engineering firms that
     incorporate our control systems into facilities and products that they
     design, construct and manufacture. As in the engineering segment, in any
     given year, a small number of clients may account for a large percentage of
     the systems segment's revenues for that year, depending on the number of
     major projects undertaken. Though the systems segment frequently receives
     work from repeat clients, its client list may vary significantly from year
     to year.

     Our ten largest customers, who vary from one period to the next, accounted
     for 78% of our total revenue in both 2005 and 2004.

     We do not have any long-term commitments from these clients and sales of
     products from the systems segment are typically made according to the
     client's specifications on a purchase order basis. Our potential revenues
     are, therefore, dependent on continuing relationships with these customers.




                                       13
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Contracts
     ---------
     We generally enter into two principal types of contracts with our clients:
     time and materials contracts and fixed-price contracts. In fiscal 2005, 88%
     and 12% of our net revenue was derived from time and materials and
     fixed-price contracts, respectively. Our various clients determine which
     type of contract we will enter into for a particular engagement.

          o    Time and Materials. Under our time and materials contracts, we
               are paid for labor at either negotiated hourly billing rates or
               reimbursed for allowable hourly rates and for other expenses.
               Profitability on these contracts is driven by billable headcount
               and cost control. Some of these contracts may have upper limits,
               referred to as "not to exceed." If our costs generate billings
               that exceed the contract ceiling or are not allowable, we will
               not be able to obtain reimbursement for any excess cost. Further,
               the continuation of each contract partially depends upon the
               customer's discretionary periodic assessment of our performance
               on that contract.

          o    Fixed-Price. Under a fixed-price contract, we provide the
               customer a total project for an agreed-upon price, subject to
               project circumstances and changes in scope. Fixed-price contracts
               carry certain inherent risks, including risks of losses from
               underestimating costs, delays in project completion, problems
               with new technologies and economic and other changes that may
               occur over the contract period. Another risk includes our ability
               to secure written change orders prior to commencing work on such
               orders, which may prevent our getting paid for work performed.
               Consequently, the profitability of fixed-price contracts may vary
               substantially.

     Backlog
     -------
     Backlog represents gross revenue of all awarded contracts that have not
     been completed and will be recognized as revenues over the life of the
     project. Although backlog reflects business that we consider to be firm,
     cancellations or scope adjustments may occur. Further, most contracts with
     clients may be terminated at will, in which case the client would only be
     obligated to us for services provided through the termination date. We have
     adjusted backlog to reflect project cancellations, deferrals and revisions
     in scope and cost (both upward and downward) known at the reporting date;
     however, future contract modifications or cancellations may increase or
     reduce backlog and future revenues. As a result, no assurances can be given
     that the amounts included in backlog will ultimately be realized.

     At December 31, 2005, our backlog was $170 million compared to an estimated
     $135 million at December 31, 2004. We estimate that approximately 75% of
     the backlog at December 31, 2005 will be recognized during fiscal 2006.

     The backlog at December 31, 2005 consists of $165 million with commercial
     customers and $5 million with the United States Federal Government. Backlog
     on the federal programs includes only the portion of the contract award
     that has been funded by the U.S. Government.

     Backlog includes gross revenue under two types of contracts: (1) contracts
     for which work authorizations have been received on a fixed-price basis and
     not-to-exceed projects that are well defined, and (2) time and material
     evergreen contracts at an assumed 12 month run-rate, where we place
     employees at our clients' site to perform day-to-day project efforts.

     Customer Service and Support
     ----------------------------
     We provide service and technical support to our customers in varying
     degrees depending upon the business line and on customer contractual
     arrangements. The Company's technical staff provides initial telephone
     support services for its customers. These services include isolating and
     verifying reported product failures and authorizing repair services in
     support of customer requirements. We also provide on-site engineering
     support if a technical issue cannot be resolved over the telephone. On
     projects for which we have provided engineering systems, we provide
     worldwide start-up and commissioning services. We also provide the
     manufacturers' limited warranty coverage for products we re-sell.

                                       14
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Dependence Upon Suppliers
     -------------------------
     Our ability to provide clients with services and systems in a timely and
     competitive manner depends on the availability of products and parts from
     our suppliers at competitive prices and on reasonable terms. Our suppliers
     are not obligated to have products on hand for timely delivery nor can they
     guarantee product availability in sufficient quantities to meet our
     demands. There can be no assurance that we will be able to obtain necessary
     supplies at prices or on terms we find acceptable. However, in an effort to
     maximize availability and maintain quality control, we generally procure
     components from multiple distributors.

     For example, all of the product components used by our systems segment are
     fabricated using components and materials that are available from numerous
     domestic suppliers. There are approximately 36 principal suppliers of these
     components, each of whom can be replaced by an equally viable competitor.
     No one manufacturer or vendor provides products that account for 10% or
     more of our revenues. Thus, we anticipate little or no difficulty in
     obtaining components in sufficient quantities and in a timely manner to
     support our manufacturing and assembly operations. Units produced through
     the systems segment are normally not produced for inventory and component
     parts are typically purchased on an as-needed basis.

     Despite the foregoing, some of our subsidiaries rely on certain suppliers
     for necessary components and there can be no assurance that these
     components will continue to be available on acceptable terms. If a
     subsidiary terminates a long-standing supply relationship, it may be
     difficult to obtain alternative sources of supply without a material
     disruption in our ability to provide products and services to our
     customers. While we do not believe that such a disruption is likely, if it
     did occur, it could have a material adverse effect on our financial
     condition and results of operations.

     Patents, Trademarks, Licenses
     -----------------------------
     Our success depends in part upon our ability to protect our proprietary
     technology, which we do primarily through protection of our trade secrets
     and confidentiality agreements. The U.S. Patent and Trademark Office
     approved our application for the uses of "ENGlobal" and "Integrated Rack"
     in September 2004 and March 2005, respectively. In addition, we have
     pending trademark applications on file with the U.S. Patent and Trademark
     Office for the names "Flare-Mon" and "Purchased Data." There can be no
     assurance that the protective measures we currently employ will be adequate
     to prevent the unauthorized use or disclosure of our technology, or the
     independent third party development of the same or similar technology.
     Although our competitive position to some extent depends on our ability to
     protect our proprietary and trade secret information, we believe that other
     factors, such as the technical expertise and knowledge base of our
     management and technical personnel, as well as the timeliness and quality
     of the support services we provide, will also help us to maintain our
     competitive position.

     Government Regulations
     ----------------------
     The Company and certain of our subsidiaries are subject to various foreign,
     federal, state, and local laws and regulations relating to our business and
     operations, and various health and safety regulations as established by the
     Occupational Safety and Health Administration. The Company and members of
     its professional staff are subject to a variety of state, local and foreign
     licensing, registration and other regulatory requirements governing the
     practice of engineering. Currently, we are not aware of any situation or
     condition relating to the regulation of the Company, its subsidiaries, or
     personnel that we believe is likely to have a material adverse effect on
     our results of operations or financial condition.

                                       15
<PAGE>

ITEM 1.     BUSINESS (Continued)

     Employees
     ---------
     As of December 31, 2005, the Company and its subsidiaries employed 1,724
     individuals. Of these employees, 23 were employed in sales and marketing;
     918 were employed in engineering and related positions; 174 were employed
     in technical production positions; 273 were employed as inspectors; 256
     were employed as project support staff; and 80 were employed in
     administration, finance and management information systems. We believe that
     our ability to recruit and retain highly skilled and experienced technical,
     sales and management personnel has been and will continue to be, critical
     to our ability to execute our business plan. None of our employees is
     represented by a labor union or is subject to a collective bargaining
     agreement. We believe that relations with our employees are good.

ITEM 1A.    RISK FACTORS

     Set forth below and elsewhere in this Report and in other documents we file
     with the SEC are risks and uncertainties that could cause actual results to
     differ materially from the results contemplated by the forward-looking
     statements contained in this Report. You should be aware that the
     occurrence of any of the events described in these risk factors and
     elsewhere in this Report could have a material adverse effect on our
     business, financial condition and results of operations and that upon the
     occurrence of any of these events, the trading price of our common stock
     could decline.

          We are engaged in highly competitive businesses and must typically bid
          against competitors to obtain engineering and service contracts.

          We are engaged in highly competitive businesses in which customer
          contracts are typically awarded through competitive bidding processes.
          We compete with other general and specialty contractors, both foreign
          and domestic, including large international contractors and small
          local contractors. Some competitors have greater financial and other
          resources than we do, which, in some instances, gives them a
          competitive advantage over us.

          The failure to attract and retain key professional personnel could
          adversely affect the Company.

          Our success depends on attracting and retaining qualified personnel in
          a competitive environment. We are dependent upon our ability to
          attract and retain highly qualified managerial, technical and business
          development personnel. Competition for key personnel is intense. We
          cannot be certain that we will retain our key managerial, technical
          and business development personnel or that we will attract or
          assimilate key personnel in the future. Failure to retain or attract
          such personnel would materially adversely affect our businesses,
          financial position, results of operations and cash flows. This is a
          major risk factor that could materially impact our operating results.

          Our business and operating results could be adversely affected by our
          inability to accurately estimate the overall risks, revenue or costs
          on a contract.

          We generally enter into two principal types of contracts with our
          clients: time and materials contracts and fixed-price contracts. Under
          our fixed-price contracts, we receive a fixed-price irrespective of
          the actual costs we incur and, consequently, we are exposed to a
          number of risks. These risks include underestimation of costs,
          problems with new technologies, unforeseen expenditures or
          difficulties, delays beyond our control and economic and other changes
          that may occur during the contract period. Our ability to secure
          change orders on scope changes and our ability to invoice for such
          changes poses an additional risk. In fiscal 2005, approximately 12% of
          our net revenue was derived from fixed-price contracts.

          Under our time and materials contracts, we are paid for labor at
          negotiated hourly billing rates or reimbursement at specified mark-up
          hourly rates and negotiated rates for other expenses. Profitability on
          these contracts is driven by billable headcount and cost control. Some
          time and materials contracts are subject to contract ceiling amounts,
          which may be fixed or performance-based. If our costs generate

                                       16
<PAGE>

ITEM 1A.    RISK FACTORS (Continued)

          billings that exceed the contract ceiling or are not allowable under
          the provisions of the contract or any applicable regulations, we may
          not be able to obtain reimbursement for all of our costs.

          Revenue recognition for a contract requires judgment relative to
          assessing the contract's estimated risks, revenue and costs, and
          technical issues. Due to the size and nature of many of our contracts,
          the estimation of overall risk, revenue and cost at completion is
          complicated and subject to many variables. Changes in underlying
          assumptions, circumstances or estimates may also adversely affect
          future period financial performance. This is a major risk factor that
          could materially impact our operating results.

          Economic downturns could have a negative impact on our businesses.

          Demand for the services offered by us has been and is expected to
          continue to be, subject to significant fluctuations due to a variety
          of factors beyond our control, including demand for engineering
          services in the petroleum refining, petroleum chemical and pipeline
          industries and in other industries that we provide services to. During
          economic downturns in these industries, our customer's ability to
          engage us may decline significantly. We cannot be certain that
          economic or political conditions will be generally favorable or that
          there will not be significant fluctuations adversely affecting our
          industry as a whole or key markets targeted by us.

          Our dependence on one or a few customers could adversely affect us.

          One or a few clients have in the past and may in the future contribute
          a significant portion of our consolidated revenues in any one year or
          over a period of several consecutive years. In 2005, approximately 44%
          of our revenues were from one client, approximately 12% of our
          revenues were from another client and another 12% were from a third
          client. As our backlog frequently reflects multiple projects for
          individual clients, one major customer may comprise a significant
          percentage of our backlog at any point in time. Because these
          significant customers generally contract with us for specific
          projects, we may lose these customers from year to year as their
          projects with us are completed. If we do not replace them with other
          customers or other projects, our business could be materially
          adversely affected. Additionally, we have long-standing relationships
          with many of our significant customers. Our contracts with these
          customers, however, are on a project-by-project basis and the
          customers may unilaterally reduce or discontinue their purchases at
          any time. The loss of business from any one of such customers could
          have a material adverse effect on our business or results of
          operations.

          Additional acquisitions may adversely affect our ability to manage our
          business.

          Acquisitions have contributed to our growth over the past three years
          and we plan to continue making acquisitions in the future on terms
          management considers favorable to us. The successful acquisition of
          other companies involves an assessment of future revenue
          opportunities, operating costs, economies and earnings after the
          acquisition is complete, potential industry and business risks and
          liabilities beyond our control. This assessment is necessarily inexact
          and its accuracy is inherently uncertain. In connection with our
          assessments, we perform reviews of the subject acquisitions we believe
          to be generally consistent with industry practices. These reviews,
          however, may not reveal all existing or potential problems, nor will
          they permit a buyer to become sufficiently familiar with the target
          companies to assess fully their deficiencies and capabilities. We
          cannot assure you that we will identify, finance and complete
          additional suitable acquisitions on acceptable terms. We may not
          successfully integrate future acquisitions. Any acquisition may
          require substantial attention from our management, which may limit the
          amount of time that management can devote to day-to-day operations.
          Our inability to find additional attractive acquisition candidates or
          to effectively manage the integration of any businesses acquired in
          the future could adversely affect our ability to grow profitably or at
          all.

          Seasonality of our industry may cause our revenues to fluctuate.

          Holidays and employee vacations during our fourth quarter exert
          downward pressure on revenues for that quarter, which is only
          partially offset by the year-end efforts on the part of many clients
          to spend any remaining funds budgeted for engineering services or
          capital expenditures during the year. The annual budgeting and
          approval process under which these clients operate is normally not
          completed until after the beginning of each new year, which can
          depress results for the first quarter. Principally due to these

                                       17
<PAGE>

ITEM 1A.    RISK FACTORS (Continued)

          factors, our revenues during the first and fourth quarters generally
          tend to be lower than in the second and third quarters.

          Liability claims could result in losses.

          Providing engineering and design services involves the risk of
          contract, professional errors and omissions and other liability
          claims, as well as adverse publicity. Further, many of our contracts
          will require us to indemnify our clients not only for our negligence,
          if any, but also for the concurrent negligence and in some cases, sole
          negligence of our clients. We currently maintain liability insurance
          coverage, including coverage for professional errors and omissions.
          However, claims outside of or exceeding our insurance coverage may be
          made. A significant claim could result in unexpected liabilities, take
          management time away from operations, and have a material adverse
          impact on our cash flow.

          If the operating result of either segment is adversely affected, an
          impairment of goodwill could result in a write down.

          Based on factors and circumstances impacting ENGlobal and the business
          climate in which it operates, the Company may determine that it is
          necessary to re-evaluate the carrying value of its goodwill by
          conducting an impairment test in accordance with SFAS No. 142. The
          Company has assigned goodwill to its two segments based on estimates
          of the relative fair value of each segment. If changes in the
          industry, market conditions, or government regulation negatively
          impact either of the Company's segments resulting in lower operating
          income, if assets are harmed, if anticipated synergies or cost savings
          are not realized with newly acquired entities, or if any circumstance
          occurs which results in the fair value of either segment declining
          below its carrying value, an impairment to goodwill would be created.
          In accordance with SFAS No. 142, the Company would be required to
          write down the carrying value of goodwill.

          Our Board of Directors may authorize future sales of ENGlobal common
          stock, which could result in a decrease in value to existing
          stockholders of the shares they hold.

          Our Articles of Incorporation authorize our board of directors to
          issue up to an additional 48,058,056 shares of common stock and an
          additional 2,265,167 shares of preferred stock. These shares may be
          issued without stockholder approval unless the issuance is 20% or more
          of our outstanding common stock, in which case the American Stock
          Exchange requires stockholder approval. We may issue shares of stock
          in the future in connection with acquisitions or financings. In
          addition, we may issue options as incentives under our 1998 Incentive
          Option Plan. Future issuances of substantial amounts of common stock,
          or the perception that these sales could occur, may affect the market
          price of our common stock. In addition, the ability of the board of
          directors to issue additional stock may discourage transactions
          involving actual or potential changes of control of the Company,
          including transactions that otherwise could involve payment of a
          premium over prevailing market prices to holders of our common stock.

          Our backlog is subject to unexpected adjustments and cancellations and
          is, therefore, an uncertain indicator of our future revenues or
          earnings.

          As of December 31, 2005, our backlog was approximately $170 million.
          We cannot assure investors that the revenues projected in our backlog
          will be realized or, if realized, will result in profits. Projects may
          remain in our backlog for an extended period of time prior to project
          execution and, once project execution begins, it may occur unevenly
          over the current and multiple future periods. In addition, project
          terminations, suspensions or reductions in scope may occur from time
          to time with respect to contracts reflected in our backlog. Such
          backlog reductions would reduce the revenue and profit we actually
          receive from contracts reflected in our backlog. Future project
          cancellations and scope adjustments could further reduce the dollar
          amount of our backlog and the revenues and profits that we actually
          earn.

                                       18
<PAGE>

ITEM 1A.    RISK FACTORS (Continued)

          Our dependence on subcontractors and equipment manufacturers could
          adversely affect us.

          We rely on third-party subcontractors as well as third-party suppliers
          and manufacturers to complete our projects. To the extent that we
          cannot engage subcontractors or acquire supplies or materials, our
          ability to complete a project in a timely fashion or at a profit may
          be impaired. If the amount we are required to pay for these goods and
          services exceeds the amount we have estimated in bidding for
          fixed-price or cost-plus contracts, we could experience losses in the
          performance of these contracts. In addition, if a subcontractor or
          supplier is unable to deliver its services or materials according to
          the negotiated terms for any reason, including the deterioration of
          its financial condition or over-commitment of its resources, we may be
          required to purchase the services or materials from another source at
          a higher price. This may reduce the profit to be realized or result in
          a loss on a project for which the services or materials were needed.

          If we are not able to successfully manage our growth strategy, our
          business and results of operations may be adversely affected.

          We have grown rapidly over the last several years. Our growth presents
          numerous managerial, administrative, operational and other challenges.
          Our ability to manage the growth of our operations will require us to
          continue to improve our management information systems and maintain
          discipline in our internal systems and controls. Industry trends and
          our strategy to pursue larger fixed-price EPC projects, our ability to
          manage and measure project performance will require us to strengthen
          our internal project and cost control systems within operations that
          have traditionally operated in a cost plus environment. In addition,
          our growth will increase our need to attract, develop, motivate and
          retain both our management and professional employees. The inability
          of our management to effectively manage our growth or the inability of
          our employees to achieve anticipated performance could have a material
          adverse effect on our business.

          If we are not able to successfully manage internal growth initiatives,
          our business and results of operations may be adversely affected.

          Our growth strategy is to use our technical expertise in conjunction
          with industry trends. To support this strategy, the Company may elect
          to fund internal growth initiatives targeted at markets that the
          Company believes may have significant potential needs for the
          Company's services. The downside risks are that such initiatives could
          have a negative effect on current earnings until such initiatives
          reach critical mass or that industry trends have been misread or
          delayed and continued funding could have a negative impact on long
          term earnings.

          A small number of stockholders own a significant portion of our
          outstanding common stock, thus limiting the extent to which other
          stockholders can effect decisions subject to stockholder vote.

          Directors, executive officers and principal stockholders of ENGlobal
          and their affiliates, beneficially own approximately 40% of our
          outstanding common stock on a fully diluted basis. Accordingly, these
          stockholders, as a group, are able to affect the outcome of
          stockholder votes, including votes concerning the adoption or
          amendment of provisions in our Articles of Incorporation or bylaws and
          the approval of mergers and other significant corporate transactions.
          The existence of these levels of ownership concentrated in a few
          persons makes it unlikely that any other holder of common stock will
          be able to affect the management or direction of the Company. These
          factors may also have the effect of delaying or preventing a change in
          management or voting control of the Company.

ITEM 1B.    UNRESSOLVED STAFF COMMENTS

     Not applicable.

ITEM 2.     PROPERTIES

     Facilities
     ----------
     We lease space in 15 buildings in the U.S. and Canada totaling
     approximately 365,000 square feet, and we own an office building in Baton
     Rouge, Louisiana with 27,500 square feet. The leases have remaining terms
     ranging from monthly to six years and are at what we consider to be

                                       19
<PAGE>

ITEM 2.     PROPERTIES (Continued)

     commercially reasonable rental rates. Our principal office locations are in
     Houston and Beaumont, Texas, and Tulsa, Oklahoma. We have other offices in
     Freeport, Midland and Dallas, Texas, Baton Rouge and Lake Charles,
     Louisiana, Cleveland and Blackwell, Oklahoma and Calgary, Alberta Canada.
     Approximately 214,000 square feet of our total office space is designated
     for our professional, technical and administrative personnel. We believe
     that our office and other facilities are well maintained and adequate for
     existing and planned operations at each operating location.

     Our systems segment performs fabrication assembly in two shop facilities.
     One facility is in Houston, Texas with approximately 62,600 square feet of
     space and a second facility is in Beaumont, Texas with approximately 30,000
     square feet of space.

     During 2005, we leased approximately 14,000 square feet of office space in
     Beaumont, Texas from a joint venture owned one-third by each of: ENGlobal
     Engineering, Inc., Michael L. Burrow (the Company's CEO), and a stockholder
     of the Company who owns less than 1% of the Company's stock. We believe
     that this lease was at a commercially reasonable rental rate. The lease was
     renewed in August 2005. In September 2005, the building was damaged by
     Hurricane Rita and all tenants have relocated to other locations. No
     further lease payments have been made by the Company since September 2005
     and the insurance claim filed by PEI Investments remains unsettled.

     Below is a complete listing of the space leased and owned with the
     expiration dates of the leases.

            Location           Square Feet            Lease Expiration Date
        ----------------    -----------------        -----------------------
            Beaumont              42,880                      2011
                                  30,250                      2008
                                  23,616                      2010
                                  13,590                 Month to Month
               **                  2,300                      2006
            Houston               62,641                      2008
                                  48,979                      2011
            Midland                4,400                      2008
           Richardson             14,323                      2008
          Lake Charles            12,183                      2006
                                   1,140                      2007
             Tulsa                68,882                      2008
                                     678                      2007
           Cleveland               8,600                      2006
           Blackwell               1,800                 Month to Month
            Freeport              23,000                      2007
          Baton Rouge             27,500                      Owned
        Calgary, Alberta           5,157                      2010
                            -----------------
                                 391,919
                            =================
     ** Began January 10, 2006

     In March 2005, we entered into a lease agreement for the relocation of our
     corporate headquarters and Houston engineering office to a 33,759 square
     foot facility in North Houston. Effective June 1, 2005, approximately 60
     employees moved to our new location at 654 North Sam Houston Parkway E,
     Suite 400, Houston, Texas 77060-5914, which can accommodate up to 150
     employees with appropriate space planning. We executed a six-year lease
     requiring aggregate lease payments in excess of $2.3 million, with a right
     of refusal covering all remaining space in the building. In the second
     quarter of 2006, we expect to lease additional space in the same building
     for planned growth.

                                       20
<PAGE>

ITEM 3.     LEGAL PROCEEDINGS

     During 2005, the Company and its subsidiaries were successful in obtaining
     the dismissal of all but one of the remaining petitions filed against the
     Company and its subsidiaries in 2003, on behalf of former employees of
     Barnard and Burk, Inc. The Company believes that the remaining petition is
     without merit and immaterial to the Company's business and financial
     condition and plans to vigorously defend itself in this lawsuit.

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

     Not applicable.







                                       21
<PAGE>

                                     PART II
                                     -------

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
            AND ISSUER PURCHASES OF EQUITY SECURITIES

     Market Information and Holders
     ------------------------------
     The Company's common stock has been quoted on the American Stock Exchange
     ("AMEX") since June 16, 1998, and is currently traded under the symbol
     "ENG." From its initial listing on AMEX on June 16, 1998 to June 15, 2002,
     the Company's stock was traded under the symbol "IDS." Newspaper stock
     listings identify us as "ENGlobal."

     The following table sets forth the high and low sales prices of our common
     stock for the periods indicated.

                                       Fiscal Year Ended December 31
                            --------------------------------------------------
                                        2005                          2004
                            -------------------------- -----------------------
                                High          Low         High         Low
                            ------------ ------------- ---------- ------------
         First Quarter          2.87          2.04        2.32        1.96
         Second Quarter         4.03          2.01        2.43        1.44
         Third Quarter          9.10          3.69        1.75        1.20
         Fourth Quarter         8.75          5.87        3.19        1.21

     The foregoing figures, based on information published by AMEX, do not
     reflect retail mark-ups or markdowns and may not represent actual trades.

     In connection with our December 2001 merger with Petrocon, we issued
     2,500,000 shares of Series A Preferred Stock, $0.001 par value per share,
     to Equus II Incorporated. In 2002 and 2003, we issued dividends to Equus in
     the form of 234,833 shares of Series A Preferred Stock. Effective August
     2003, the Company exercised its right to convert all outstanding Series A
     Preferred Stock to 1,149,089 shares of common stock. The Series A Preferred
     Stock had fixed terms that were specific to the 2001 merger with Petrocon.
     Therefore, the Company intends to seek stockholder approval to eliminate
     the 2,265,167 shares of available and unissued Series A Preferred Stock
     from its capital structure.

     As of March 24, 2006, approximately 200 stockholders of record held the
     Company's common stock. We do not have current information regarding the
     number of holders of beneficial interest holding our common stock.




                                       22
<PAGE>

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
            AND ISSUER PURCHASES OF EQUITY SECURITIES (Continued)

     Equity Compensation Plan Information
     ------------------------------------
     The following table sets forth certain information concerning the Company's
     equity compensation plans as of December 31, 2005. See Note 11 in the
     attached financial statements.
<TABLE>
<CAPTION>

                                                                                           Number of Securities
                                                                                         Remaining Available for
                                    Number of Securities to       Weighted-Average        Future Issuance Under
                                    be Issued Upon Exercise      Exercise Price of      Equity Compensation Plans
                                    of Outstanding Options,     Outstanding Options,     [Excluding Securities in
                                    Warrants and Rights (a)   Warrants and Rights (b)        Column (a)] (c)
                                    -----------------------   -----------------------  --------------------------
<S>                                 <C>                       <C>                      <C>
     Equity compensation plans
        approved by security
        holders                         1,438,234  (1)                 3.07                      509,260
                                    -----------------------                            --------------------------
</TABLE>

     Dividend Policy
     ---------------
     The Company has never declared or paid a cash dividend on its common stock.
     The Company intends to retain any future earnings for reinvestment in its
     business and does not intend to pay cash dividends in the foreseeable
     future. In addition, restrictions contained in our loan agreements
     governing our credit facility with Comerica Bank preclude us from paying
     any dividends on our common stock while any debt under those agreements is
     outstanding. The payment of dividends in the future will depend on numerous
     factors, including the Company's earnings, capital requirements, operating
     and financial position and general business conditions.

     Dividends on outstanding shares of Series A Preferred Stock were paid on
     the last day of May in 2002 and 2003 in shares of stock of Series A
     Preferred Stock at a rate of 0.08 shares for each outstanding share of
     Series A Preferred Stock. The Company elected to convert all shares of
     preferred stock to 1,149,089 shares of common stock in August 2003.






--------------------
(1) Includes options issued through our 1998 Incentive Plan. For a brief
description of the material features of the Plan, see Note 11 of the Notes to
the Consolidated Financial Statements. Some of these options, also granted
through the 1998 Incentive Plan were options granted as replacement options for
outstanding Petrocon incentive options pursuant to the terms of the December
2001 Merger Agreement with Petrocon.


                                       23
<PAGE>

ITEM 6.     SELECTED FINANCIAL DATA

     Summary Selected Historical Consolidated Financial Data
     -------------------------------------------------------
     The following tables set forth our selected financial data. The data for
     the years ended December 31, 2005, 2004, and 2003 have been derived from
     the audited financial statements appearing elsewhere in this document. The
     data as of December 31, 2003, 2002 and 2001 and for the years ended
     December 31, 2002 and 2001 have been derived from audited financial
     statements not appearing in this document. You should read the selected
     financial data set forth below in conjunction with our financial statements
     and the notes thereto included in Part II, Item 8, Part II, Item 7,
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations," and other financial information appearing elsewhere in this
     document. In addition, the merger with Petrocon in December 2001 should be
     considered in connection with your review of this information.

     Note: Due to the sale of Thermaire, all items related to the previously
     reported manufacturing segment have been reclassified to discontinued
     operations in order to provide comparative results. Previously reported
     amounts will not agree to the amounts presented below except net income.
<TABLE>
<CAPTION>

                                                                                   Years Ended December 31,
                                                              -------------------------------------------------------------
                                                                 2005         2004         2003        2002          2001
                                                              -------------------------------------------------------------
                                                                         (in thousands, except per share amounts)
                                                              -------------------------------------------------------------
<S>                                                           <C>          <C>          <C>          <C>          <C>
     Statement of Operations
         Revenues
              Engineering                                     $ 215,698    $ 133,630    $ 108,380    $  74,971    $  14,235
              Systems                                            17,887       15,258       15,339       14,151        3,575
                                                              ---------    ---------    ---------    ---------    ---------
                  Total revenues                                233,585      148,888      123,719       89,122       17,810
                                                              ---------    ---------    ---------    ---------    ---------

         Costs and expenses
              Engineering                                       189,696      117,606       93,579       62,877       10,433
              Systems                                            15,616       13,090       13,167       11,840        3,107
              Selling, general and administrative                19,689       13,700       12,439       10,632        2,836
                                                              ---------    ---------    ---------    ---------    ---------
                  Total costs and expenses                      225,001      144,396      119,185       85,349       16,376
                                                              ---------    ---------    ---------    ---------    ---------
         Operating income                                         8,584        4,492        4,534        3,773        1,434
         Interest income (expense), net                            (800)        (590)        (784)        (821)          14
         Other income (expense), net                                116          118         (355)         143           14
         Foreign currency gain (loss)                                (2)        --           --           --           --
                                                              ---------    ---------    ---------    ---------    ---------
         Income from continuing operations before provision
            for income taxes                                      7,898        4,020        3,395        3,095        1,462
         Provision for income taxes                               3,116        1,656        1,110        1,197          595
                                                              ---------    ---------    ---------    ---------    ---------
         Income from operations                                   4,782        2,364        2,285        1,898          867
         Income (loss) from discontinued operations, net of
            taxes                                                  --           --           (154)        (146)         115
         Income from disposal of discontinued operations           --           --             26         --           --
                                                              ---------    ---------    ---------    ---------    ---------
                  Net income                                  $   4,782    $   2,364    $   2,157    $   1,752    $     982
                                                              =========    =========    =========    =========    =========


                                       24
<PAGE>

ITEM 6.     SELECTED FINANCIAL DATA (Continued)

                                                                            Years Ended December 31,
                                                            --------------------------------------------------------
                                                               2005       2004        2003        2002        2001
                                                            --------------------------------------------------------
                                                                    (in thousands, except per share amounts)
                                                            --------------------------------------------------------
     Per Share Data
         Basic earnings (loss) per share
              Continuing operations                         $   0.20    $   0.10    $   0.09    $   0.07    $   0.07
              Discontinued operations                           --          --          --          --          --
                                                            --------    --------    --------    --------    --------
                  Net income per share                      $   0.20    $   0.10    $   0.09    $   0.07    $   0.07
                                                            ========    ========    ========    ========    ========

         Weighted average common
            shares outstanding - basic                        24,300      23,455      23,301      22,861      13,236

         Diluted earnings (loss) per share
              Continuing operations                         $   0.19    $   0.10    $   0.09    $   0.07    $   0.07
              Discontinued operations                           --          --          --          --          --
                                                            --------    --------    --------    --------    --------
                  Net income per share                      $   0.19    $   0.10    $   0.09    $   0.07    $   0.07
                                                            ========    ========    ========    ========    ========

         Weighted average common
            shares outstanding - diluted                      25,250      23,786      23,734      23,013      13,236

     Cash Flow Data
         Operating activities, net                          $   (920)   $ (2,391)   $  6,557    $  1,302    $    744
         Investing activities, net                            (2,417)     (1,811)       (471)     (1,290)          5
         Financing activities, net                             3,492       4,170      (6,122)     (1,182)        253
         Exchange rate changes                                    (4)       --          --          --          --
                                                            --------    --------    --------    --------    --------
              Net change in cash and cash equivalents       $    151    $    (32)   $    (36)   $ (1,170)   $  1,002
                                                            ========    ========    ========    ========    ========

     Balance Sheet Data
         Working capital                                    $ 21,825    $ 14,503    $  6,505    $  8,416    $  5,703
         Property and equipment, net                        $  6,861    $  5,262    $  4,302    $  4,779    $  4,095
         Total assets                                       $ 75,936    $ 57,261    $ 42,530    $ 40,068    $ 38,286
         Long-term debt, net of current portion             $  5,228    $ 15,585    $  7,506    $ 12,580    $  1,357
         Long-term capital leases, net of current portion   $   --      $   --      $     12    $     17    $     48
         Stockholders' equity                               $ 39,865    $ 20,051    $ 18,175    $ 13,389    $ 11,846




                                       25
</TABLE>
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION

     The following discussion is qualified in its entirety by, and should be
     read in conjunction with, our Consolidated Financial Statements including
     the Notes thereto, included elsewhere in this Annual Report on Form 10-K.
     Note 18 to the Financial Statements contains segment information.

     Overview
     --------
     We furnish engineering consulting and control system services to the
     petroleum refining, petrochemical, pipeline, production and processing
     industries. Our business consists of two segments: engineering and systems.
     Our engineering segment offers engineering consulting services to clients
     for the development, management and turnkey execution of engineering
     projects, construction management, and inspection services. Our systems
     segment designs, assembles, programs, installs, integrates and services
     control and instrumentation systems for specific applications in the energy
     and processing related industries.

     The Company's revenue is composed of engineering, construction and
     procurement service revenue and product sales. The Company recognizes
     service revenue as soon as the services are performed. The majority of the
     Company's engineering services have historically been provided through
     cost-plus contracts whereas a majority of the Company's product sales are
     earned on fixed-price contracts.

     In the course of providing our services, we routinely provide engineering,
     materials, equipment and may provide construction services on a
     subcontractor basis. Generally, these materials, equipment and
     subcontractor costs are passed through to our clients and reimbursed, along
     with fees, which in total are at margins lower than those of our normal
     core business. In accordance with industry practice and generally accepted
     accounting principles, all costs and fees are included in revenue. The use
     of subcontractor services can change significantly from project to project;
     therefore, changes in revenue may not be indicative of business trends.

     For analytical purposes only, we have historically segregated from our
     total revenue the revenues derived from material assets or companies
     acquired during the first 12 months following their respective dates of
     acquisition and referred to such revenue as "Acquisition" revenue. We also
     segregate gross profits and SG&A expenses derived from material assets or
     company acquisitions on the same basis as we segregate revenues. We
     analyze, for internal purposes only, the percentage of our revenue that
     comes from staffing services versus the percentage that comes from
     engineering services, as engineering services have a higher margin than
     staffing services.

     Operating SG&A expense includes management and staff compensation, office
     costs such as rents and utilities, depreciation, amortization, travel and
     other expenses generally unrelated to specific client contracts, but
     directly related to the support of a segment's operation.

     Corporate SG&A expense is comprised primarily of marketing costs, as well
     as costs related to the executive, governance/investor relations, finance,
     accounting, safety, human resources, project controls and information
     technology departments and other costs generally unrelated to specific
     client projects, but which can vary as costs are incurred to support
     corporate activities and initiatives.

                                       26
<PAGE>
<TABLE>
<CAPTION>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

     Results of Operations
     ---------------------
     The following table sets forth, for the periods indicated, certain
     financial data derived from our consolidated statements of operations and
     indicates the percentage of total revenue for each item. The manufacturing
     segment is reported in "Income/(Loss) from Discontinued Operations."

                                                                                  Years Ended December 31,
                                                          ------------------------------------------------------------------------
                                                                  2005                      2004                     2003
                                                          ---------------------     ---------------------    ---------------------
                                                             Amount       %           Amount        %           Amount       %
                                                          ------------------------------------------------------------------------
                                                                                       (in thousands)
                                                          ------------------------------------------------------------------------
<S>                                                       <C>             <C>       <C>             <C>      <C>             <C>
     Revenue
         Engineering                                      $    203,640    87.2      $   124,507     83.6     $    106,895    86.4
         Systems                                                17,887     7.7           13,965      9.4           14,892    12.0
         Acquisition                                            12,058     5.2           10,416      7.0            1,932     1.6
                                                          -------------             ------------  -------    ------------- -------
              Total revenue                               $    233,585   100.0      $   148,888    100.0     $    123,719   100.0
                                                          =============             ============             =============

     Gross profit
         Engineering                                      $     24,780    12.2      $    14,351     11.5     $     14,652    13.7
         Systems                                                 2,271    12.7            2,168     15.5            2,109    14.2
         Acquisition                                             1,222    10.1            1,673     16.1              212    11.0
                                                          -------------             ------------             -------------
              Total gross profit                          $     28,273    12.1      $    18,192     12.2     $     16,973    13.7
                                                          =============             ============             =============

     Selling, general and administrative
         Non-acquisition                                  $     18,863     8.5      $    11,866      8.0     $     12,274     9.9
         Acquisition                                               826     6.9            1,834      1.2              165     0.1
                                                          -------------             ------------             -------------
              Total                                       $     19,689     8.4      $    13,700      9.2     $     12,439    10.1
                                                          =============             ============             =============

     Income from continuing operations                    $      4,782     2.1      $     2,364      1.6     $      2,285     1.8
     Income (loss) on discontinued operations                        -       -                -        -             (128)   (0.1)
                                                          -------------             ------------             -------------
              Net income                                  $      4,782     2.1      $     2,364      1.6     $      2,157     1.7
                                                          =============             ============             =============

     Total revenue increased 56.9% or $84.7 million from 2004 to 2005.

     Overall gross profit increased 55.5%, or $10.1 million, from 2004 to 2005.

     Total SG&A expense increased 43.8%, or $6.0 million, in 2005. Income from
     continuing operations increased 102.3%, or $2.4 million.


                                       27
</TABLE>
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)


     Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
     ---------------------------------------------------------------------

         Total Revenue
         -------------
         Engineering revenue accounted for 87.2% of our total revenue for the
         year, increasing $79.1 million from $124.5 million in 2004 to $203.6
         million in 2005.

         The increase in engineering revenue was primarily brought about by
         increased activity in the engineering and construction markets.
         Refining related activity has been particularly strong, including
         projects to satisfy environmental mandates, expand existing facilities
         and utilize heavier sour crude. Acquisitions in the fourth quarter of
         2004, together with our client's increased demand for in-house
         technical and inspection resources, stimulated growth in our staffing
         services division where revenues increased 58.8%, or $21.4 million,
         from $36.4 million in 2004 to $57.8 million in 2005.

         Revenue from procurement services increased 55.5%, or $21.3 million,
         from 2004 to 2005 and contributed 25.1%, or $21.3 million, of the
         increase in total engineering revenue during the same period. The level
         of procurement services will vary depending on the volume of
         procurement activity our customers choose to do themselves as opposed
         to using our services on the larger EPC contracts.

         In 2005, the Company was awarded two significant fixed-price
         engineering, procurement and construction ("EPC") projects in the
         refining industry that includes procurement and subcontractor
         activities within our scope of work. The shift to more fixed-price, EPC
         type projects is expected to continue into 2006 and beyond as clients
         look to sole source responsibility on the larger projects.

         The systems segment contributed 7.7% of our total revenue for the year,
         as its revenue increased $3.9 million, or 27.9%, from $14.0 million in
         2004 to $17.9 million in revenue in 2005. A general turnaround in the
         oil and gas industry has helped to increase the demand for ESI's
         services. Projects from one major supplier of distributed control
         systems ("DCS") equipment, together with projects from a large
         engineering and construction firm, contributed most of the increase in
         revenue in 2005. The completion of turnkey remote instrument enclosures
         ("RIE's") from projects awarded in the fourth quarter of 2004
         contributed $4.7 million to ESI's revenue in 2005. Backlog for ESI at
         December 31, 2005 reached $9.1 million.

         Acquisition revenue, representing only 5.2% of total revenue for 2005,
         increased 15.8%, or $1.6 million, during the comparable periods,
         primarily from nine months of revenue generated in 2005 through
         acquisitions completed in the 4th quarter of 2004.

         We formerly operated a third segment, the manufacturing segment.
         Certain assets of this segment were sold in December 2003 and its
         financial results during 2003 are reported in "Income/(Loss) from
         Discontinued Operations."

         Gross Profit
         ------------
         Total gross profit increased $10.1 million, or 55.5%, from $18.2
         million in 2004 to $28.3 million in 2005 although, as a percentage of
         total revenue, decreased slightly from 12.2% to 12.1% during the same
         period.

         Gross profit from engineering increased $10.4 million, or 72.2%, from
         $14.4 million in 2004 to $24.8 million in 2005 and, as a percentage of
         revenue, increased from 11.5% in 2004 to 12.2% in 2005. Gross profit
         was negatively impacted by approximately $249,000 during 2005 due to
         start-up expenses and non-reimbursable proposal activity conducted by
         two of the Company's internal start-up initiatives, ENGlobal Sulfur
         Group and ENGlobal Automation Group. The staffing services division
         increased gross profit $2.4 million, or 55.8%, from $4.3 million in
         2004 to $6.7 million in 2005 on margins remaining relatively stable
         over the comparable periods, although such margins are approximately 1%
         lower than average margins on all other engineering revenues.

                                       28
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

         We earn a lower margin on procurement services as compared to the
         margin we earn on our core engineering services. In 2005, $21.5
         million, or 25.1% of the increase in our total revenue was from
         procurement services, providing a 1.7% gross profit margin. Comparably,
         gross profit margin on core engineering services was 12.1%. In 2004,
         procurement services produced a .4% gross profit margin. Due to the
         increase in procurement services in 2005 over 2004, our overall gross
         profit, as a percentage of total revenue, was negatively impacted by
         4.0% and 3.6%, respectively.

         Again, the shift to more fixed-price EPC type projects will negatively
         impact engineering gross profit as a percentage of revenue because
         higher historical cost plus margins on engineering labor recognized
         during the period in which it was earned will now be combined with the
         lower margins on procurement services and construction subcontractor
         charges and recorded throughout the overall duration and completion of
         the projects.

         Gross profit for our systems segment increased $103,000, or 4.5%, from
         $2.2 million in 2004 to $2.3 million in 2005. However, as a percent of
         revenue, gross profit decreased by 2.8% from 15.5% in 2004 to 12.7% in
         2005. The lower margin in 2005 is a result of several factors. The
         increase in the workload created a shortage in shop labor which was
         filled by hiring contract labor leading to inefficiencies and rework.
         This led to overruns in shop labor on projects, thus dropping margins
         below already tight budgeted margins. Secondly, with the increase in
         proposal work, estimates of material and labor cost were
         underestimated, thus causing lower profit margins. Lastly, market
         pressures have driven down margins on projects overall. Corrective
         measures have been taken during the first quarter of 2006 to replace
         all contract labor with more stable, direct-hire employees. Additional
         staffing and systems within the estimating and proposal group should
         improve proposal pricing.

         During the fourth quarter, ESI experienced delays in receiving major
         components for a project that were being supplied by a third party
         vendor. As a result, the work ESI expected to perform on such project
         during 2005 will be completed in 2006, resulting in a corresponding
         delay in our recognition of revenues and profits.

         One current project representing 25% of the systems segment's backlog
         at December 31, 2005 has a 13.6% budgeted margin.

         Selling, General and Administrative ("SG&A") Expenses
         -----------------------------------------------------
         Selling, general and administrative expenses increased $6.0 million, or
         43.8%, from $13.7 million in 2004 to $19.7 million in 2005, primarily
         due to increases in salaries and burdens, facilities and office
         expenses, and travel. However, as a percent of revenue, SG&A decreased
         .8% from 9.2% in 2004 to 8.4% in 2005.

         Salaries and burden expenses increased $3.6 million in 2005 over 2004.
         $1.0 million of this increase was related to additional incentives paid
         under the 2005 incentive plans. An additional $1.0 million of the
         increase was due to increases in corporate salaries, primarily in
         Business Development, Accounting and Project Controls, to support
         Company growth. The remainder of the increase came from increases in
         operation salaries and burdens primarily due to increases in
         administrative staffing from acquisitions, EAG's start-up during the
         year, ESI's expansion into the Beaumont area, and increases in their
         administrative support staffing in the Houston facility; plus
         additional overhead due to the growth of EEI's offices in Beaumont and
         Tulsa.


                                       29
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

         Facilities and office expenses increased $1.4 million in 2005 over 2004
         due to the expansion of EEI's offices in Tulsa, Houston, Dallas, and
         Beaumont to meet both current and projected growth requirements, plus
         the additional cost of facilities utilized by acquisitions made in the
         fourth quarter of 2004.

         Increased business development activity pushed marketing and travel
         expenses up by almost $500,000 in 2005 over similar expenses in 2004.

         Operating Profit
         ----------------
         Operating profit increased $4.1 million to $8.6 million in 2005 as
         compared to $4.5 million in 2004, increasing, as a percentage of total
         revenue, from 3.0% in 2004 to 3.7% in 2005. Although operating profit
         for 2005 exceeded operating profit for 2004, our net operating profit
         for the fourth quarter of 2005 was down approximately $1.2 million, or
         39%, over third quarter operating results, primarily due to losses of
         approximately $659,000 in start-up expenses and non-reimbursable
         proposal activity conducted by two of the Company's internal start-up
         initiatives, ENGlobal Sulfur Group and EAG. For 2005, the combined
         operating loss for both groups was approximately $817,000.

         Other Income (Expense)
         ----------------------
         Other income decreased from $118,000 in 2004 to $116,000 in 2005. The
         income in 2004 resulted from a legal settlement. The income in 2005 was
         derived from distributions from PEI Investments, insurance proceeds
         from Hurricane Rita losses, and income from the sale of assets,
         partially offset by a reclassification of financing costs.






                                       30
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

     Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
     ---------------------------------------------------------------------

         Total Revenue
         -------------
         Total engineering revenue accounted for 83.6% of our total revenue for
         the year, increasing $17.6 million from $106.9 million in revenue in
         2003 to $124.5 million in revenue in 2004.

         Revenue from procurement services increased $9.2 million in 2004, or
         52% of the total increase in engineering revenue. This was the result
         of additional revenue of $25.5 million on a co-generation project that
         began in 2003, offset by $16.3 million in lower revenue from a
         cyclohexane project that began in 2002. The remaining increase of $8.4
         million in revenue came from an additional $4.9 million through the
         Tulsa office, $2.4 million through the Beaumont office and $1.1 million
         from all other office locations. Our engineering segment has been
         successful in obtaining major projects in the petroleum refining
         industry in the mid-continent area for the Tulsa office, but we do not
         currently have a project that would replace the co-generation project
         when it is completed in the Beaumont office.

         In 2005, the Company was awarded two significant projects to be
         completed primarily out of our Tulsa office. Coffeyville Resources
         Refining & Marketing, LLC ("CRRM") has entered into an agreement with
         ENGlobal for detailed engineering and procurement services for CRRM's
         ultra low sulfur diesel fuel facilities at its Coffeyville, Kansas
         refinery on a cost reimbursable basis. We estimate that the agreement
         will result in approximately 150,000 man-hours in engineering and
         related activities in addition to a significant amount of revenue
         attributable to the procurement of materials and equipment. The project
         began in January 2005 and is scheduled to conclude in the third quarter
         of 2006. Frontier Refining, Inc. has awarded ENGlobal a contract to
         provide lump sum turnkey services for engineering, procurement and
         construction for modifications to produce ultra low sulfur diesel at
         Frontier's Cheyenne, Wyoming refinery. The Company estimates revenue
         from the Frontier contract to be approximately $7 million. The project
         began in February 2005 and is scheduled to complete in the spring of
         2006.

         The systems segment contributed 9.4% of our total revenue for the year,
         as its revenue declined $900,000 from $14.9 million in 2003 to $14.0
         million in revenue in 2004. Our systems segment began 2005 with a
         project backlog of $7.6 million, representing the largest booking of
         new work in the segment's history.

         During the fourth quarter of 2004, the systems segment was awarded
         projects totaling $2.8 million from Honeywell to build eight turnkey
         remote instrument enclosures ("RIEs") of which six units are scheduled
         for completion during the second quarter and additional units following
         in the third and fourth quarters of 2005. In the first quarter of 2005,
         Honeywell awarded the Company three additional turnkey RIEs totaling
         $1.6 million with one unit scheduled for delivery in the second quarter
         and two units scheduled for delivery in the fourth quarter of 2005.





                                       31
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

         Revenue from acquired companies accounted for 7.0% of our total revenue
         during 2004, increasing by $8.5 million or 447% from $1.9 million in
         revenue in 2003 to $10.4 million in revenue in 2004. Revenue recognized
         from acquired assets or companies during the first 12 months of their
         operation within ENGlobal is referred to as "Acquisition" revenue.
         Acquisition revenue in 2004 includes revenue of $3.6 million, $3.3
         million, $1.7 million, $1.3 million and $500,000 from EDG, CIS,
         Petro-Chem, Senftleber and AmTech, respectively.

         We formerly operated a third segment, the manufacturing segment.
         Certain assets of this segment were sold in December 2003 and March
         2005 and its financial results during 2003 and 2004 are reported in
         "Income/(Loss) from Discontinued Operations."

         Gross Profit
         ------------
         Gross profit from our engineering segment decreased $301,000 from $14.7
         million in 2003 to $14.4 million in 2004. Gross profit declined as a
         percent of revenue from 13.7% in 2003 to 11.5% in 2004. This decrease
         was the result of higher non-project labor cost invested in estimating
         larger EPC projects and in internal growth initiatives such as low
         sulfur diesel. Margins from our field service operations were lower by
         .3% primarily due to the impact of integration costs and recognition of
         lower profits on $3.3 million in revenue generated by the acquisition
         of CIS during the last quarter of 2004.

         Gross profit for our systems segment increased $100,000 or 4.8% from
         $2.1 million in 2003 to $2.2 million in 2004. Competitive market
         pressures on pricing, project management, cost containment against
         project budgets, and stronger support service controls continue to
         provide challenges for management in response to growth initiatives and
         record backlog levels. The acquisition of contract rights and other
         assets from InfoTech during the fourth quarter of 2004 could have a
         short-term negative impact on the systems segment's gross profit until
         new employees and new projects are fully integrated into the Company's
         operations.

         Gross profits from acquisitions increased $1.5 million or 689.2% from
         $200,000 in 2003 to $1.7 million in 2004. Gross profit from acquired
         assets or companies during their first 12 months of operations within
         the Company is recorded and referred to as "Acquisition" gross profit.
         Acquisition gross profit in 2004 includes gross profit of $800,000,
         $400,000, $200,000, $200,000, and $100,000 from EDG, CIS, Petro-Chem,
         Senftleber and AmTech, respectively.




                                       32
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

         Selling, General and Administrative ("SG&A") Expenses
         -----------------------------------------------------
         Selling, general and administrative expenses not related to
         acquisitions decreased $300,000 from $16.8 million in 2003 to $16.5
         million in 2004. Depreciation expenses of $401,400 were reclassed from
         SG&A expenses to direct costs for presentation in the consolidated
         statements of income included herein in 2004. As depreciation expense
         in 2003 related to direct costs was immaterial, no reclassification was
         made for that year.

         In March 2004, the Company announced organizational changes intended to
         reduce overhead and enhance profitability. The Company eliminated four
         operational facilities and consolidated offices to improve efficiency.
         For example, effective January 2004, within the systems segment, ECP
         relocated offices and shop facilities into the same facility as ESI
         resulting in improved shop personnel utilization, reduction of
         duplicative overhead functions and reduction of facility expenses. As a
         result, during 2004, the systems segment SG&A expenses decreased
         $500,000 or 28.6% from $2.0 million in 2003 to $1.5 million in 2004.
         Corporate SG&A charges increased $198,000 due to additional software
         enhancements to our billings system to meet client format demands, plus
         $222,000 related to proposal and internal growth initiatives.
         Engineering SG&A expenses increased $80,000 due to numerous
         miscellaneous items.

         SG&A expenses from acquisitions increased $1.7 million from $165,000 in
         2003 to $1.8 million in 2004. SG&A expenses from acquired assets or
         companies during their first 12 months of operations within the Company
         have been recorded and are referred to as "Acquisition" under SG&A
         expenses. Acquisition SG&A in 2004 includes $1.3 million, $250,000, and
         $150,000 from EDG, CIS, Petro-Chem respectively, plus $100,000 for all
         other acquisition activity.

         Operating Profit
         ----------------
         Operating profit remained constant at $4.5 million in 2003 and 2004,
         decreasing as a percentage of total revenue from 3.7% in 2003 to 3.0%
         in 2004.

         Other Income (Expense)
         ----------------------
         Other income (expense) changed from $355,000 expense in 2003 to
         $118,000 income in 2004. The expense in 2003 was the result of a book
         basis loss on the sale of the vacant office building in Baton Rouge, as
         compared to the income in 2004, which resulted from a legal settlement.


     Liquidity and Capital Resources
     -------------------------------
     Historically, we have satisfied our cash requirements through operations
     and borrowings under a revolving credit facility. The Company's current
     credit facility is with Comerica Bank ("Comerica") and consists of a line
     of credit maturing July 27, 2007. The loan agreement positions Comerica as
     senior to all other debt. The line of credit is limited to $22.0 million
     subject to loan covenant restrictions. The Comerica Credit Facility is
     collateralized by substantially all the assets of the Company. As of
     December 31, 2005, the outstanding balance on the line of credit was $3.8
     million and we had working capital of $22.0 million. Our total long-term
     debt outstanding on December 31, 2005 was $5.2 million (see Note 8), a
     decrease from $15.6 million as of December 31, 2004. Under the terms and
     conditions of our revolving credit facility, as of December 31, 2005, we
     have additional borrowing capacity of approximately $12.0 million after
     consideration of borrowing base limitations and outstanding letters of
     credit of $6.2 million at December 31, 2005.

     On September 29, 2005, we entered into and closed on a definitive agreement
     to issue and sell 2,000,000 shares of our $.001 par value per share Common
     Stock in a private placement to Tontine Capital Partners, L.P., a Delaware
     limited partnership. The purchase agreement provided $14,000,000 in gross
     proceeds which were used to pay down our existing line-of-credit debt.

                                       33
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

     The Company has been awarded a significant project with a central states
     refinery and entered into an Agreement for Engineering and Procurement
     Services to provide detailed engineering and procurement services for ultra
     low sulphur diesel fuel facilities on a cost reimbursable basis. The terms
     of the agreement require that any progress payments made by our client for
     engineered and manufactured project items must be secured by one or more
     irrevocable stand-by letters of credit issued on the account of ENGlobal.
     The project began in January 2005 and is scheduled to complete in the third
     quarter of 2006.

     The following table summarizes our contractual obligations as of December
     31, 2005:
<TABLE>
<CAPTION>

                                                               Payments Due by Period
                                              ---------------------------------------------------------
                                               2006      2007      2008      2009    2010 and    Total
                                                                                     thereafter
                                              -------   -------   -------   -------  ---------  -------
                                                                   (in thousands)
                                              ---------------------------------------------------------
<S>                                           <C>       <C>       <C>       <C>       <C>       <C>
     Long-term debt(1)                        $   910   $ 4,724   $   486   $   403   $  --     $ 6,523
     Operating leases                           2,227     2,482     1,520     1,507     1,772     9,508
                                              -------   -------   -------   -------   -------   -------
         Total contractual cash obligations   $ 3,137   $ 7,206   $ 2,006   $ 1,910   $ 1,772   $16,031
                                              =======   =======   =======   =======   =======   =======
</TABLE>

     (1)Long-term debt includes future interest payments assuming the existing
     long-term debt and revolving credit facility remain outstanding with the
     interest rate in effect at December 31, 2005. The Company's interest rate
     on its revolving credit facility fluctuates with the prime rate.

     Cash Flow
     ---------
     Operating activities required the use of $920,000 and $2.4 million in net
     cash for the fiscal years ended December 31, 2005 and December 31, 2004,
     respectively. Though a decline in revenues would be likely to adversely
     impact our cash flow from operations, we believe that future cash flows,
     our ability to manage the timing of acquisitions, and our borrowing
     capacity under our line of credit will allow us to meet cash requirements
     in 2006 and beyond. Future uses of cash in operations will continue to be
     primarily for labor and material costs required in connection with contract
     performance.

     Our cash flow has been negatively impacted beginning in the fourth quarter
     of 2005 by a slow-down in our ability to invoice certain clients primarily
     due to the temporary relocation of the accounting department to Houston in
     early October followed by its relocation to Beaumont in mid-November. In
     addition, we have experienced slower collections of our accounts receivable
     from our Beaumont and Lake Charles customers as a result of Hurricanes Rita
     and Katrina. The accounting and invoice functions are fully restored and we
     believe the collection situation is temporary pending recovery from the
     hurricanes.

     Investing activities used cash totaling $2.4 million in 2005, compared to
     $1.8 in 2004 and $500,000 in 2003. In 2005, our investing activities
     consisted of capital additions of $3.2 million primarily for computers and
     leasehold improvements to our offices. In the first quarter of 2005, we
     completed the sale of the Thermaire building, receiving $823,000 in cash
     from the sale. We used $625,000 in the fourth quarter of 2004 to complete
     the acquisitions of EDGI, AmTech, Cleveland Inspection Services, Inc., and
     InfoTech. Future investing activities are anticipated to remain consistent
     with prior years and include capital additions for leasehold improvements,
     technical applications software, and equipment, such as upgrades to
     computers. On December 31, 2005, we amended our line of credit to permit an
     increase in annual capital expenditure limits from $2.5 million to $3.25
     million.

     Financing activities provided cash totaling $3.5 million and $4.2 million
     in 2005 and 2004, respectively. Financing activities used $6.1 million
     during 2003. Our primary financing mechanism is our revolving line of
     credit. The line of credit has been used principally to finance accounts
     receivable. During 2005, our borrowings, on the line of credit were $92.2
     million, and we repaid an aggregate of $101.9 million on our short-term and
     long-term bank and other debt. On September 30, 2005, we reduced our
     outstanding line of credit by $13.5 million using cash generated from
     working capital and the sale of 2,000,000 shares of our Common Stock in a
     private placement.

                                       34
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

     Future cash flows from financing activities are anticipated to be
     borrowings, payments on the line of credit and payments on long-term debt
     instruments. Line of credit fluctuations are a function of timing related
     to operations, obligations and payments received on accounts receivable.
     Payments on long-term debt, including interest for the coming year, are
     estimated to be $910,000.

     In addition, our cash flow was impacted during the fourth quarter of 2005
     by our decision to pay $1.0 million in insurance renewals rather than
     financing that payment, by investing $1.0 million in capital expenditures
     and by funding our

     growth. We also extended hardship allowances in an aggregate amount of
     $192,000 to a number of our employees to assist them with hurricane
     recovery. Most of this amount has been repaid.

     The Company's requirement on its letters of credit for a major project has
     declined from $6.9 million in January 2006 to $3.1 million in February
     2006. We believe that all letter of credit obligations on this project will
     be fulfilled by May 2006.

     There were no significant non-cash transactions in 2005. In 2004, non-cash
     transactions include $2.6 million notes payable issued related to
     acquisitions and $592,000 note payable issued for treasury stock. During
     2003, our preferred stock was converted to common stock valued at $27
     million. We also acquired insurance with notes payable of $198,000, $1.1
     million, and $1.1 million in 2005, 2004, and 2003, respectively.

     The Company believes that it has available necessary cash for operations
     for the next 12 months. Cash and the availability of cash could be
     materially restricted if circumstances prevent the timely internal
     processing of invoices into accounts receivable, if such accounts are not
     collected timely, or if our project mix shifts from cost reimbursable to
     fixed cost contracts during significant periods of growth.

     If losses occur, we may not be able to meet our monthly fixed charge ratio
     covenant under our credit facility with Comerica. In that event, if we are
     unable to obtain a waiver or amendment of the covenant, we may be unable to
     make further borrowings and may be required to repay all loans then
     outstanding under the credit facility.

     We do not hold any derivative financial instruments for trading purposes or
     otherwise. Furthermore, we have not engaged in energy or commodity trading
     activities and do not anticipate doing so in the future, nor do we have any
     transactions involving unconsolidated entities or special purpose entities.

     Asset Management
     ----------------
     We typically sell our products and services on short-term credit and seek
     to minimize our credit risk by performing credit checks and conducting our
     own collection efforts. Our trade accounts receivable increased to $46.2
     million from $30.8 million as of December 31, 2005 and 2004, respectively,
     primarily due to increased revenue growth. The number of days outstanding
     for trade accounts receivable decreased from 62 days at December 31, 2004
     to 59 days at December 31, 2005. Our actual bad debt expense has been
     approximately 0.05% and 0.02% of revenues for the periods ending December
     31, 2005 and 2004. We increased our allowance for doubtful accounts from
     $476,000 to $503,000 or 1.5% and 1.1% of the trade accounts receivable
     balance for 2004 and 2005, respectively.

     Related Party Transactions
     --------------------------
     ENGlobal Engineering, Inc. leases office space from PEI Investments, a
     joint venture in which ENGlobal Engineering, Inc. has a one-third interest,
     Michael L. Burrow (the Company's CEO) has a one-third interest, and a
     stockholder who owns less than 1% of the Company's common stock has a
     one-third interest. Rentals paid under the lease were $105,000, $135,000
     and $135,000 for 2005, 2004 and 2003, respectively. The lease was renewed
     in August 2005. In September 2005, the building was damaged by Hurricane
     Rita and all tenants have relocated to other locations. No further lease
     payments have been made by the Company since September 2005 and the
     insurance claim filed by PEI Investments remains unsettled.

                                       35
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

     Risk Management
     ---------------
     In performing services for our clients, we could potentially be liable for
     breach of contract, personal injury, property damage or negligence,
     including professional errors and omissions. We often agree to indemnify
     our clients for losses and expenses incurred as a result of our negligence
     and, in certain cases, the concurrent negligence of our clients. Our
     quality control and assurance program includes a control function to
     establish standards and procedures for performance and for documentation of
     project tasks, and an assurance function to audit and to monitor compliance
     with procedures and quality standards. We maintain liability insurance for
     bodily injury and third-party property damage, professional errors and
     omissions, and workers compensation coverage, which we consider sufficient
     to insure against these risks, subject to self-insured amounts.

     Seasonality
     -----------
     Holidays and employee vacations during our fourth quarter exert downward
     pressure on revenues for that quarter, which is only partially offset by
     the year-end efforts on the part of many clients to spend any remaining
     funds budgeted for engineering services or capital expenditures during the
     year. The annual budgeting and approval process under which these clients
     operate is normally not completed until after the beginning of each
     new-year, which can depress results for the first quarter. Principally due
     to these factors, our revenues during the first and fourth quarters
     generally tend to be lower than in the second and third quarters.

     Critical Accounting Policies
     ----------------------------
         Revenue Recognition
         -------------------
         Because the majority of the Company's revenues are recognized under
         cost-plus contracts, significant estimates are generally not involved
         in determining revenue recognition. In addition, most of our contracts
         are with Fortune 500 companies. As a result, collection risk is
         generally not a relevant factor in the recognition of revenue.

         Our revenues are largely composed of engineering service revenue and
         product sales. The majority of our services are provided through
         time-and-material contracts (also referred to as cost-plus contracts),
         many of which have not-to-exceed provisions that place a cap on the
         revenue that we may receive under a particular contract. These time and
         material billings are produced every two weeks.

         On occasion, we serve as purchasing agent by procuring subcontractors,
         material and equipment on behalf of a client and passing the cost on to
         the client with no mark-up or profit. In accordance with Statement of
         Position ("SOP") 81-1, revenues and costs for these type purchases are
         not included in total revenues and costs. For financial reporting this
         "pass-through" type of transaction is reported net.

         Profits and losses on fixed-fee contracts are recorded on the
         percentage-of-completion method of accounting, measured by the
         percentage-of-contract costs incurred to date to estimated total
         contract costs for each contract. Contract costs include amounts paid
         to subcontractors. Anticipated losses on uncompleted construction
         contracts are charged to operations as soon as such losses can be
         estimated. Changes in job performance, job conditions, estimated
         profitability and final contract settlements may result in revisions to
         costs and income and are recognized in the period in which the
         revisions are determined.

         The asset, "costs and estimated earnings in excess of billings on
         uncompleted contracts," represents revenues recognized in excess of
         amounts billed on fixed-fee contracts. The liability "billings in
         excess of costs and estimated profits on uncompleted contracts"
         represents amounts billed in excess of revenues recognized on fixed-fee
         contracts.

         Goodwill
         --------
         A change in assumptions in the estimation of the fair market value of
         the segments would unlikely give rise to an impairment of goodwill
         without deteriorating operating results in the segments.

         In conjunction with each acquisition, we must allocate the cost of the
         acquired entity to the assets and liabilities assumed based on their
         estimated fair values at the date of acquisition. As additional

                                       36
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

         information becomes available, adjustments may be made to the original
         estimates within a short time subsequent to the acquisition. Goodwill
         is not amortized but instead is periodically assessed for impairment.
         The impairment testing entails estimating current market value of the
         segments, based on management's estimate of market conditions including
         pricing, demand, competition, operating costs and other factors.
         Determining the fair value of assets and liabilities acquired involves
         professional judgment and is ultimately based on management's
         assessment of the value of the assets acquired. We believe our
         estimates for these items are reasonable, but there is no assurance
         that actual amounts will not vary significantly from estimated amounts.
         Consistent with SFAS 142, we have not amortized goodwill related to the
         merger with Petrocon, but instead tested the balance for impairment.

         Change Orders
         -------------
         Change orders are modifications of an original contract that
         effectively change the provisions of the contract without adding new
         provisions. Either we or our clients may initiate change orders. Change
         orders may include changes in specifications or design, manner of
         performance, equipment, materials, scope of work, and/or the period of
         completion of the project.

         Change orders occur when changes are experienced once a contract is
         begun. Change orders are sometimes documented and the terms of change
         orders are agreed with the client before the work is performed. Other
         times, circumstances may require that work progress without the
         client's written agreement before the work is performed. Costs related
         to change orders are recognized when they are incurred. Change orders
         are included in the total estimated contract revenue when it is
         probable that the change orders will result in a bona fide addition to
         value that can be reliably estimated.

         We have a favorable history of negotiating and collecting for work
         performed under change orders and our bi-weekly billing cycle has
         proven to be timely enough to properly account for change orders.

     Recent Accounting Pronouncements
     --------------------------------
     In December 2004, the FASB issued Statement of Financial Accounting
     Standards No. 123, (revised 2004) "Share-Based Payment" ("SFAS 123(R)").
     This statement is a revision of Statement of Financial Accounting Standards
     No. 123, "Accounting for Stock-Based Compensation" as amended ("SFAS123"),
     and requires entities to measure the cost of employee services received in
     exchange for an award of equity instruments based on the grant-date fair
     value of the award. The cost will be recognized over the period during
     which an employee is required to provide services in exchange for the award
     (usually the vesting period). SFAS 123(R) covers various share-based
     compensation arrangement rights and employee share purchase plans. SFAS
     123(R) eliminates the ability to use the intrinsic value methods of
     accounting for share options, as provided in Accounting Principles Board
     Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS
     123(R) is effective as of the beginning of the first interim period that
     begins after June 15, 2005, with early adoption encouraged. The Company is
     currently evaluating the statement's transition methods and does not expect
     this statement to have an effect materially different than that of the pro
     forma SFAS 123 disclosures provided in Note 11 to the Company's
     Consolidated Financial Statements.

     In December 2004, the FASB issued Statement of Financial Accounting
     Standards No. 153, "Exchanges of Non-monetary Assets, an amendment of APB
     Opinion No. 29" ("SFAS 153"). This Statement amends APB Opinion No. 29 to
     permit the exchange of non-monetary assets to be recorded on a carry over
     basis when the non-monetary assets do not have commercial substance. This
     is an exception to the basic measurement principal of measuring a
     non-monetary asset exchange at fair value. A non-monetary asset exchange
     has commercial substance if the future cash flows of the entity are
     expected to change significantly as a result of the exchange. SFAS 153 is
     effective for non-monetary asset exchanges occurring in fiscal periods
     beginning after June 15, 2005. The adoption of this standard is not
     expected to impact the Company's Consolidated Financial Statements.

                                       37
<PAGE>


ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION (Continued)

     In January 2003, the Financial Accounting Standard Board ("FASB") issued
     Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
     Entities." FIN 46 clarifies the application of Accounting Research Bulletin
     No. 51, "Consolidated Financial Statements," and addresses consolidation by
     business enterprises of variable interest entities (more commonly known as
     "Special Purpose Entities" or "SPE's"). In December 2003, FASB issued FIN
     No. 46R which replaced FIN 46 and clarified ARB 51. This interpretation
     provides guidance on how to identify a variable interest entity and
     determine when the assets, liabilities, non-controlling interests and
     results of operations of a variable interest entity should be consolidated
     by the primary beneficiary. The primary beneficiary is the enterprise that
     will absorb a majority of the variable interest entity's expected losses or
     receive a majority of the expected residual returns as a result of holding
     variable interests. This FIN requires the consolidation of results of
     variable interest entities in which the Company is the primary beneficiary
     of the variable interest entity. As of December 31, 2005, the Company did
     not own an interest in a variable interest entity that met the
     consolidation requirements and as such the adoption of FIN No. 46R did not
     have any effect on the financial condition, results of operations, or
     liquidity of the Company. Interests in entities acquired or created after
     December 31, 2003 will be evaluated based on FIN No. 46R criteria and
     consolidated, if required.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of December 31, 2005 and 2004, the Company did not participate in any
     derivative financial instruments or other financial and commodity
     instruments for which fair value disclosure would be required under SFAS No
     107. There are no investments at December 31, 2005. Accordingly, the
     Company has no quantitative information concerning the market risk of
     participating in such investments.

     As of December 31, 2005 and 2004, the Company did not participate in any
     derivative financial instruments or other financial and commodity
     instruments for which fair value disclosure would be required under SFAS
     No. 133.

     The Company's primary interest rate risk relates to its variable-rate line
     of credit debt obligation, which totaled $3.8 million and $13.5 million as
     of December 31, 2005 and 2004, respectively. Assuming a 10% increase in the
     interest rate on this variable-rate debt obligation (i.e., an increase from
     the actual average interest rate of 6.19% as of December 31, 2005, to an
     average interest rate of 6.81%), annual interest expense would have been
     approximately $47,000 higher in 2005 based on the annual average balance.
     The Company does not have any interest rate swap or exchange agreements.

     The Company has no market risk exposure in the areas of interest rate risk
     from investments because the Company did not have an investment portfolio
     as of December 31, 2005.

     Currently, the Company does not engage in foreign currency hedging
     activities. Transactions in Canadian dollars in our Canadian subsidiary
     have been translated into U.S. dollars using the current rate method, such
     that assets and liabilities are translated at the rates of exchange in
     effect at the balance sheet date and revenue and expenses are translated at
     the average rates of exchange during the appropriate fiscal period. As a
     result, the carrying value of the Company's investments in Canada is
     subject to the risk of foreign currency fluctuations. Additionally, any
     revenues received from the Company's international operations in other than
     U.S. dollars will be subject to foreign exchange risk.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMTARY DATA

     The audited consolidated balance sheets for ENGlobal Corporation, as of
     December 31, 2005 and 2004 and statements of income, cash flows and
     stockholders' equity for the three-year period ended December 31, 2005, are
     attached hereto and made part hereof.

                                       38
<PAGE>

                                      INDEX



                                                                        Page
                                                                   -------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                  40

CONSOLIDATED BALANCE SHEETS
     December 31, 2005 and 2004                                          41

CONSOLIDATED STATEMENTS OF INCOME
     Years Ended December 31, 2005, 2004 and 2003                        42

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
     Years Ended December 31, 2005, 2004 and 2003                        43

CONSOLIDATED STATEMENTS OF CASH FLOW
     Years Ended December 31, 2005, 2004 and 2003                        44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                               45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   ON FINANCIAL STATEMENT SCHEDULE                                       67

SCHEDULE II
     Valuation and Qualifying Accounts                                   68






                                       39
<PAGE>

                                    REPORT OF
                  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
ENGlobal Corporation


We have audited the accompanying consolidated balance sheets of ENGlobal
Corporation as of December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal controls over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ENGlobal Corporation and Subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.


/s/ Hein & Associates LLP
-------------------------
Hein & Associates LLP

Houston, Texas
March 17, 2006




                                       40
<PAGE>
<TABLE>
<CAPTION>

                                     ENGLOBAL CORPORATION AND SUBSIDIARIES

                                          CONSOLIDATED BALANCE SHEETS
                                          DECEMBER 31, 2005 AND 2004


                                                    ASSETS
                                                    ------
                                                                                        2005            2004
Current Assets                                                                     ------------    ------------
<S>                                                                                <C>             <C>
     Cash                                                                          $    159,414    $      8,006
     Trade receivables, net                                                          46,248,458      30,839,597
     Prepaid expenses and other current assets                                        1,600,369       1,984,274
     Costs and estimated earnings in excess of billings on uncompleted contracts      4,148,275       1,113,330
     Deferred tax asset                                                                 305,258         640,380
     Inventories                                                                        153,968         172,715
     Assets held for sale                                                                  --           678,106
     Federal income taxes receivable                                                     52,818         118,000
                                                                                   ------------    ------------
         Total Current Assets                                                        52,668,560      35,554,408
Property and Equipment, net                                                           6,861,361       5,262,370
Goodwill                                                                             15,454,583      15,284,220
Non-current Deferred Tax Asset                                                           74,892            --
Other Assets                                                                            876,534       1,159,750
                                                                                   ------------    ------------

         Total Assets                                                              $ 75,935,930    $ 57,260,748
                                                                                   ============    ============


                                    LIABILITIES AND STOCKHOLDERS' EQUITY
                                    ------------------------------------
Current Liabilities
     Accounts payable                                                              $ 15,211,331    $ 10,512,123
     Accrued compensation and benefits                                                9,799,074       6,059,221
     Notes payable                                                                         --           839,606
     Deferred rent                                                                      361,292            --
     Current portion of long-term debt                                                  547,934         622,410
     Current portion of capital lease                                                      --             4,371
     Billings and estimated earnings in excess of costs on uncompleted contracts      3,775,625       2,313,954
     Other liabilities                                                                1,148,079         699,601
                                                                                   ------------    ------------
         Total Current Liabilities                                                   30,843,335      21,051,286
Long-Term Debt, net of current portion                                                5,227,976      15,585,152
Deferred Tax Liability                                                                     --           573,380
                                                                                   ------------    ------------

         Total Liabilities                                                           36,071,311      37,209,818
                                                                                   ------------    ------------
Commitments and Contingencies (Notes 9, 10, 12, 16, 19 and 20)
Stockholders' Equity
     Series A redeemable convertible preferred stock - $0.001 par value, with
        fair value of $1.00 per share; 2,265,167 shares authorized 2005 and
        2004, respectively; 0 shares issued and outstanding 2005 and 2004,
        respectively                                                                       --              --
     Common stock - $0.001 par value; 75,000,000 shares authorized; 26,289,567
        and 23,466,839 shares outstanding and 26,941,944 and 24,119,216 issued
        at December 31, 2005 and 2004, respectively                                      26,941          24,119
     Additional paid-in capital                                                      27,230,332      12,198,215
     Retained earnings                                                               13,203,208       8,420,827
     Treasury stock - 652,377 shares at cost                                           (592,231)       (592,231)
     Accumulated other comprehensive income (loss)                                       (3,631)           --
                                                                                   ------------    ------------

         Total Stockholders' Equity                                                  39,864,619      20,050,930
                                                                                   ------------    ------------

         Total Liabilities and Stockholders' Equity                                $ 75,935,930    $ 57,260,748
                                                                                   ============    ============


                      See accompanying notes to these consolidated financial statements.

                                                    41
<PAGE>

                                 ENGLOBAL CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED STATEMENTS OF INCOME


                                                                      Years Ended December 31,
                                                          -----------------------------------------------
                                                               2005             2004             2003
                                                          -------------    -------------    -------------
Operating Revenues
     Engineering                                          $ 215,698,073    $ 133,630,281    $ 108,380,100
     Systems                                                 17,886,760       15,257,960       15,339,002
                                                          -------------    -------------    -------------
         Total Revenue                                      233,584,833      148,888,241      123,719,102
                                                          -------------    -------------    -------------

Direct Costs
     Engineering                                            189,696,352      117,606,309       93,578,716
     Systems                                                 15,615,821       13,089,874       13,166,811
                                                          -------------    -------------    -------------
         Total Direct Costs                                 205,312,173      130,696,183      106,745,527
                                                          -------------    -------------    -------------

Gross Profit                                                 28,272,660       18,192,058       16,973,575

Selling, General, and Administrative Expenses                19,688,765       13,700,088       12,439,408
                                                          -------------    -------------    -------------

Operating Income                                              8,583,895        4,491,970        4,534,167
     Interest Expense                                          (800,072)        (590,227)        (784,227)
     Other income (expense)                                     114,538          118,409         (355,175)
                                                          -------------    -------------    -------------
         Income from Continuing Operations
            before Provisions for Income Taxes                7,898,361        4,020,152        3,394,765

Provision for Income Taxes                                    3,115,980        1,655,763        1,109,496
                                                          -------------    -------------    -------------

Income from Continuing Operations                             4,782,381        2,364,389        2,285,269

Income/(Loss) from Discontinued Operations
     Loss from operations of discontinued segment,
        net of tax of $75,066                                      --               --           (154,615)
     Gain from sale of discontinued segment,
        net of tax of $12,834                                      --               --             26,434
                                                          -------------    -------------    -------------

         Net Income                                           4,782,381        2,364,389        2,157,088

         Preferred Dividends                                       --               --            131,100
                                                          -------------    -------------    -------------

Net Income Available for Common Stock                     $   4,782,381    $   2,364,389    $   2,025,988
                                                          =============    =============    =============

Basic Earnings per Share from Continuing Operations       $        0.20    $        0.10    $        0.09
Basic Earnings per Share from Discontinued Operations              --               --               --
                                                          -------------    -------------    -------------
     Basic Earnings per Share from Net Income             $        0.20    $        0.10    $        0.09
        Available for Common Stock
                                                          =============    =============    =============

Weighted Average Common Shares Outstanding for Basic         24,300,114       23,454,545       23,300,600
                                                          =============    =============    =============

Diluted Earnings per Share from Continuing Operations     $        0.19    $        0.10    $        0.09
Diluted Earnings per Share from Discontinued Operations            --               --               --
                                                          -------------    -------------    -------------
     Diluted Earnings per Share from Income               $        0.19    $        0.10    $        0.09
        Available for Common Stock
                                                          =============    =============    =============

Weighted Average Common Shares Outstanding for Diluted       25,250,487       23,785,939       23,733,807
                                                          =============    =============    =============


                   See accompanying notes to these consolidated financial statements.

                                                   42
<PAGE>


                                               ENGLOBAL CORPORATION AND SUBSIDIARIES

                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                         FOR YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003



                                                                           Accumulated
                                       Common Stock          Additional   Comprehensive                                   Total
                               ---------------------------    Paid-In        Income        Retained       Treasury     Stockholders'
                                  Shares          Stock       Capital        (Loss)        Earnings        Stock          Equity
                               ------------   ------------  ------------  ------------   ------------   ------------   ------------
BALANCES-JANUARY 1, 2003         22,861,199   $     22,862  $  9,335,471  $       --     $  4,030,448   $       --     $ 13,388,781
  Preferred stock dividend             --             --            --            --         (131,098)          --         (131,098)
  Conversion of preferred stock
     2.38 preferred shares to
    each common share             1,149,089          1,148     2,733,685          --             --             --        2,734,833
  Exercise of stock options          24,000             24        25,226          --             --             --           25,250
  Net income                           --             --            --            --        2,157,088           --        2,157,088
                               ------------   ------------  ------------  ------------   ------------   ------------   ------------

BALANCES-DECEMBER 31, 2003       24,034,288         24,034    12,094,382          --        6,056,438           --       18,174,854
  Exercise of options                38,242             38        42,474          --             --             --           42,512
  Common stock purchased for
     treasury                      (652,377)          --            --            --             --         (592,231)      (592,231)
  Common stock issued through
     employee stock purchase
     plan                            46,686             47        61,359          --             --             --           61,406
  Net income                           --             --            --            --        2,364,389           --        2,364,389
                               ------------   ------------  ------------  ------------   ------------   ------------   ------------

BALANCES-DECEMBER 31, 2004       23,466,839         24,119    12,198,215          --        8,420,827       (592,231)    20,050,930
  Exercise of options               727,793            728     1,484,981          --             --             --        1,485,709
  Common stock issued through
    employee stock purchase
    plan                             94,935             94       231,044          --             --             --          231,138
  Common stock issued through
    private placement             2,000,000          2,000    13,071,092          --             --             --       13,073,092
  Tax benefit of non-qualified
    options exercised                  --             --         245,000          --             --             --          245,000
    Net income                         --             --            --            --        4,782,381           --        4,782,381
  Comprehensive income:
    Foreign currency
      translation adjustment           --             --            --          (3,631)          --             --           (3,631)
                               ------------   ------------  ------------  ------------   ------------   ------------   ------------

BALANCES-DECEMBER 31, 2005       26,289,567   $     26,941  $ 27,230,332  $     (3,631)  $ 13,203,208   $   (592,231)  $ 39,864,619
                               ============   ============  ============  ============   ============   ============   ============


                                See accompanying notes to these consolidated financial statements.

                                                             43
<PAGE>

                                    ENGLOBAL CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                 Years Ended December 31,
                                                                       ---------------------------------------------
                                                                            2005            2004            2003
                                                                       -------------   -------------   -------------
Cash Flows from Operating Activities
     Net income                                                        $   4,782,381   $   2,364,389   $   2,157,088
     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities -
         Depreciation and amortization                                     1,836,376       1,246,532         824,476
         Deferred income tax expense                                        (313,150)        254,000         542,000
         (Gain) Loss on disposal of property, plant and equipment           (131,732)          2,564         312,307
     Changes in current assets and liabilities, net of acquisitions -
         Trade receivables                                               (15,462,947)    (10,595,425)     (3,947,817)
         Inventories                                                          18,747         (54,375)        110,056
         Costs and estimated earnings in excess of billings               (2,980,859)        (90,604)      1,020,877
         Prepaid expenses and other assets                                   630,559         231,401         372,419
         Accounts payable                                                  4,699,207         691,093       5,695,662
         Accrued compensation and benefits                                 3,739,853       1,713,253         403,724
         Billings in excess of costs and estimated earnings                1,461,670       1,939,616        (437,506)
         Other liabilities                                                   326,655         128,114        (280,166)
         Income taxes receivable (payable)                                   473,523        (221,610)       (215,619)
                                                                       -------------   -------------   -------------
              Net cash provided by (used in) operating activities           (919,717)     (2,391,052)      6,557,501
                                                                       -------------   -------------   -------------
Cash Flows from Investing Activities
     Purchase of property and equipment                                   (3,229,925)     (1,195,588)     (1,146,351)
     Proceeds from sale of property                                             --              --           554,866
     Additional consideration for acquisitions                               (26,368)       (625,000)       (424,900)
     Proceeds from sale of equipment                                          15,400           9,897            --
     Proceeds from sale of Thermaire                                         823,350            --           545,198
                                                                       -------------   -------------   -------------
              Net cash used in investing activities                       (2,417,543)     (1,810,691)       (471,187)
                                                                       -------------   -------------   -------------
Cash Flows from Financing Activities
     Borrowings on line of credit                                         92,151,545     134,571,349     127,650,133
     Payments on line of credit                                         (101,907,187)   (126,597,915)   (132,178,422)
     Proceeds from issuance of common stock                               15,034,940         103,918          25,250
     Short-term borrowings (repayments)                                   (1,037,399)     (1,071,885)       (484,023)
     Capital lease repayments                                                 (4,371)        (12,478)         (4,364)
     Long-term debt repayments                                              (745,229)     (2,822,679)     (1,130,544)
                                                                       -------------   -------------   -------------
              Net cash provided by (used in) financing activities          3,492,299       4,170,310      (6,121,970)

Effect of Exchange Rate Changes on Cash                                       (3,631)           --              --
                                                                       -------------   -------------   -------------
              Net Change in Cash and Cash Equivalents                        151,408         (31,433)        (35,656)
Cash and Cash Equivalents - beginning of year                                  8,006          39,439          75,095
                                                                       -------------   -------------   -------------
Cash and Cash Equivalents - end of year                                $     159,414   $       8,006   $      39,439
                                                                       =============   =============   =============
Non-Cash Transactions
     Stock issued for preferred dividend                               $        --     $        --     $     146,833
     Insurance acquired with notes payable                                   197,794       1,092,096       1,085,363
     Conversion of preferred stock to common stock                              --              --         2,734,834
     Acquisition of assets of EDG, AmTech, CIS and InfoTech with
        issuance of notes payable                                               --         2,575,000            --
     Acquisition of treasury stock with note payable                            --           592,231            --
Supplemental Cash Flow Information
     Cash paid during the year for -
         Interest                                                      $     890,266   $     420,627   $     771,793
         State and federal income taxes                                    2,959,133       1,196,761         734,615
         Dividend payment                                                       --              --           105,040
         Refund from state franchise taxes                                    48,531            --              --


                     See accompanying notes to these consolidated financial statements.

                                                   44
</TABLE>
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION

     Basis of Presentation
     ---------------------
     Our consolidated financial statements are prepared in accordance with
     accounting principles generally accepted in the United States of America.
     Our Company consolidates all of its wholly-owned subsidiaries and all
     significant inter-company accounts and transactions have been eliminated in
     the consolidation.

     Organization
     ------------
     Brief descriptions of the active companies included in the consolidated
     group follow:

          ENGlobal Corporation ("ENGlobal") - our public holding company.

          ENGlobal Corporate Services, Inc. ("ECS") - provides the corporate
          oversight function.

          ENGlobal Engineering, Inc. ("EEI") - provides general engineering,
          construction and procurement services for industrial customers
          primarily in the United States with specialties in the areas of
          distributive control systems, power distribution, process design and
          process safety management.

          ENGlobal Construction Resources, Inc. ("ECR") - provides technical and
          inspection personnel within client facilities for the petroleum
          industry.

          RPM Engineering, Inc. d/b/a ENGlobal Engineering, Inc. ("RPM") -
          provides engineering services primarily in southeast Louisiana.

          ENGlobal Systems, Inc. ("ESI") - provides design, fabrication,
          installation, start-up, checkout and maintenance of specialized
          systems such as programmable logic controller (PLC) systems
          integration, supervisory controls and data acquisition (SCADA) and
          triple modular redundancy (TMR) systems, distribution control system
          (DCS), and analyzer systems.

          ENGlobal Automation Group, Inc. ("EAG") - formerly ENGlobal
          Technologies, Inc. ("ETI") - provides service relating to the
          implementation of process controls, advanced automation, and
          information technology projects.

          ENGlobal Technical Services, Inc. ("ETS") - formerly ENGlobal Design
          Group, Inc. ("EDG") - provides design, installation and maintenance of
          various government and public sector facilities, the most active
          sector being Automated Fuel Handling Systems serving the U.S.
          Military.

          ENGlobal Canada, ULC - provides engineering services relating to the
          implementation of process controls, instrumentation, advanced
          automation and information technology projects.



                                       45
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Cash
     ----
     Cash includes cash in bank at December 31, 2005. The Company's banking
     system provides for daily replenishment of major bank accounts for
     check-clearing requirements. Accordingly, there were negative book balances
     of $2.0 million on December 31, 2005 and $3.3 million on December 31, 2004.
     Such balances result from outstanding checks that have not yet been paid by
     the bank and are reclassified to accounts payable in the accompanying
     consolidated balance sheets.

     Inventories
     -----------
     Inventories carried by our ESI subsidiary are composed primarily of raw
     materials and component parts (enclosures, electronics, PC boards and wire)
     and are carried at the lower of cost or market value, with cost determined
     on the first-in, first-out ("FIFO") method of accounting. Inventory is
     classified as assets held for sale on December 31, 2005 pending a sale of
     the ENGlobal Constant Power division of ESI which occurred in January,
     2006.

     Revenue Recognition
     -------------------
     The Company's revenue is composed of engineering, construction and
     procurement service revenue and product sales. The Company recognizes
     service revenue as soon as the services are performed. The majority of the
     Company's engineering services have historically been provided through
     cost-plus contracts whereas a majority of the Company's product sales are
     earned on fixed-fee contracts.

     On occasion, the Company, serving as an agent for the client, procures
     materials and equipment on behalf of the client and the cost of such
     materials and equipment is reimbursed with no mark-up or profit. In
     accordance with Statement of Position (SOP) 81-1, revenue and cost for
     these types of purchases are not included in total revenue and cost. For
     financial reporting, this "pass-through" type of transaction is reported
     net. During 2005 and 2004, pass-through transactions totaled $20.6 million
     and $15.9 million, respectively.

     Profits and losses on fixed-fee contracts are recorded on the
     percentage-of-completion method of accounting, measured by the
     percentage-of-contract cost incurred to date relative to estimated total
     direct contract cost. Direct contract cost includes professional
     compensation and related benefits, materials, subcontractor services and
     other direct cost of projects. Any freight charges and inspection costs are
     directly charged to the project to which the charges relate. The cost
     recognized for labor includes all actual employee compensation plus a
     burden factor to cover estimated variable labor expenses for the year.
     These variable labor expenses consist of payroll taxes, self-insured
     medical plan expenses, workers compensation insurance, general liability
     insurance, and employee benefits for paid time off. The actual periodic
     cost for these expenses is adjusted at the end of each quarter to provide
     consistent cost recognition throughout the year.

     Variable costs such as travel, repairs and maintenance, supplies and
     depreciation directly related to producing revenues are included to arrive
     at gross profit.

     Under the percentage-of-completion method, revenue recognition is dependent
     upon the accuracy of a variety of estimates, including the progress of
     engineering and design efforts, material installation, labor productivity,
     cost estimates and others. These estimates are based on various
     professional judgments made with respect to the factors noted and are
     difficult to accurately determine until projects are significantly
     underway. Due to uncertainties inherent to the estimation process, it is
     possible that actual completion costs may vary materially from estimates.
     Anticipated losses on uncompleted contracts are charged to operations as
     soon as such losses can be estimated. Changes in job performance, job
     conditions, estimated profitability and final contract settlements may
     result in revisions to costs and income and are recognized in the period in
     which the revisions are determined.

     Selling, general and administrative cost includes management and staff
     compensation, office cost such as rents and utilities, depreciation,
     amortization, travel and other expenses that are unrelated to specific
     client contracts, but directly relate to the support of each segment's
     operations.

                                       46
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Occasionally, it is appropriate under SOP 81-1 to combine or segment
     contracts. Contracts are combined in those limited circumstances when they
     are negotiated as a package in the same economic environment with an
     overall profit margin objective and constitute, in essence, an agreement to
     do a single project. In such cases, we recognize revenue and cost over the
     performance period of the combined contracts as if they were one. Contracts
     may be segmented if the customer had the right to accept separate elements
     of a contract and the total economic returns and risks of the separate
     contract elements are similar to the economic returns and risks of the
     overall contract. For segmented contracts, we recognize revenue as if they
     were separate contracts over the performance periods of the individual
     elements or phases.

     We have three major types of contracts:

     Cost-Plus, Labor Plus Fixed Mark-up
     -----------------------------------
     Under cost-plus, labor plus fixed mark-up contracts, clients are charged
     based on actual labor rates plus a fixed mark-up that includes estimated
     recoverable direct and indirect cost and a profit component, which is
     applied as a percentage of the recoverable labor, to arrive at a total
     dollar estimate in negotiating a cost-plus, labor plus fixed mark-up
     contract. We recognize revenue based on a multiple of the actual total
     number of labor hours completed on a project multiplied by the actual labor
     rates and multiplied by the negotiated fixed mark-up percentage, plus other
     non-labor costs at cost plus a fixed mark-up that we negotiate at the time
     of contract award. Aggregate revenue from cost-plus, labor plus fixed
     mark-up contracts may vary in scope and we generally must obtain a change
     order in order to receive additional revenue relating to any additional
     costs that exceed the original contract estimate (see "Change Orders").

     Cost-Plus, Fixed Labor Rate
     ---------------------------
     Under cost-plus, fixed labor rate contracts, clients are charged based on
     fixed labor rates by work classification (Project Manager, Sr. Engineer,
     Designer, CADD Operator, etc.) whereby the fixed labor rate includes
     estimated recoverable direct and indirect cost plus a profit component. In
     negotiating cost-plus, fixed labor rate contracts the total dollar estimate
     is a multiple of the fixed labor rates times the recoverable work class
     labor man-hours estimated to complete the project. We recognize revenues
     based on a multiple of the fixed labor rates times the actual total number
     of labor hours completed on a project, plus other non-labor costs at cost
     plus a fixed rate negotiated at the time of contract award. Aggregate
     revenues from cost-plus, fixed labor rate contracts may vary in scope and
     we generally must obtain a change order in order to receive additional
     revenues relating to any additional cost that exceed the original contract
     estimate (see "Change Orders").

     Fixed Price
     -----------
     Under fixed price contracts, clients are charged an agreed amount
     negotiated in advance of a specific scope of work, be it related to
     engineering, construction and procurement service revenue or product sales.
     We recognize revenue on fixed-price contracts using the
     percentage-of-completion method described above. Prior to completion, gross
     profit recognition on any fixed-price contract is dependent upon the
     accuracy of our estimates and will increase to the extent that current
     estimates of aggregate actual cost are below the amounts previously
     estimated. Conversely, if the Company's current estimated cost exceeds
     prior estimates, gross profit will decrease and we may realize a loss on a
     project. In order to increase aggregate revenue on a contract, we generally
     must obtain a change order to receive payment for additional cost (see
     "Change Orders").

     Change Orders
     -------------
     Change orders are modifications of an original contract that effectively
     change the provisions of the contract without adding new provisions. Either
     we or our clients may initiate change orders. Change orders may include
     changes in specifications or design, manner of performance, equipment,
     materials, scope of work and/or the period of completion of the project.

                                       47
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Change orders occur when changes are experienced after work on a contract
     has begun. Change orders are documented and the terms of change orders are
     agreed with the client before the work is performed. Circumstances, at
     times, may require that work progress without the client's written
     agreement before the work is performed. Cost related to change orders is
     recognized when they are incurred. Change orders are included in the total
     estimated contract revenue when it is probable that the change orders will
     result in a bona fide addition to value that can be reliably estimated.

     Inspection and Acceptance (Cost-plus Contracts)
     -----------------------------------------------
     Generally, other than on fixed price contracts, clients inspect and accept
     work as executed based on designated milestones or billing cycles, although
     such acceptance does not waive the client's right to a claim under a
     warranty provision for work deficiencies that fail to meet industry
     standards. If we are required to remedy defective work, the client normally
     reimburses all cost except for the labor cost necessary to correct such
     defects.

     Inspection and Acceptance (Fixed Price Contracts)
     -------------------------------------------------
     Generally, clients inspect and accept work based on designated milestones,
     although such acceptance does not waive the client's right to a claim under
     a warranty provision for work deficiencies. If we are required to remedy
     defective work, the client normally reimburses all costs except for the
     labor cost necessary to correct such defects.

     Contract Termination Provisions
     -------------------------------
     Generally, our clients may terminate at any time and for any reason any
     part of the Company's project work by giving proper notice, specifying the
     part of the work to be terminated and the effective date of the
     termination. If any part of the work on a project is terminated, the
     client, with respect to such work, is required to reimburse the Company for
     all cost incurred prior to the effective date of termination and for all
     additional amounts that are directly related to the work performed. The
     client is required to issue a change order with respect to any termination.

     Property and Equipment
     ----------------------
     All property and equipment is stated at cost, adjusted for accumulated
     depreciation. Depreciation is calculated using a straight-line method over
     the estimated useful lives of the related assets. The useful life is
     estimated to be 3 years for computers and autos, 5 years for software,
     furniture and fixtures, 10 years for machinery and equipment, and 39 years
     for buildings. Leasehold improvements are amortized over the term of the
     related lease.

     Goodwill
     --------
     In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
     Assets." SFAS 142 requires that goodwill and intangible assets with
     indefinite useful lives no longer be amortized, but instead tested for
     impairment at least annually. SFAS 142 also requires that intangible assets
     with estimable useful lives be amortized over their respective estimated
     useful lives to their estimated residual values and reviewed for impairment
     in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
     of Long-Lived Assets."

                                       48
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     The Company adopted SFAS 142 effective January 1, 2002. Upon adoption, the
     Company tested goodwill for impairment at January 1, 2002 according to the
     provisions of SFAS 142, which resulted in no impairment identified. The
     Company tested goodwill for impairment at December 31, 2004 and 2005
     resulting in no impairment of goodwill.

     In 2004, acquisitions of assets of several companies resulted in an
     increase of $1,725,000 to goodwill. Acquisitions of the assets of
     Engineering Design Group, Inc. ("EDGI"), InfoTech, and Cleveland Inspection
     Services, Inc. ("CIS") resulted in increases to goodwill of $139,000,
     $270,000 and $1,316,000, respectively. In 2005, goodwill increased
     $170,000.

     Long-lived Assets
     -----------------
     The Company reviews long-lived assets and certain identifiable intangible
     assets for impairment annually or whenever events or changes in
     circumstances indicate that the carrying amount of an asset may not be
     recoverable. An impairment loss would be recognized when estimated future
     cash flows expected to result from the use of the asset and its eventual
     disposition is less than its carrying amount. The Company has not
     identified any such impairment losses.

     Software Development Costs
     --------------------------
     Under the provisions of SOP-98-1 ENGlobal capitalizes costs associated with
     software developed or obtained for internal use when both the preliminary
     project stage is completed and when management authorizes funding for the
     project which is deemed probable of completion. Costs include 1) external
     direct costs of materials and services incurred in obtaining and developing
     the software, and 2) payroll and payroll related costs for employees who
     are directly associated with and devote time to the project. Capitalization
     of these costs ceases no later than the point at which the project is
     substantially complete and ready for its intended use. At that time, the
     costs are reclassified to fixed assets. Amortization of such costs is
     provided on the straight-line basis over 5 years.

     The project controls system upgrade was completed at the end of 2004 and
     amortization began in January 2005.

     Dispositions - Assets Held for Sale
     -----------------------------------
     During 2005, the building previously occupied by Thermaire was sold. The
     sale resulted in proceeds of $823,350 and a gain of $119,000 which amount
     is included in other income. As of December 31, 2004, the building was the
     sole asset recorded as "assets held for sale" in the amount of $678,106.




                                       49
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Income Taxes
     ------------
     The Company accounts for deferred income taxes in accordance with the asset
     and liability method, whereby deferred income taxes are recognized for the
     tax consequences of temporary differences by applying enacted statutory tax
     rates applicable to future years to differences between the financial
     statement and tax bases of its existing assets and liabilities. The
     provision for income taxes represents the current tax payable or refundable
     for the period plus or minus the tax effect of the net change in the
     deferred tax assets and liabilities during the period.

     Stock Based Compensation
     ------------------------
     The Company applies SFAS No. 123, Accounting for Stock-Based Compensation,
     as amended by SFAS 148, which encourages, but does not require, companies
     to recognize compensation expense for grants of stock, stock options, and
     other equity instruments to employees based on fair value. The Company has
     elected to record compensation expense in accordance with Accounting
     Principles Board (APB) Opinion No. 25, which calculates compensation as the
     difference between an option's exercise price and the current price of the
     underlying stock. (For equity instruments issued to employees, see Note 10
     that contains required pro forma disclosure of the impact of adopting SFAS
     No. 123)

     In December 2004, the FASB issued Statement of Financial Accounting
     Standards No. 123, (revised 2004) "Share-Based Payment" ("SFAS 123R"). This
     statement is a revision of Statement of Financial Accounting Standards No.
     123, "Accounting for Stock-Based Compensation" as amended ("SFAS 123"), and
     requires entities to measure the cost of employee services received in
     exchange for an award of equity instruments based on the grant-date fair
     value of the award. The cost will be recognized over the period during
     which an employee is required to provide services in exchange for the award
     (usually the vesting period). SFAS 123R covers various share-based
     compensation arrangement rights and employee share purchase plans. SFAS
     123R eliminates the ability to use the intrinsic value methods of
     accounting for share options, as provided in APB No. 25. SFAS 123R is
     effective as of the beginning of the first annual reporting period that
     begins after June 15, 2005.

     The Company will adopt SFAS 123(R) in its first quarter of 2006 utilizing
     the modified prospective method. The modified prospective method requires
     that compensation expense be recorded for all unvested stock options and
     restricted stock awards as of December 31, 2005 over the requisite service
     period (generally the vesting schedule). At December 31, 2005, the Company
     had approximately 423,400 unvested stock options and awards that vest
     through 2008. The Company is currently in the process of evaluating the
     impact of the adoption of SFAS 123(R). For equity instruments issued to
     employees, see Note 11 that contains required pro forma disclosure of the
     impact of adopting SFAS No. 123.




                                       50
<PAGE>
<TABLE>
<CAPTION>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Earnings Per Share
     ------------------
     Earnings per share was computed as follows:

                                                                 Reconciliation of Earnings per Share Calculation
                                                 ----------------------------------------------------------------------------------
                                                           2005                        2004                        2003
                                                 -------------------------   -------------------------   --------------------------
                                                    Basic        Diluted        Basic        Diluted        Basic         Diluted
                                                 -----------   -----------   -----------   -----------   -----------    -----------
     <S>                                         <C>           <C>           <C>           <C>           <C>            <C>
     Income from continuing operations           $ 4,782,381   $ 4,782,381   $ 2,364,389   $ 2,364,389   $ 2,285,269    $ 2,285,269
     Preferred dividends                                --            --            --            --         131,100        131,100
                                                 -----------   -----------   -----------   -----------   -----------    -----------
     Income available for common stock from        4,782,381   $ 4,782,381     2,364,389     2,364,389     2,154,169      2,154,169
        continuing operations
     Loss from discontinued operations                  --            --            --            --        (128,181)      (128,181)
                                                 -----------   -----------   -----------   -----------   -----------    -----------
     Net income available for common stock       $ 4,782,381   $ 4,782,381   $ 2,364,389   $ 2,364,389   $ 2,025,988    $ 2,025,988
                                                 ===========   ===========   ===========   ===========   ===========    ===========
     Weighted average number of shares
        outstanding for basic                     24,300,114                  23,454,545                  23,300,600
     Weighted average number of shares
        outstanding for diluted                                 25,250,487                  23,785,939                   23,733,807
     Net income (loss) per share available
        for common stock
         Income from continuing operations       $      0.20   $      0.19   $      0.10   $      0.10   $      0.09    $      0.09
         Gain (loss) from discontinued
            operations                                  --            --            --            --            --             --
         Net income available for common stock   $      0.20   $      0.19   $      0.10   $      0.10   $      0.09    $      0.09


     Diluted earnings per share are computed including the impact of all
     potentially dilutive securities. The following table sets forth the shares
     outstanding for the earnings per share calculations for the years ended
     December 31, 2005, 2004 and 2003.

                                                                 2005          2004           2003
                                                             -----------   -----------    -----------
     Common stock issued - beginning of year                  23,466,839    24,034,288     22,861,199
     Weighted average common stock issued (repurchased)          833,275      (579,743)       439,401
                                                             -----------   -----------    -----------
         Shares used in computing basic earnings per share    24,300,114    23,454,545     23,300,600
     Assumed conversion of dilutive stock options                950,373       331,394        433,207
                                                             -----------   -----------    -----------
     Shares used in computing diluted earnings per share      25,250,487    23,785,939     23,733,807
                                                             ===========   ===========    ===========

     Use of Estimates
     ----------------
     The preparation of the Company's consolidated financial statements in
     conformity with accounting principles generally accepted in the United
     States of America requires the Company's management to make estimates and
     assumptions that affect the amounts reported in these financial statements
     and accompanying results. Actual results could differ from these estimates.

     Fair Value of Financial Instruments
     -----------------------------------
     The fair value of financial instruments, primarily accounts receivable,
     notes receivable and accounts payable, closely approximate the carrying
     values of the instruments due to the short-term maturities of such
     instruments. Based on the borrowing rate currently available to the Company
     for loans with similar terms, we believe the fair value of the long-term
     obligations approximate their carrying value.

                                       51
</TABLE>
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Comprehensive Income
     --------------------
     Comprehensive income is defined as all changes in stockholders' equity,
     exclusive of transactions with owners, such as capital investments.
     Comprehensive income includes net income or loss, changes in certain assets
     and liabilities that are reported directly in equity, such as translation
     adjustments on investments in foreign subsidiaries and certain changes in
     minimum pension liabilities. The cumulative translation adjustment is
     included in accumulated other comprehensive income. (See Note 4)

     Reclassifications
     -----------------
     Amounts in prior years' financial statements are reclassified as necessary
     to conform to the current year's presentation. Such reclassifications had
     no effect on net income. Certain categories of depreciation expense were
     reclassified in 2004 to direct costs. As depreciation expense in 2003
     related to direct costs was immaterial, no reclassification was made for
     that year.


NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the FASB issued Statement of Financial Accounting
     Standards No. 123, (revised 2004) "Share-Based Payment" ("SFAS 123(R)").
     This statement is a revision of Statement of Financial Accounting Standards
     No. 123, "Accounting for Stock-Based Compensation" as amended ("SFAS123"),
     and requires entities to measure the cost of employee services received in
     exchange for an award of equity instruments based on the grant-date fair
     value of the award. The cost will be recognized over the period during
     which an employee is required to provide services in exchange for the award
     (usually the vesting period). SFAS 123(R) covers various share-based
     compensation arrangement rights and employee share purchase plans. SFAS
     123(R) eliminates the ability to use the intrinsic value methods of
     accounting for share options, as provided in Accounting Principles Board
     Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS
     123(R) is effective as of the beginning of the first interim period of the
     first annual period that begins after June 15, 2005, with early adoption
     encouraged. The Company is currently evaluating the statement's transition
     methods and does not expect this statement to have an effect materially
     different than that of the pro forma SFAS 123 disclosures provided in Note
     10 to the Company's Consolidated Financial Statements.

     In December 2004, the FASB issued Statement of Financial Accounting
     Standards No. 153, "Exchanges of Non-monetary Assets, an amendment of APB
     Opinion NO. 29" ("SFAS 153"). This Statement amends APB Opinion No 29 to
     permit the exchange of non-monetary assets to be recorded on a carry over
     basis when the non-monetary assets do not have commercial substance. This
     is an exception to the basic measurement principal of measuring a
     non-monetary asset exchange at fair value. A non-monetary asset exchange
     has commercial substance if the future cash flows of the entity are
     expected to change significantly as a result of the exchange. SFAS 153 is
     effective for non-monetary asset exchanges occurring in fiscal periods
     beginning after June 15, 2005. The adoption of this standard is not
     expected to impact the Company's Consolidated Financial Statements.

     In January 2003, the Financial Accounting Standard Board ("FASB") issued
     Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
     Entities." FIN 46 clarifies the application of Accounting Research Bulletin
     No. 51, "Consolidated Financial Statements," and addresses consolidation by
     business enterprises of variable interest entities (more commonly known as
     Special Purpose Entities or SPE's). In December 2003, FASB issued


                                       52
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

     FIN No. 46R which replaced FIN 46 and clarified ARB 51. This interpretation
     provides guidance on how to identify a variable interest entity and
     determine when the assets, liabilities, non-controlling interests and
     results of operations of a variable interest entity should be consolidated
     by the primary beneficiary. The primary beneficiary is the enterprise that
     will absorb a majority of the variable interest entity's expected losses or
     receive a majority of the expected residual returns as a result of holding
     variable interests. This FIN requires the consolidation of results of
     variable interest entities in which the Company is the primary beneficiary
     of the variable interest entity. As of December 31, 2004 and 2005, the
     Company did not own an interest in a variable interest entity that met the
     consolidation requirements and as such the adoption of FIN No. 46R did not
     have any effect on the financial condition, results of operations, or
     liquidity of the Company. Interests in entities acquired or created after
     December 31, 2005 will be evaluated based on FIN No. 46R criteria and
     consolidated, if required.


NOTE 4 - COMPREHENSIVE INCOME (LOSS)

     Comprehensive income (loss) represents net earnings and any revenue,
     expenses, gains and losses that, under accounting principles generally
     accepted in the United States of America, are excluded from net earnings
     and recognized directly as a component of stockholders' equity.

     Accumulated other comprehensive income is as follows:

                                                     2005       2004      2003
                                                    -------    -------   -------
                                                           (in thousands)
                                                    ----------------------------
       Net income                                   $ 4,782    $ 2,364   $ 2,157
           Other comprehensive income:
           Foreign currency translation adjustment       (4)      --        --
                                                    -------    -------   -------
       Comprehensive income                         $ 4,778    $ 2,364   $ 2,157
                                                    =======    =======   =======


NOTE 5 - PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following at December 31, 2005 and
     2004:

                                                            2005        2004
                                                          --------    --------
                                                             (in thousands)
                                                          --------------------
       Land                                               $    202    $    202
       Building                                              1,359       1,359
       Computer equipment and software                       6,374       4,038
       Shop equipment                                          904         783
       Furniture and fixtures                                  477         303
       Building and leasehold improvement                    1,561         692
       Autos and trucks                                        191         169
                                                          --------    --------
                                                            11,068       7,546
       Accumulated depreciation and amortization            (4,254)     (2,645)
                                                          --------    --------
                                                             6,814       4,901
       Project controls and software upgrade in process         47         361
                                                          --------    --------
           Property and equipment, net                    $  6,861    $  5,262
                                                          ========    ========

     Depreciation and amortization expense were $1,836,000, $1,246,000, and
     $824,000 in 2005, 2004 and 2003, respectively.

                                       53
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

     The components of trade receivables as of December 31, 2005 and 2004 are as
     follows:

                                                      2005        2004
                                                    --------    --------
                                                       (in thousands)
                                                    --------------------
       Amounts billed at December 31                $ 28,964    $ 21,204
       Amounts billable at December 31,
         billed January of the following year         16,523       9,177
       Retainage                                       1,265         935
       Less: Allowance for uncollectible accounts       (503)       (476)
                                                    --------    --------
           Trade receivables, net                   $ 46,249    $ 30,840
                                                    ========    ========

     The components of other liabilities as of December 31, 2005 and 2004 are as
     follows:

                                                        2005        2004
                                                       ------      ------
                                                         (in thousands)
                                                       ------------------
       Reserve for known contingencies                 $ --        $   51
       Accrued interest                                   144         161
       Sales taxes                                        322           6
       State taxes                                        408         198
       Other                                              274         284
                                                       ------      ------
           Other liabilities                           $1,148      $  700
                                                       ======      ======


NOTE 7 - FIXED-PRICE CONTRACTS

     Costs, estimated earnings and billings on uncompleted contracts consisted
     of the following at December 31, 2005 and 2004:

                                                             2005        2004
                                                           --------    --------
                                                              (in thousands)
                                                           --------------------
       Costs incurred on uncompleted contracts             $ 23,426    $  8,292
       Estimated earnings on uncompleted contracts            4,437       1,584
                                                           --------    --------
       Earned revenues                                       27,863       9,876
       Less:  Billings to date                               27,490     (11,077)
                                                           --------    --------
           Net costs and estimated earnings in excess of
              billings on uncompleted contracts            $    373    $ (1,201)
                                                           ========    ========

       Costs and estimated earnings in excess of
         billings on uncompleted contracts                 $  4,148    $  1,113
       Billings in excess of costs and estimated
         earnings on uncompleted contracts                   (3,775)     (2,314)
                                                           --------    --------
           Net costs and estimated earnings in excess of
              billings on uncompleted contracts            $    373    $ (1,201)
                                                           ========    ========

                                       54
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - LINE OF CREDIT AND DEBT

     The Company had a Credit Facility with Comerica Bank ("Comerica") that
     consisted of a line of credit maturing on July 27, 2007 (the "Comerica
     Credit Facility"). The loan agreement positioned Comerica as senior to all
     other debt. The line of credit is limited to $22.0 million, subject to loan
     covenant restrictions. The Comerica Credit Facility is collateralized by
     substantially all the assets of the Company. The outstanding balance on the
     line of credit as of December 31, 2005 and 2004 was $3.8 million and $13.5
     million, respectively. At the election of the Company, the interest rate
     will be the lesser of prime or a three tiered Eurodollar rate, plus 150,
     175, or 200 basis points, respectively, based on the ratio of total funded
     debt to EBITDA for the trailing 12 months of less than 2.00, between 2.00
     and 2.50, and greater than 2.50, respectively. The commitment fee on the
     unused line of credit is 0.250%. The remaining borrowings available under
     the line of credit as of December 31, 2005 and 2004, respectively, were
     $12.0 and $4.0 million after consideration of loan covenant restrictions.

     The Comerica Credit Facility contains covenants requiring the Company, as
     of the end of each calendar month, to maintain certain ratios, including
     total average funded debt to EBITDA; total average funded debt to total
     liabilities, plus net worth; and total funded debt to accounts/unbilled
     receivables. The Company is also required, as of the end of each quarter,
     to maintain minimum levels of net worth, plus the Company must comply with
     an annual limitation on capital expenditures. The Company was in compliance
     with all covenants under the Comerica Credit Facility as of December 31,
     2005.

     Letters of credit
     -----------------
     As of December 31, 2005, the Company had $6.2 million outstanding in
     standby letters of credit issued to a refining client to cover contractual
     obligations funded by the client for progress payments made to equipment
     manufacturers for major project items. We expect obligations under standby
     letters of credit to decrease each month until the obligations are fully
     released in May 2006. As of February 23, 2006, the Company had $3.1 million
     outstanding in standby letters of credit.

     Long-term debt consisted of the following at December 31, 2005 and 2004:
<TABLE>
<CAPTION>

                                                                           2005        2004
                                                                         --------    --------
                                                                            (in thousands)
                                                                         --------------------
       <S>                                                               <C>         <C>
       Comerica Credit Facility - Line of credit, prime (7.25% at
          December 31, 2005), maturing in July 2007                      $  3,774    $ 13,530
        The following notes are subordinate to the credit facility
          and are unsecured:
            Sterling Planet and EDGI - Notes payable, interest at 5%,
              principal payment installments of $15,000 plus interest
              due quarterly, maturing in December 2008                        195         255
            Significant PEI Shareholders (See Note 19)                        188         385
            Cleveland Inspection Services, Inc., CIS Technical
              Services and F.D. Curtis - Notes payable, discounted at
              5% interest, principal in installments of $100,000 due
              quarterly, maturing in October 2009                           1,444       1,762
            InfoTech Engineering, Inc. - Note payable, interest at 5%,
              principal payments in installments of $65,000 plus
              interest due annually, maturing in December 2007                130         195
            Miscellaneous                                                      45          80
                                                                         --------    --------

                Total long-term debt                                        5,776      16,207

                Less:  Current maturities                                    (548)       (622)
                                                                         --------    --------

                Long-term debt, net of current portion                   $  5,228    $ 15,585
                                                                         ========    ========

                                       55
</TABLE>
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 8 - LINE OF CREDIT AND DEBT (Continued)

     Maturities of long-term debt as of December 31, 2005, are as follows:

                                                      Maturities
                                                      ----------
                                                    (in thousands)
                                                      ----------
              Years Ending December 31,
                  2006                                $     548
                  2007                                    4,396
                  2008                                      444
                  2009                                      388
                                                      ---------
                      Total long-term debt            $   5,776
                                                      =========


NOTE 9 - OPERATING LEASES

     The Company leases equipment and office space under long-term operating
     lease agreements.

     The future minimum rental payments on operating leases (with initial or
     remaining non-cancelable terms in excess of one year) as of December 31,
     2005 are as follows:

                                                       Operating
                                                      ------------
                                                     (in thousands)
                                                      ------------
              Years Ending December 31,
                  2006                                $     2,227
                  2007                                      2,482
                  2008                                      1,520
                  2009                                      1,507
                  2010 and after                            1,772
                                                      -----------
                      Total minimum lease payments    $     9,508
                                                      ===========


     Rent expense for the years ended December 31, 2005, 2004 and 2003 was
     $2,167,000, $1,754,000 and $1,268,000, respectively.


NOTE 10 - EMPLOYEE BENEFIT PLANS

     The Company sponsors a 401(k) profit sharing plan for its employees.
     Effective October 1, 2005, the Company amended the Plan to implement a
     mandatory matching contribution equal to 25% of employee contributions up
     to 4% of employee compensation for non-regular employees. For regular
     employees, the Company makes mandatory matching contributions equal to 50%
     of employee contributions up to 4% of employee compensation. The Company,
     as determined by the Board of Directors, may make other discretionary
     contributions. The employees may elect to make contributions pursuant to a
     salary reduction agreement upon meeting age and length-of-service
     requirements. The Company made contributions of approximately $401,000,
     $221,000, and $144,000, respectively, for the years ended December 31,
     2005, 2004, and 2003. Effective April 1, 2006, the Company will increase
     its matching contributions to the ENGlobal Corporation 401(k) Plan equal to
     50% of regular employee contributions up to 6% of employee compensation,
     and all other employees will be matched at 33.33% of employee contribution
     up to 6% of compensation, as defined.

     On June 17, 2004, ENGlobal shareholders ratified the Company's adoption of
     the 2004 Employee Stock Purchase Plan ("Plan"). Beginning April 2004, the
     Company provided eligible employees with the opportunity and a convenient
     means to purchase shares of the Company's Common Stock as an incentive to

                                       56
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - EMPLOYEE BENEFIT PLANS (Continued)

     exert maximum efforts for the success of the Company. ENGlobal intends that
     options to purchase stock granted under the Plan qualify as options granted
     under an "employee stock purchase plan" as defined in Section 423(b) of the
     Code. The Plan is construed so as to be consistent with Section 423 of the
     Code, including Section 423(b)(5) which requires that all participants have
     the same rights and privileges with respect to options granted under the
     Plan. The cash deferred by participants into the plan has been used to meet
     the Company's cash requirements or has been applied to the reduction of the
     Company's long-term debt. Because of requirements of SFAS 123(R), and
     probable reduction of benefits that would be required, the Company elected
     to terminate the Plan effective December 31, 2005.


NOTE 11 - STOCK OPTION PLAN

     The Company has an incentive plan that provides for the issuance of options
     to acquire up to 2,650,000 shares of common stock. The incentive plan
     ("Option Plan") provides for grants of non-statutory options, incentive
     stock options, restricted stock awards and stock appreciation rights. No
     compensation cost has been recognized for grants under the Option Plan
     because the exercise price of the options granted to employees equaled or
     exceeded the market price of the stock on the date of the grant. Had the
     method prescribed by SFAS No. 123 been applied, the Company's net income
     available to common stockholders for the years ended December 31, 2005,
     2004 and 2003 would have been changed to the pro forma amount indicated
     below:
<TABLE>
<CAPTION>

                                                                    2005           2004           2003
                                                                 -----------    -----------    -----------
<S>                                                              <C>            <C>            <C>
       Net income available for common stock-as reported         $ 4,782,381    $ 2,364,389    $ 2,025,988
       Compensation expenses if the fair value method had been
          applied to the grants                                     (538,273)      (112,830)       (64,492)
                                                                 -----------    -----------    -----------
            Net income available for common stock-pro forma      $ 4,244,108    $ 2,251,559    $ 1,961,496
                                                                 ===========    ===========    ===========

         Net income per share-as reported
              Basic                                              $      0.20    $      0.10    $      0.09
              Diluted                                            $      0.19    $      0.10    $      0.09
         Net income available per share-pro forma
              Basic                                              $      0.17    $      0.10    $      0.08
              Diluted                                            $      0.17    $      0.10    $      0.08


     The fair value of each option granted is estimated on the date of grant
     using the Black-Scholes option-pricing model with the following weighted
     average assumptions used for grants in 2005, 2004, and 2003: dividend yield
     of 0%, expected volatility of 74.5% to 79.1%, 56% and 73%, and risk-free
     interest rates of 3.42% to 4.50%, 5% and 5% for each year presented, and
     expected lives of two to four years. The maximum term of each option is ten
     years.

                                       57
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - STOCK OPTION PLAN (Continued)

     The following table summarizes total aggregate stock option activity for
     the period December 31, 2002 through December 31, 2005.

                                                                     Weighted
                                             Number of Shares         Average
                                               Outstanding        Exercise Price
                                              --------------      --------------
     Balance at December 31, 2002                  1,254,929           1.79
         Granted                                     120,000           2.09
         Exercised                                   (51,710)          1.02
         Canceled or expired                         (66,051)          1.00
                                              --------------
     Balance at December 31, 2003                  1,257,168           2.11
         Granted                                     386,000           2.01
         Exercised                                   (87,332)          1.03
         Canceled or expired                         (28,686)          1.19
                                              --------------
     Balance at December 31, 2004                  1,527,150           2.10
         Granted                                     425,000           3.79
         Exercised                                  (492,019)           .99
         Canceled or expired                         (21,897)          1.88
                                              --------------
     Balance at December 31, 2005                  1,438,234           3.07
                                              ==============

     The following table summarizes information concerning outstanding and
     exercisable Company common stock options at December 31, 2005.

                                                      Average
                                      Weighted       Remaining                      Weighted
        Exercise      Options         Average       Contractual     Options         Average
         Prices     Outstanding    Exercise Price       Life      Exercisable    Exercise Price
         ------     -----------    --------------       ----      -----------    --------------

      $      0.96     179,884        $      0.96         4.8         179,884      $       0.96
      $      1.00      20,000        $      1.00         5.2          20,000      $       1.00
      $      1.25      80,000        $      1.25        3.95          80,000      $       1.25
      $      1.81      60,000        $      1.81         8.5          60,000      $       1.81
      $      1.87      60,000        $      1.87         7.3          60,000      $       1.87
      $      1.97      25,000        $      1.97         8.2          25,000      $       1.97
      $      2.05     266,850        $      2.05         8.2         158,450      $       2.05
      $      2.32      60,000        $      2.32         7.4          60,000      $       2.32
      $      2.39     100,000        $      2.39         9.1          40,000      $       2.39
      $      2.50      75,000        $      2.50         9.2          30,000      $       2.50
      $      3.75     150,000        $      3.75         9.5               -      $        -
      $      4.26      61,766        $      4.26          .7          61,766      $       4.26
      $      6.24     199,734        $      6.24         1.8         199,734      $       6.24
      $      6.71     100,000        $      6.71         9.9          40,000      $       6.71
                    ---------                                     ----------
                    1,438,234                                      1,014,834
                    =========                                     ==========

     Available for grant at December 31, 2005                                                    509,260
     Weighted-average fair value of options at grant date, granted in 2005                        $ 3.52
     Weighted-average fair value of options at grant date, granted in 2004                        $ 2.15
     Weighted-average fair value of options at grant date, granted in 2003                        $ 2.01
     Weighted-average remaining vesting life of all options outstanding at December 31, 2005   1.5 years

                                       58
</TABLE>
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - STOCK OPTION PLAN (Continued)

     For 2002 through 2004, the summary above does not include 234,774
     non-qualified options issued at the time of the Merger to replace existing
     options issued by Petrocon in consideration for services. Such options had
     an exercise price of $4.26 per share. In September 2005, these options were
     exercised.

     Replacement warrants of 305,102 (not included in the table above) with an
     exercise price of $6.24 expired in October 2003.


NOTE 12 - RELATED-PARTY TRANSACTIONS

     The Company leases office space from PEI Investments, a joint venture in
     which ENGlobal Engineering, Inc. has a one-third interest, Michael L.
     Burrow (the Company's CEO) has a one-third interest, and a stockholder who
     owns less than 1% of the Company's common stock has a one-third interest.
     Rentals paid under these leases were $105,000, $135,000, and $135,000 for
     2005, 2004 and 2003, respectively. The lease was renewed in August, 2005.
     In September 2005, the building was damaged by Hurricane Rita and all
     tenants have relocated to other locations. No further lease payments have
     been made by the Company since September 2005 and the insurance claim filed
     by PEI Investments remains unsettled.


NOTE 13 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

     The Company provides engineering and fabricated systems and services
     primarily to major integrated oil and gas companies throughout the world.
     It also fabricates power systems and battery chargers. The Company performs
     ongoing credit evaluations of its customers and generally does not require
     collateral. Management reviews all trade receivable balances that exceed 30
     days past due and based on its assessment of current credit worthiness,
     estimate what portion, if any seems doubtful for collection. A valuation
     allowance that reflects management's best estimate of the amounts that will
     not be collected is established.

     For the years ended December 31, 2005, 2004, and 2003, the Company had
     sales in the engineering segment totaling approximately $84.8 million,
     $87.9 million and $45.2 million attributable to a single customer. . In
     2005, approximately 44% of our revenues were from one client, approximately
     12% of our revenues were from another client and another 12% were from a
     third client. During 2004 and 2003, a single customer represented
     approximately 59% and 36% of total sales, respectively. At December 31,
     2005 the Company had amounts due from two customers totaling $8.3 million
     with neither customer exceeding 10% of trade receivables. At December 31,
     2004, the Company had amounts due from one customer totaling $7.0 million;
     no other customer exceeded 10% of trade receivables at that date. At
     December 31, 2003, one customer had amounts in excess of 10% of trade
     receivables, totaling $5.1 million.


NOTE 14 - REDEEMABLE PREFERRED STOCK

     ENGlobal has a class of preferred stock with 5,000,000 shares originally
     authorized for issuance. The Company issued to Equus II Incorporated
     2,500,000 shares of preferred stock in 2001 and stock dividends totaling
     88,000 shares in 2002 and 146,833 shares in 2003. Par value for the
     preferred stock was $0.001 with a fair value of $1.00 per share at the time
     of issuance. The preferred shares outstanding were converted into 1,149,089
     shares of common stock in August 2003. Following the conversion, the
     Company reduced the authorized shares of preferred stock to 2,265,167.

                                       59
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - FEDERAL INCOME TAXES

     The components of income tax expense (benefit) from continuing operations
     for the years ended December 31, 2005, 2004 and 2003 were as follows:

                                               2005       2004      2003
                                             -------    -------   -------
                                                   (in thousands)
                                             ----------------------------
       Current
            Federal                          $ 3,016    $   975   $   536
            State                                413        427        30
                                             -------    -------   -------
                                               3,429      1,402       566
       Deferred
            Federal                             (313)       254       543
                                             -------    -------   -------

                Total tax provision          $ 3,116    $ 1,656   $ 1,109
                                             =======    =======   =======


     The components of the deferred tax asset (liability) consisted of the
     following at December 31, 2005 and 2004:

                                                             2005       2004
                                                           -------    -------
                                                             (in thousands)
                                                           ------------------
       Deferred tax asset
            Allowance for doubtful accounts                $   171    $   162
            Net operating loss carryforward                    474       --
            Accruals not yet deductible for tax purposes       310        478
            Alternative minimum tax credit carryforward        194       --
                                                           -------    -------
                Deferred tax assets                          1,149        640
                                                           -------    -------

       Deferred tax liabilities
            Depreciation                                      (436)      (558)
            Prepaid expenses                                  (293)      --
            Goodwill                                           (40)       (15)
                                                           -------    -------
                Deferred tax liability                        (769)      (573)
                                                           -------    -------

                Deferred tax asset, net                    $   380    $    67
                                                           =======    =======


     The following is a reconciliation of expected to actual income tax expense
     from continuing operations:

                                                     2005       2004      2003
                                                    -------   -------   -------
                                                           (in thousands)
                                                    ---------------------------
       Federal income tax expense at 34%            $ 2,685   $ 1,147   $ 1,154
       State and foreign taxes, net of tax effect       273       212         2
       Nondeductible expenses                             9        53        31
       Other                                            149       244       (78)
                                                    -------   -------   -------
                                                    $ 3,116   $ 1,656   $ 1,109
                                                    =======   =======   =======


     The Company has a net operating loss carryforward at December 31, 2005 of
     approximately $1,393,000. Earlier utilization of the net operating loss on
     the Company's 2002 and 2003 consolidated tax returns was disallowed by the
     IRS which resulted in a reinstated carryforward that will be available for
     utilization in 2006 through 2010. The Company believes, based on favorable
     market conditions in the foreseeable future, that the net operating loss
     will be fully utilized.

                                       60
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - ACQUISITIONS

     Assets acquired and liabilities assumed by the Company in acquisitions have
     been recorded on the Company's Consolidated Balance Sheets as of the
     respective acquisition dates based upon their estimated fair values at such
     dates. The results of operations of our acquisitions have been included in
     the Company's Consolidated Statement of Income since their respective dates
     of acquisition. The excess of the purchase price over the estimated fair
     values of the underlying assets acquired and liabilities assumed has been
     allocated to goodwill.

     One of the Company's subsidiaries, ENGlobal Technical Services, Inc.
     ("ETS") (formerly known as ENGlobal Design Group, Inc. ("EDG")), purchased
     certain assets of Tulsa-based Engineering Design Group, Inc. ("EDGI")
     effective February 1, 2004. The Company expects that the acquisition of
     these assets will enhance its capabilities related to various government
     and public sector facilities. ETS's most active sector is the Automated
     Fuel Handling Systems that serve the U.S. Military. In connection with the
     purchase, the Company acquired $344,000 in tangible assets including
     furniture and fixtures, computer equipment and software. The Company also
     assumed a liability for $44,000 in accrued compensated absences for former
     EDGI employees hired at the time of the purchase, issued two $150,000 notes
     bearing interest at 5% maturing in December 2008 and a $2.5 million
     five-year contingent promissory note, with payments due annually, as part
     of an earn-out based on revenues of the ETS operations over the next five
     years. ETS did not pay any cash or issue any stock in the transaction. The
     original consideration given for the purchase of certain EDGI assets
     approximated the fair value of the net assets acquired; therefore no
     goodwill arose from the transaction. Principal and interest on the $2.5
     million five-year contingent promissory note is being charged to goodwill.
     As of December 31, 2005, $218,000 in principal and interest payments on the
     contingent promissory note has been charged to goodwill and is being
     amortized over 15 years for tax purposes.

     In October 2004, one of the Company's subsidiaries, ENGlobal Construction
     Resources, Inc., purchased the name and certain assets of Cleveland
     Inspection Services, Inc. ("CIS"). CIS provides inspection and construction
     management services in support of the oil and gas, utility, and pipeline
     industries. The Company paid $2.5 million consisting of cash, discounted
     promissory notes and the assumption of certain designated contract
     obligations and entered into non-compete agreements with CIS and its
     principals in exchange for approximately $1.0 million in machinery and
     equipment, furniture and fixtures, computer equipment, software and other
     intangible assets. The acquisition resulted in approximately $1.3 million
     in goodwill which is being recorded and amortized over 15 years for tax
     purposes.

     In December 2004, ESI purchased contract rights and other assets of
     InfoTech Engineering Company, LLC, a limited liability company
     ("InfoTech"), headquartered in Baton Rouge, Louisiana. The Company paid
     $325,000 in cash, a promissory note in the amount of $225,000 and entered
     into a non-compete agreement with the former owner in exchange for
     approximately $55,000 in computer equipment and certain intangible assets.
     The acquisition resulted in approximately $270,000 in goodwill which is
     being recorded and amortized over 15 years for tax purposes. The InfoTech
     acquisition expands ESI's capability in controls system integration in both
     the automation and process control services. InfoTech's primary experience
     is in the onshore and offshore oil and gas and petrochemical industries.

     Two acquisitions were completed in 2003, Senftleber & Associates, L.P. and
     Petro-Chem Engineering, Inc. Through the Petro-Chem transaction, selected
     assets were acquired expanding the Company's presence in Freeport, Texas
     and surrounding area. The new Freeport operations began in June as a
     division of EEI. Senftleber, a limited partnership, provides support in the
     pipeline industry in Houston. The Senftleber acquisition occurred in
     November as a subsidiary of ETI. The acquisitions had an aggregate cost of
     $425,000. Goodwill was created with both transactions: $115,000 for
     Petro-Chem and $428,000 for Senftleber.

                                       61
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 17 - SALE OF THERMAIRE

     The Company completed its sale of assets of its subsidiary, Thermaire,
     Inc., d/b/a Thermal Corporation, the only company in the manufacturing
     segment, to a medium-sized HVAC equipment manufacturer in December 2003.
     The disposition had been actively pursued since November 2001 in order to
     permit the Company to strategically focus on its core operations. This
     discontinued segment had reported losses from operations of $154,000 in
     2003. The sale resulted in the receipt of $545,000 in cash and a $26,000
     gain, net of tax. The 37,000 square foot office and manufacturing facility
     owned by Thermaire was not included in the transaction and has been
     separately listed for sale.

     In March 2005, the Company completed the sale of the building formerly
     occupied by Thermaire, Inc. The Company received proceeds of $823,350. The
     Company realized a gain on the sale of the building of $119,000.


NOTE 18 - SEGMENT INFORMATION

     With the sale of the manufacturing segment, the Company operates in two
     business segments: engineering and systems. The engineering segment
     provides services primarily to major integrated oil and gas companies that
     for the most part are located in the United States. The systems segment
     operates primarily full-service systems/controls engineering and
     integration with some uninterruptible power systems and battery chargers
     that for the most part are located in the United States. Sales, operating
     income, identifiable assets, capital expenditures and depreciation for each
     segment are set forth in the following table. The amount in the corporate
     segment includes those activities that are not allocated to the operating
     segments and include costs related to business development, executive
     functions, finance, accounting, safety, human resources and information
     technology that are not specifically identifiable with the two segments.
     The inter-company elimination column includes the amount of administrative
     costs allocated to the segments. The Corporate function supports both
     business segments and therefore cannot be specifically assigned to either.
     A significant portion of Corporate costs are allocated to each segment
     based on each segment's revenues and subsequently eliminated in
     consolidation.

     Financial information about geographic areas
     --------------------------------------------
     Revenues from the Company's non-U.S. operations are currently not material.
     Long-lived assets located in Canada are currently not material.






                                       62
<PAGE>
<TABLE>
<CAPTION>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18 - SEGMENT INFORMATION (Continued)

     Segment information for 2005, 2004 and 2003 was as follows:

                                                                                     Intercompany
                                        Engineering       Systems       Corporate    Eliminations        Total
                                                                       (in thousands)
<S>                                      <C>            <C>            <C>           <C>               <C>
                                   2005
                                   ----
                Net sales from external
                              customers  $  215,699     $   17,886     $        -    $         -       $  233,585
                Operating profit (loss)      17,752            309            732        (10,209)           8,584
                       Depreciation and
                           amortization       1,256            101            479              -            1,836
                        Tangible assets      52,602          5,460          2,419              -           60,481
                               Goodwill      14,756            699              -              -           15,455
                   Capital expenditures       2,569            172            489              -            3,230

                                   2004
                                   ----
                Net sales from external
                              customers  $  133,630     $   15,258     $        -    $         -       $  148,888
                Operating profit (loss)      10,512            585          2,267         (8,872)           4,492
                       Depreciation and
                           amortization         706            108            432              -            1,246
                        Tangible assets      31,971          6,673          3,332              -           41,976
                               Goodwill      14,585            699              -              -           15,284
                   Capital expenditures       1,378             20             67              -            1,465

                                   2003
                                   ----
                Net sales from external
                              customers  $  108,380     $   15,339     $        -    $         -       $  123,719
                Operating profit (loss)      10,716            (38)           762         (6,906)           4,534
                       Depreciation and
                           amortization         375             89            360              -              824
                        Tangible assets      22,642          3,049          3,048              -           28,762
                               Goodwill      12,889            864              -              -           13,753
                   Capital expenditures         902            105            139              -            1,146


     Tangible assets include cash, accounts receivable, costs in excess of
     billings, prepaid expenses, income tax receivables, deferred tax assets,
     property and equipment and deferred financing. Goodwill, investments in
     subsidiaries, and inter-company accounts receivables and payables are
     excluded.

                                       63
</TABLE>
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19 - COMMITMENTS AND CONTINGENCIES

     In connection with the 2001 merger of Petrocon Engineering, Inc.
     ("Petrocon") and a wholly-owned subsidiary of ENGlobal Corporation, certain
     former Petrocon shareholders (the "Significant PEI Shareholders") entered
     into an Indemnification Escrow Agreement, an Option Escrow Agreement, a
     Voting Agreement and a Significant PEI Shareholder Voting Agreement
     (collectively, the "2001 Agreements"). In August 2004, the Company and the
     requisite percentage of Significant PEI Shareholders entered into a
     Termination Agreement (the "Termination Agreement") terminating the 2001
     Agreements. The 2001 Agreements included the following:

          Indemnification Escrow.
          -----------------------
          Pursuant to the Indemnification Escrow Agreement, 1,000,000 shares of
          ENGlobal common stock owned by the Significant PEI Shareholders were
          deposited into an escrow to serve as a fund against which the Company
          could make claims for indemnity pursuant to the Merger Agreement with
          Petrocon. Pursuant to the terms of the Termination Agreement, the
          remaining shares in the Indemnification Escrow agreement will be
          released pro rata to the Significant PEI Shareholders.

          Voting Agreement.
          -----------------
          ENGlobal, the Significant PEI Shareholders, and certain other parties
          entered into a Voting Agreement which obligated the parties thereto to
          vote for certain persons to serve on the Board of Directors of
          ENGlobal. Pursuant to the terms of the Termination Agreement, the
          Voting Agreement has been terminated.

          Significant PEI Shareholder Voting Agreement.
          ---------------------------------------------
          The Significant PEI Shareholders entered into a Significant PEI
          Shareholders Voting Agreement governing the manner in which they would
          designate three ENGlobal director nominees under the Voting Agreement
          and vote shares held in escrow. Pursuant to the terms of the
          Termination Agreement, the Significant PEI Shareholders Voting
          Agreement has been terminated.

          Option Escrow.
          --------------
          Pursuant to the Option Escrow Agreement, the Significant PEI
          Shareholders deposited 1,737,473 shares of ENGlobal common stock into
          an escrow account. The Option Escrow Agreement required that if
          ENGlobal issued shares of its common stock on the exercise of
          incentive options granted as replacement options for outstanding
          Petrocon incentive options ("Replacement Options"), a like number of
          shares of ENGlobal common stock would be surrendered from the escrow
          account to ENGlobal. As a result, no dilution to ENGlobal stockholders
          would occur upon the exercise of Replacement Options.

     The Company's management has since determined that, due to the cost and
     complexity associated with administering the 2001 Agreements, it would be
     in the best interest of the Company and its stockholders to terminate the
     same. Pursuant to the terms of the Termination Agreement, ENGlobal
     purchased the 652,377 shares being held in escrow underlying the
     Replacement Options with an exercise price of $0.96 per share for a
     discounted payment of $592,231, payable over three years to the Significant
     PEI Shareholders. ENGlobal also terminated its rights to any of the
     remaining shares held in escrow and those shares were distributed to the
     Significant PEI Shareholders. The transaction resulted in 652,377 shares of
     Treasury Stock and a decrease in Shareholders' Equity of $592,231 until
     such time as the replacement options are exercised and the exercise price
     is remitted to the Company. As of December 31, 2005, remaining payments due
     to Significant PEI Shareholders are $188,000.

                                       64
<PAGE>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19 - COMMITMENTS AND CONTINGENCIES (Continued)

     Employment Agreements
     ---------------------
     The Company has employment agreements with certain of its executive
     officers and certain other officers, the terms of which expire through
     January 2009. Such agreements provide for minimum salary levels. During the
     last twelve months the Company executed new employment agreements with
     certain other officers. If the Company terminates the employment of the
     employee for any reason other than 1) termination for cause, 2) voluntary
     resignation, or 3) employee's death, the Company is obligated to provide a
     severance benefit equal to six months of the employee's salary, and, at its
     option, an additional six months at 50% to 100% of the employee's salary.
     These agreements are renewable for one year at the Company's option.

     The Company has not renewed employment agreements with the Chairman, Chief
     Executive Officer and President and Chief Financial Officer which expired
     on December 21, 2005.

     Litigation
     ----------
     From time to time, the Company and its subsidiaries become parties to
     various legal proceedings arising in the ordinary course of normal business
     activities. While we cannot predict the outcome of these proceedings, in
     our opinion and based on reports of counsel any liability arising from such
     matters, individually or in the aggregate, are not expected to have a
     material affect upon the consolidated financial position or operations of
     the Company, after giving effect of recorded reserves.

     Insurance
     ---------
     The Company carries a broad range of insurance coverage, including general
     and business automobile liability, commercial property, professional errors
     and omissions, workers' compensation insurance and a general umbrella
     policy. The Company is not aware of any claims in excess of insurance
     recoveries. ENGlobal is partially self-funded for health insurance claims.
     Provisions for expected future payments are accrued based on the Company's
     experience. Specific stop loss levels provide protection for the Company
     with $125,000 per occurrence and approximately $8.6 million in aggregate in
     each policy year being covered by a separate insurance policy.


NOTE 20 - SUBSEQUENT EVENTS

     On January 9, 2006 the Company through its wholly-owned subsidiary,
     ENGlobal Systems, Inc. ("ESI") acquired certain assets of Analyzer
     Technology International, Inc. ("ATI"), a Houston-based analyzer systems
     provider. ATI, which specializes in the design and fabrication of online
     process analyzer systems, will relocate its operation to ESI's Houston
     facility. Co-locating enables ESI's clients to perform a more efficient
     factory acceptable test by temporarily connecting both control and analyzer
     systems onsite prior to delivery. The addition of ATI will provide ESI with
     a greater presence in the process analyzer sector, especially in Middle
     Eastern petrochemical facilities.


                                       65
<PAGE>
<TABLE>
<CAPTION>

                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     All quarterly periods and the annual data have been restated to reflect the
     discontinued operations separate from continuing operations and
     reclassification of depreciation expense to direct costs.

                                                                  For the Quarters Ended - 2005
                                            March                  June               September               December
                                         -------------          ------------        --------------          ------------
                                                            (in thousands, except per share amounts)
<S>                                      <C>           <C>     <C>          <C>    <C>            <C>     <C>           <C>
     Revenues per segment
         Engineering                     $     40,299  90.3%   $    54,028  90.9%  $     55,143   93.0%   $    66,229   94.2%
         Systems                                4,330   9.7%        5,391   9.1%         4,123    7.0%         4,042    5.8%
                                         -------------         ------------        -------------          ------------
              Total                      $     44,629 100.0%   $    59,419 100.0%  $     59,266  100.0%   $    70,271  100.0%
                                         =============         ============        =============          ============

     Gross profit per segment
         Engineering                     $      5,131  12.7%   $     6,594  12.2%  $      7,328   13.3%   $     6,920   10.4%
         Systems                                  567  13.1%           686  12.7%           510   12.4%           537   13.3%
                                         -------------         ------------        -------------          ------------
              Total                      $      5,698  12.8%   $     7,280  12.3%  $      7,838   13.2%   $     7,457   10.6%
                                         =============         ============        =============          ============

         Net income                      $        921          $     1,520         $      1,620           $       721
                                         =============         ============        =============          ============

     Earnings per share - basic          $       0.04          $      0.06         $       0.07           $      0.03

     Earnings per share - diluted        $       0.04          $      0.06         $       0.07           $      0.03



                                                                 For the Quarters Ended - 2004
                                            March                 June               September               December
                                         -------------         ------------        --------------          -------------
                                                           (in thousands, except per share amounts)
     Revenues per segment
         Engineering                     $     28,463  91.8%   $    31,470  91.8%  $     32,796  88.0%   $     40,901   88.3%
         Systems                                2,529   8.2%         2,813   8.2%         4,476  12.0%          5,440   11.7%
                                         -------------         ------------        -------------         -------------
              Total                      $     30,992 100.0%   $    34,283 100.0%  $     37,272 100.0%   $     46,341  100.0%
                                         =============         ============        =============         =============

     Gross profit per segment
         Engineering                     $      3,805  13.4%   $     3,925  12.5%  $      3,899  11.9%   $      4,394   10.7%
         Systems                                  324  12.8%           216   7.7%           810  18.1%            819   15.1%
                                         -------------         ------------        -------------         -------------
              Total                      $      4,129  13.3%   $     4,141  12.1%  $      4,709  12.6%   $      5,213   11.2%
                                         =============         ============        =============         =============

         Net income                      $        471          $       421         $        755          $        717
                                         =============         ============        =============         =============

     Earnings per share - basic          $       0.02          $      0.02         $       0.03          $       0.03

     Earnings per share - diluted        $       0.02          $      0.02         $       0.03          $       0.03



                                       66
<PAGE>

                                    REPORT OF
                  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                         ON FINANCIAL STATEMENT SCHEDULE

                   To the Board of Directors and Stockholders
                              ENGlobal Corporation

We have audited, in accordance with auditing the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements of ENGlobal Corporation and Subsidiaries included in this Form 10-K
and have issued our report thereon dated March 17, 2006. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The financial statement schedule listed in Schedule II - Valuation and
Qualifying Accounts is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
financial statement schedule has been subjected to the auditing procedures
applied to the audits of the basic financial statements and in our opinion, is
fairly stated in all material respects with the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.



/s/ Hein & Associates LLP
Hein & Associates LLP

Houston, Texas
March 17, 2006




                                       67
<PAGE>

                                           Schedule II
                                           -----------

                                      ENGlobal Corporation

                                VALUATION AND QUALIFYING ACCOUNTS



                                               Balance -                                Balance -
                                               Beginning                Deductions-      End of
               Description                     of Period   Additions    Write offs       Period
-------------------------------------------------------------------------------------------------
                                                              (in thousands)
                                               --------------------------------------------------
Allowance for doubtful accounts

     For year ended December 31, 2005          $   476      $    53      $    (26)      $    503

     For year ended December 31, 2004          $   376      $   134      $    (34)      $    476

     For year ended December 31, 2003          $   282      $   282      $   (188)      $    376









                                                  68
</TABLE>
<PAGE>

ITEM 9.     CHANAGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

     None.


ITEM 9A.    CONTROLS AND PROCEDURES

     (a)  Evaluation of Disclosure Controls and Procedures. We maintain
          disclosure controls and procedures designed to provide reasonable
          assurance that information required to be disclosed in the periodic
          reports we file with the SEC is recorded, processed, summarized and
          reported within the time periods specified in the rules and forms of
          the SEC. We carried out an evaluation as of December 31, 2005, under
          the supervision and the participation of our management, including our
          chief executive officer and chief financial officer, of the design and
          operation of the disclosure controls and procedures pursuant to Rules
          13a-14 and 15d-14 under the Securities Exchange Act of 1934. Based
          upon that evaluation, our chief executive officer and chief financial
          officer concluded that our disclosure controls and procedures are
          effective in timely alerting them to material information relating to
          the Company that is required to be included in our periodic SEC
          filings.

     (b)  Changes in Internal Controls over Financial Reporting. There have been
          no changes in internal control over financial reporting during the
          fiscal quarter ended December 31, 2005 that has materially affected,
          or is reasonably likely to affect, the registrant's internal control
          over financial reporting.







                                       69
<PAGE>

                                    PART III
                                    --------


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information under the captions Election of Directors and Executive
     Officers Section 16(a) Beneficial Ownership Reporting Compliance and
     Corporate Code of Conduct, in our definitive proxy statement for our 2006
     annual meeting of stockholders to be filed with the SEC pursuant to
     Regulation 14A under the Exchange Act is incorporated herein by reference.


ITEM 11.    EXECUTIVE COMPENSATION

     The information under the captions Executive Compensation, Director
     Compensation, Compensation Committee, Report of the Compensation Committee
     on Executive Compensation and Comparative Stock Performance Graph contained
     in our definitive proxy statement for our 2006 annual meeting of
     stockholders to be filed with the SEC pursuant to Regulation 14A under the
     Exchange Act is incorporated herein by reference.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
            RELATED STOCKHOLDER MATTERS

     The information under the caption Security Ownership of Certain Beneficial
     Owners and Management contained in our definitive proxy statement for our
     2006 annual meeting of stockholders to be filed with the SEC pursuant to
     Regulation 14A under the Exchange Act is incorporated herein by reference.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information under the caption Certain Relationships and Related
     Transactions contained our definitive proxy statement for our 2006 annual
     meeting of stockholders to be filed with the SEC pursuant to Regulation 14A
     under the Exchange Act is incorporated herein by reference.


ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

     The information under the caption Principal Accounting Fees and Services in
     our definitive proxy statement for our 2006 annual meeting of stockholders
     to be filed with the SEC pursuant to Regulation 14A under the Exchange Act
     is incorporated herein by reference.



                                       70
<PAGE>

                                     PART IV
                                     -------


ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES


     (a)(1) Financial Statements
               The consolidated financial statements filed as part of this Form
               10-K are listed and indexed in Part II, Item 8, on page 38.

     (a)(2) Schedules
               All schedules have been omitted since the information required by
               the schedule is not applicable, or is not present in amounts
               sufficient to require submission of the schedule, or because the
               information required is included in the consolidated financial
               statements and notes thereto.

     (a)(3) Exhibits










                                       71
<PAGE>
<TABLE>
<CAPTION>

                                               EXHIBIT INDEX

                                                                             Incorporated by Reference to:
                                                                          -----------------------------------

                                                               Form or                 Filing Date   SEC File
Exhibit No.              Description                          Schedule    Exhibit No.  with SEC      Number
-----------              -----------                          --------    -----------  --------      ------
<S>                                                           <C>          <C>         <C>           <C>
    2.1  Agreement and Plan of Merger by and between           10-QSB         2.23      8/14/01      001-14217
         Industrial Data Systems Corporation, IDS
         Engineering Management, LC, PEI Acquisition, Inc.
         and Petrocon Engineering, Inc.

    2.2  First Amendment of the Agreement and Plan of           S-4/A         2.24      11/6/01      333-68288
         Merger

    2.3  Letter Agreement of the Agreement and Plan of          S-4/A         2.25      11/6/01      333-68288
         Merger

    3.1  Restated Articles of Incorporation of ENGlobal         10-Q          3.1       11/14/02     001-14217
         Corporation

    3.2  Amended and Restated Bylaws of Registrant               S-3          4.4       10/31/05     333-129336

    4.1  Specimen common stock certificate                       S-3          4.1       10/31/05     333-129336

    4.2  Registration Rights Agreement, dated as of              S-3          4.2       10/31/05     333-129336
         September 29, 2005, by and among ENGlobal
         Corporation and Certain Investors named therein

    4.3  Securities Purchase Agreement, dated September          S-3          4.5       10/31/05     333-129336
         29, 2005, by and between Tontine Capital
         Partners, L.P. and Registrant

    4.4  Form of Subscription Agreement by and among             S-3          4.6       10/31/05     333-129336
         Registrant, Michael L. Burrow, Alliance 2000,
         Ltd. and certain subscribers

   10.1  Option Pool Agreement between Industrial Data         10-KSB        10.48      4/1/2002     001-14217
         Systems Corporation and Alliance 2000, Ltd. Dated
         December 21, 2001

   10.2  Guaranty and Suretyship Agreement between              10-Q         10.64      8/12/02      001-14217
         Industrial Data Systems Corporation and Corporate
         Property Associates 4 dated April 26, 2002

   10.3  ENGlobal Corporation Incentive Bonus Plan dated        10-Q         10.65      8/12/02      001-14217
         June 12, 2002

   10.4  1998 Incentive Plan                                     S-8         10.49      8/24/05      333-127803

   10.5  Amendment No. 1 to 1998 Incentive Plan                  S-8         10.65A     6/9/03       333 - 105966

   10.6  Amendment No. 2 to the 1998 Incentive Plan              S-8         10.65A     6/9/03       333 - 105966

   10.7  Amendment No. 3 to the 1998 Incentive Plan              S-8         10.52      8/24/05      333-127803

   10.8  Form of ENGlobal Corporation (f/k/a Industrial          S-8         10.80      8/24/05      333-127803
         Data Systems Corporation) Non-qualified Stock
         Option Agreement Granted Outside of 1998
         Incentive Plan

   10.9  Lease Agreement between Petrocon Engineering,          10-Q         10.66      11/14/02     001-14217
         Inc. and Phelan Investments on July 25, 2002


                                                72
<PAGE>

                                                                             Incorporated by Reference to:
                                                                          -----------------------------------

                                                               Form or                 Filing Date   SEC File
Exhibit No.              Description                          Schedule    Exhibit No.  with SEC      Number
-----------              -----------                          --------    -----------  --------      ------

   10.10  Second Amendment of the Second Amended and             10-Q        10.67      11/14/02     001-14217
          Restated Loan and Security Agreement as of July
          31, 2002 between IDS Engineering and Subsidiaries
          and Fleet Capital Corporation

   10.11  Amendment of the Intercreditor Agreement between       10-Q        10.68      11/14/02     001-14217
          Fleet Capital Corporation, Equus II Incorporated
          and ENGlobal Corporation dated July 31, 2002

   10.12  Fifth Amendment of Lease Agreement between IDS         10-Q        10.69      11/14/02     001-14217
          and 600 C.C. Business Park Ltd.

   10.13  Lease Agreement between PEI Investments and            10-Q        10.70      5/13/03      001-14217
          Petrocon Engineering, Inc. dated July 1, 2002

   10.14  Lease Agreement between Petro-Chem Engineering         10-Q        10.72      8/14/03      001-14217
          and ENGlobal Engineering, Inc. dated June 4, 2003

   10.15  Contract between BASF and ENGlobal Engineering,        10-Q        10.73      8/14/03      001-14217
          Inc. dated June 9, 2003

   10.16  Sublease Agreements between Family Connect, Inc.,      10-Q        10.74      11/14/03     001-14217
          a tenant of CitiPlex Towers Building and IDS
          Engineering dated February 2, 2003

   10.17  Lease Agreement between Oral Roberts University        10-Q        10.75      11/14/03     001-14217
          and IDS Engineering, dba ENGlobal Engineering,
          Inc. dated October 20, 2003

   10.18  Sixth Amendment of the Second Amended and              10-Q        10.76      11/14/03     001-14217
          Restated Loan and Security Agreement as of June
          30, 2003 between ENGlobal Corporation and
          Subsidiaries and Fleet Capital Corporation

   10.19  Second Amendment of the ENGlobal Engineering,          10-K        10.77      3/30/04      001-14217
          Inc. 401(k) Plan dated January 1, 2004 (formerly
          called the "Petrocon Engineering, Inc. 401(k)
          Plan")

   10.20  ENGlobal Corporation Employee Stock Purchase Plan       S-8         10.1      3/12/04      333-113554
          dated March 2, 2004


   10.21  Lease Agreement between ENGlobal Design Group,         10-K        10.79      3/30/04      001-14217
          Inc. and TC Meridian Tower LP dated January 24,
          2004

   10.22  Credit Agreement by and between Comerica Bank and       8-K        10.1       8/9/04       001-14217
          ENGlobal Corporation and its subsidiaries dated
          July 27, 2004

   10.23  Security Agreement by and between Comerica Bank         8-K        10.2       8/9/04       001-14217
          and ENGlobal Corporation and its subsidiaries
          dated July 27, 2004

   10.24  Master Revolving Note by and between Comerica           8-K        10.3       8/9/04       001-14217
          Bank and ENGlobal Corporation and its
          subsidiaries dated July 27, 2004

   10.25  Termination Agreement by and among ENGlobal             8-K        99.1       10/1/04      001-14217
          Corporation, Equus II Incorporated, Alliance
          2000, Ltd., Significant PEI Shareholders, Michael
          L. Burrow, as shareholder representative for the
          Significant PEI Shareholders, and Johnny J.
          Williams, Esq., as Escrow Agent, dated September
          28, 2004

                                                    73
<PAGE>

                                                                             Incorporated by Reference to:
                                                                          -----------------------------------

                                                               Form or                 Filing Date   SEC File
Exhibit No.              Description                          Schedule    Exhibit No.  with SEC      Number
-----------              -----------                          --------    -----------  --------      ------

   10.26  ENGlobal Corporation Key Manager Incentive Plan         8-K        10.1       12/21/04     001-14217
          dated December 16, 2004

   10.27  ENGlobal Corporation Executive Level Incentive          8-K        10.1       12/21/04     001-14217
          Plan dated December 16, 2004

   10.28  Third Amendment of the ENGlobal Engineering, Inc.      10-K        10.48      3/30/05      001-14217
          401(k) Plan (formerly called the "Petrocon
          Engineering, Inc. 401(k) Plan") dated March 9,
          2005 and effective January 1, 2005.

   *11.1  Statement Regarding Computation of Per Share
          Earnings is included as Note 2 to the Notes to
          Consolidated Financial Statements.

    14.1  ENGlobal Corporation Code of Ethics for Chief          10-K        99.5       3/30/04      001-14217
          Executive Officer and Senior Financial Officers
          dated March 25, 2004

    14.2  ENGlobal Corporation Code of Business Conduct and      10-K        99.6       3/30/04      001-14217
          Ethics dated March 25, 2004

   *21.1  Subsidiaries of the Registrant

   *23.1  Consent of Hein & Associates LLP

   *31.1  Certification of Chief Executive Officer pursuant
          to Exchange Act Rules 13a-14 or 15d-14

   *31.2  Certification of Chief Financial Officer pursuant
          to Exchange Act Rules 13a-14 or 15d-14

   *32.1  Certification of Chief Executive Officer pursuant
          to Exchange Act Rules 13a-14(b) or 15d-14(b) and
          18 U.S.C. Section 1350

   *32.2  Certification of Chief Financial Officer pursuant
          to Exchange Act Rules 13a-14(b) or 15d-14(b) and
          U.S.C. Section 1350

*  Filed herewith


                                                    74
</TABLE>
<PAGE>



                                   SIGNATURES


In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.

ENGlobal CORPORATION


Dated:   March 30, 2006
                                   By: //s// Michael L. Burrow
                                             Michael L. Burrow, P.E.,
                                             Chief Executive Officer, Director


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

                                   By: //s// Michael L. Burrow
                                             Michael L. Burrow, P.E.
                                             Chief Executive Officer, Director

                                   By: //s// William A. Coskey
                                             William A. Coskey, P.E.
                                             Chairman of the Board, Director

                                   By: //s// Robert W. Raiford
                                             Robert  W. Raiford
                                             Chief Financial Officer, Treasurer

                                   By: //s// David W. Gent
                                             David W. Gent, P.E., Director

                                   By: //s// Randall B. Hale
                                             Randall B. Hale, Director

                                   By: //s// David C. Roussel
                                             David C. Roussel, Director



                                       75