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

                                    Form 10-K/A

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


                   For the fiscal year ended December 31, 2006

                                       or

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

             For the transition period from __________ to __________


                          Commission File 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 repo
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):
                                                           Non-accelerated
    Large accelerated filer       Accelerated filer  X         filer
                            ---                     ---                     ---

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)

                                                           Yes         No   X
                                                                ---        ---
<PAGE>


The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on June 30, 2006 was $126,159,307 (based upon
the closing price for shares of common stock as reported by the American Stock
Exchange on that date).

The number of shares outstanding of the registrant's common stock on March 15,
2007 is as follows:

     $0.001 Par Value Common Stock                 26,829,090 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 2007 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission on or before April 30,
2007.














                                       2
<PAGE>


                                EXPLANATORY NOTE

This Amendment No. 1 (this "Form 10-K/A") to our Annual Report on Form 10-K for
the year ended December 31, 2006 that was originally filed on March 16, 2007
(the "Original Filing"), is being filed to correct certain references and
clerical errors.

For the convenience of the reader, this Form 10-K/A sets out the Original Filing
in its entirety. However, this Form 10-K/A only amends and restates the
following Items of the Original Filing:

Cover Page - A clerical error on the cover page has been corrected; the Original
Filing should have indicated that disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K will be contained in the definitive proxy statement.

Page 42 - Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting, the last sentence should read: "Our report
thereon dated March 15, 2007 expressed an unqualified opinion."

Page 44 - Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements, the last sentence was omitted and should
read: "As discussed in Note 11 to the consolidated financial statements, the
Company adopted Statement of Accounting Standards No. 123 (revised 2004),
"Share-Based Payment", during the year ended December 31, 2006.

Page 81 - Part III, Items 10, 12, 13 and 14 should refer to the 2007 annual
meeting of stockholders.

Finally, in order to provide for completeness in our annual report filing,
certain exhibits that were not available in a form acceptable for filing with
the SEC, have been added. The Exhibit listing is provided in its entirety on
pages 82 through 86.

No attempt has been made in this Form 10-K/A to modify or update other
disclosures presented in the Original Filing, other than to correct
typographical and other immaterial errors. This Form 10-K/A does not reflect
events occurring after the filing of the Original Filing or modify or update
disclosures affected by subsequent events. None of the additional exhibits filed
herewith update or are affected by subsequent events. Accordingly, this Form
10-K/A should be read in conjunction with our filings made with the Securities
and Exchange Commission subsequent to the filing of the Original Filing,
including our current reports on Form 8-K filed on March 16, 2007.


                                        i
<PAGE>


                              ENGlobal Corporation
                              --------------------
                         2006 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                                   20

ITEM 2.         PROPERTIES                                                  20

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        22
                  SECURITIES

ITEM 6.         SELECTED FINANCIAL DATA                                     25

ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATION                        27

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES
                  ABOUT MARKET RISK                                         40

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                 40

ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE                    77

ITEM 9A.        CONTROLS AND PROCEDURES                                     77


                                    PART III
                                    --------
ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT          81

ITEM 11.        EXECUTIVE COMPENSATION                                      81

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS                81

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS              81

ITEM 14.        PRINCIPAL ACCOUNTING FEES AND SERVICES                      81

                                     PART IV
                                     -------
ITEM 15.        EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES                82


                                   SIGNATURES
                                   ----------
                SIGNATURES                                                  87


                                        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) our ability to collect
accounts receivable in a timely manner; (ii) our ability to accurately estimate
costs and fees on fixed-price contracts; (iii) 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; (iv) 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; (v) the effect of changes in the Company's organization,
compensation and benefit plans; (vi) 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; (vii) the effect of
increases and decreases in oil prices; (viii) the availability of parts from
vendors; (ix) our ability to increase or renew our line of credit; (x) 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; (xi) our ability to hire and retain qualified
personnel; (xii) our ability to retain existing customers and get new customers
and (xiii) 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,
     and procurement and construction management. We also supply automation,
     control and instrumentation systems to our clients worldwide. On May 25,
     2006, the Company purchased Denver-based WRC Corporation, expanding our
     engineering services, by providing integrated land management, engineering,
     and related services.

     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".

     Since the Company's merger with Petrocon, the net revenue from continuous
     operations has grown from $89.1 million in 2002 to $303.1 million in 2006,
     a compounded annual growth rate of approximately 35.8%. 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 2,100 full-time equivalent employees in offices
     strategically located in Houston, Beaumont, Clear Lake, Freeport, and
     Midland, Texas; Baton Rouge and Lake Charles, Louisiana; Tulsa, Cleveland
     and Blackwell, Oklahoma; Denver, Colorado; and Calgary, Alberta, Canada.

     In December 2006, ENGlobal Engineering, Inc. began its plan to cease
     operations in Dallas, Texas. Some project activities previously performed
     in the Dallas office have been transferred to other ENGlobal offices. On
     February 19, 2007, the Company entered into agreements with another firm
     providing for the sale of the majority of Dallas assets and for the partial
     sublease of Dallas office space. These actions were the result of a
     decision to consolidate the Company's Texas-based operations while
     streamlining or reducing overhead costs. A small number of the Company's
     former Dallas personnel transferred to other ENGlobal offices and others
     were asked to remain with the Company through May 31, 2007, to allow for an
     orderly transfer of on-going projects. However, the majority of the
     previous Dallas employees are now employed by the firm which purchased
     certain of the Dallas assets, and the Company expects to utilize some on a
     subcontract basis for a short period of time and on a discretionary basis
     to complete projects. Currently the Company has no plans to sell the assets
     of consolidate any of its other office locations.

     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.


                                       5
<PAGE>


ITEM 1.        BUSINESS (Continued)

     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.

     Business Segments
     -----------------
     During 2006, we operated two business segments: engineering and systems.
     The respective contributions to our total sales in 2006, 2005 and 2004 for
     the engineering and the systems segments are summarized below.

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     Revenues and expenses have been reclassified between the segments to
     provide comparative results. Amounts will tie in total to prior reporting,
     however, individual segments will vary from prior reports.

                                                  Percentage of Revenues
                                         --------------------------------------
              Segment                      2006         2005              2004
                                         -------       -------         --------

                  Engineering              91.8%          93.9%           90.5%
                  Systems                   8.2%           6.1%            9.5%
                                         -------       --------        --------
                                          100.0%         100.0%          100.0%
                                         =======       ========        ========

     Revenues from the systems segment remained constant from 2004 to 2005, but
     increased 75.4% from 2005 to 2006 primarily as a result of the acquisition
     of certain assets of Analyzer Technology International, Inc. ("ATI") in
     January 2006. Engineering revenues increased 62.8% and 26.8%, respectively,
     from 2004 to 2005 and from 2005 to 2006.

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

                                            2006        2005         2004
                                         -----------------------------------
                                                   (Amounts in thousands)
                                         -----------------------------------

              Revenues                   $278,157     $219,426      $134,778
              Operating profit           $  9,084     $ 18,911      $ 10,437
              Total assets               $ 70,549     $ 54,342      $ 46,122

         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"), ENGlobal Construction
         Resources, Inc. ("ECR"), ENGlobal Technical Services, Inc. ("ETS"),
         ENGlobal Automation Group, Inc. ("EAG"), ENGlobal Canada ULC ("ENGlobal
         Canada"), WRC Corporation ("WRC") and WRC Canada. EEI focuses 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 pipeline inspection services to the oil and gas,
         utility and pipeline industries and turnaround, asset management, and
         start-up services for the petrochemical industry. ETS primarily
         provides Automated Fuel Handling Systems and services to branches of
         the U.S. military and public sector companies. EAG and


                                       6
<PAGE>


ITEM 1.        BUSINESS (Continued)

         ENGlobal Canada provide engineering services relating to the
         implementation of process controls, instrumentation, advanced
         automation and information technology projects. Further expanding our
         services within the pipeline industry, WRC and WRC Canada primarily
         provide land management, right-of-way services, environmental
         compliance, and governmental regulatory services to pipeline, utility
         and telecom companies and other owner/operators of "infrastructure"
         facilities. The engineering segment derives revenues primarily from
         cost-plus fees charged for professional and technical services. We also
         enter into contracts providing for the execution of projects on a
         fixed-price basis, whereby some or all of the project activities
         related to engineering, material procurement and construction are
         performed for a lump sum amount. As a service company, we are more
         labor than capital intensive. Our income primarily results from our
         ability to generate revenues and collect cash under both cost-plus and
         fixed-price contracts that is in excess of any cost for employees,
         material, equipment and subcontracts and selling, general and
         administrative (SG&A) expenses.

         As of December 31, 2006, the engineering segment had more than one
         hundred 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, Clear Lake, Houston, Midland and Freeport, Texas; Tulsa,
         Cleveland and Blackwell, Oklahoma; Denver, Colorado; and Calgary,
         Alberta.

         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 2005, 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.

         During 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.

         In May 2006, ENGlobal Corporation purchased Denver-based WRC
         Corporation ("WRC") and its subsidiary WRC Canada further expanding our
         services within the pipeline industry. WRC provides land management,
         environmental compliance, and governmental regulatory services to the
         pipeline, utility and telecom companies and other owner/operators of
         "infrastructure facilities."

         In October 2006, ENGlobal Construction Resources acquired selected
         assets of Watco Management, Inc. located in Clear Lake, Texas. As a
         result, we now provide turnaround, asset management, and start-up
         services for the refining and petrochemical industry. The addition of
         WATCO will provide ECR with opportunities to expand its current


                                       7
<PAGE>


ITEM 1.           BUSINESS (Continued)

         services to existing WATCO clients to a complementary business,
         allowing expansion of current services to both existing and future
         clients.

         In the first quarter of 2007, the Dallas office was closed with the
         majority of assets being sold, a major portion of the office lease
         obligations being assumed by others and remaining operations being
         transferred to other offices.

         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 fixed-price,
         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 include:

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

         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
         -----------------------------------------------------------------------

         Note: Previously, within the Systems Segment, ESI provided products and
         services supporting the advanced automation and integrated controls
         fields. In January 2006, EAG assumed responsibility for these services,
         which resulted in a move of this division of ESI to the Engineering
         Segment. Revenues and expenses have been reclassified between the
         segments to provide comparative results. Amounts will tie in total to
         prior reporting, however, individual segments will vary from prior
         reports.


                                              2006         2005          2004
                                             ---------------------------------
                                                  (Amounts in thousands)
                                             ---------------------------------
              Revenues                       $24,933     $ 14,159      $14,110
              Operating profit (loss)        $   (14)    $   (852)     $   660
              Total assets                   $16,099     $  6,159      $ 7,806

         General
         -------
         Our systems segment designs, assembles, 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 from fees on contracts for the design, assembly and servicing
         of control and instrumentation systems. Income from the systems segment
         is primarily 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 are
         typically based on electronic, programmable controls, however ESI's
         work also includes conventional pneumatic and hydraulic systems.
         Typical applications for ESI's systems include refinery, petrochemical
         and pipeline facility controls; analyzer packaging; fire and gas
         detection systems; data acquisition systems; oil and gas production
         safety 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 relocated 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 2006, 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 comprise
         the basis of competition for ESI's marketplace.


                                       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, 2006.
<TABLE>
<CAPTION>

<S>           <C>                                    <C>                      <C>
              Name/Location/Business Unit            Date Acquired            Primary Services
              ---------------------------            -------------            ----------------

             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

        Analyzer Technology International, Inc.      January 2006         Process Analyzer Systems
                      Houston, TX
             Operates as s Division of ESI

                  WRC Corporation and                  May 2006          Integrated Land Management
                       WRC Canada
                       Denver, CO

                    PEI Investments                    May 2006                  Real Estate
                      Beaumont, TX

                 WATCO Management, Inc.              October 2006                Turnaround
                     Clearlake, TX                                            Asset Management
             Operates as a Division of ECR                                 Project Commissioning
                                                                          Construction Management


                                       10
</TABLE>
<PAGE>


ITEM 1.        BUSINESS (Continued)

     Business Strategy
     -----------------
     In the past year, the Company has focused considerable attention on
     streamlining its organizational structure and strengthening its leadership
     team. It anticipates that these efforts will be ongoing in 2007. In
     addition, 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.

          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
               has partnered with several offshore technical resources to
               establish longer-term access to professional engineering and
               design work in lower cost countries such as Mexico, Venezuela,
               Costa Rica and the Far East. The Company has entered into an
               agreement with a Malaysian firm that provides for "low cost, high
               value" engineering and drafting services. We believe these
               partnerships, both formal and informal, 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. One of the engineering
               segment's goals is to increase revenues by developing and
               marketing its ability to perform full service turnkey projects,
               also called EPC (Engineering, Procurement and Construction)
               projects, that is expected to emphasize a cost plus contracting
               strategy. 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. The
               Company intends to audit and monitor compliance with these
               procedures and quality standards.

          o    Expand and Enhance Technical Capabilities. We believe that it is
               important to develop and enhance our overall technical
               capabilities in the markets we serve. To achieve this objective
               in the area of advanced computer-aided process simulation, design
               and drafting, 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 include an active business development program, together
               with selected initiatives to start new business operations. We
               also pursue acquisitions that will allow us to offer expanded
               engineering and control system services


                                       11
<PAGE>


ITEM 1.           BUSINESS (Continued)

               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 we anticipate that
               newly acquired entities will adopt ENGlobal as a part of their
               name within 12 to 18 months of their acquisition.

     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. 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 also believes that our acquisition program, although
     small, has provided the benefit of expanding our existing customer base.

     We currently employ 25 full-time professional in-house marketers in our
     business development department who concentrate on both the engineering and
     systems segments. We have formed alliances, which include marketing
     activities, with other engineering and construction firms in Mexico City,
     Central and South America and Malaysia.

     Customers
     ---------
     In 2007, the Company will focus substantial attention on improving customer
     services in certain of its offices in order to enhance satisfaction and
     increase customer retention. 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. We have had
     success undertaking new projects for prior clients and providing ongoing
     services to clients following the completion of the projects.

     The Company believes that about two-thirds of our revenue is generated
     through sources such as in-plant staffing and alliance relationships that
     we consider longer-term in nature and that are not typically limited to one
     project. As an example, our In Plant Staffing division of EEI provides
     outsourced technical and other personnel that are assigned to work at
     client locations. The Company's past experience with this activity is that
     the term of these assignments on average spans multiple projects and
     multiple years.


                                       12
<PAGE>


ITEM 1.        BUSINESS (Continued)

     A major long-term trend among our clients and their industry counterparts
     has been toward outsourcing of engineering services, and more recently,
     sole-sourcing. This trend has fostered the development of ongoing,
     longer-term alliance arrangements with clients, rather than one-time
     limited engagements. These arrangements vary in scope, duration and degree
     of commitment. While there is typically no guarantee of work that will
     result from these alliance agreements, often they form the basis for a
     longer-term relationship with our clients. Despite their variety, we
     believe that these partnering relationships have a stabilizing influence on
     our service revenues. At December 31, 2006, we maintained some form of
     partnering or alliance arrangement with 16 major oil and chemical
     companies. For example, alliance 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.

     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. Also during 2006 we generated
     $26 million in revenues away from the historical large "owner/operator"
     type Fortune 500 companies to smaller developer type entities such as
     smaller refiners and developers of renewable energy.

     In the engineering segment, our ten largest customers, who vary from one
     period to the next, accounted for 71% of our total revenue for 2006, 77% of
     total revenue for 2005, and 80% of total revenue for 2004. 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. Our top
     three clients in 2006 were ConocoPhillips, ExxonMobil and Motiva.

     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.

     In the systems segment, our ten largest customers, who vary from one period
     to the next, accounted for 64% of our total revenue for 2006, 70% of total
     revenue for 2005, and 77% of total revenue for 2004. During 2006, foreign
     customers accounted for 31% of our systems segment revenue compared to less
     than 1% during both 2005 and 2004. The increase in revenue from foreign
     customers is based on the expansion of the analytical division that
     provides online process analyzer systems, through the acquisition of ATI.
     Our ability to provide analyzer systems is dependent on fundamental
     contracts with customers doing business in oil producing regions. The loss
     of business from anyone of such customers could have a material adverse
     effect on our systems business or results of operations, but not the
     company as a whole. Other factors affecting our analyzer systems business
     that are beyond our control include: political instability or armed
     conflict, the level of customer demand, the willingness of clients to make
     payments, and to make those payments timely.

     We do not have any long-term commitments from systems segment 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 our engineering
     segment, in fiscal 2006, 89% and 11% of our net revenue was derived from
     time and materials and fixed-price contracts, respectively, compared to 95%
     and 5% of net revenue from time and materials and fixed-price contract
     respectively in 2005. In our systems segment, in fiscal 2006, 7% and 93% of
     our net revenue was derived from time and materials and fixed-price
     contracts, respectively, compared to 3% and 97% of net revenues from time
     and materials and fixed-price contracts, respectively in 2005. Our clients
     typically determine the type of contract to be utilized for a particular
     engagement, with the specific terms and conditions of a contract resulting
     from a negotiation process between the Company and our client.

          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. We
               are paid for material and contracted services at an agreed upon
               multiplier of our cost, and at times pass these non-labor
               services through with no profit. Profitability on these contracts
               is driven by billable headcount, the amount of non-labor related
               services, 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 projects
               vary in scope, including some engineering activities and related
               services, and procurement of material and construction
               responsibility. 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,
               and we plan to limit the size and scope of fixed-price contracts
               that we enter into in the future due to significant losses on two
               fixed-price contracts.

     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, 2006, our backlog was $192.0 million compared to an
     estimated $170.0 million at December 31, 2005. We expect that a majority of
     the $192.0 million in backlog to be completed during 2007.

     The backlog at December 31, 2006 consists of $187.0 million with commercial
     customers and $5.0 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.

     There is no assurance as to what percentage of backlog will be recognized.


                                       14
<PAGE>


ITEM 1.         BUSINESS (Continued)

     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 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.

     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 5 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 7% 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;
     rather, they 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 or one of its suppliers 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 "Engineered for Growth" and "ENGlobal CARES -
     Communicating Appropriate Responses in Emergency Situations", "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


                                       15
<PAGE>


ITEM 1.        BUSINESS (Continued)

     Company, its subsidiaries, or personnel that we believe is likely to have a
     material adverse effect on our results of operations or financial
     condition.

     Employees
     ---------
     As of December 31, 2006, the Company and its subsidiaries employed 2,100
     individuals. Of these employees, 1,127 were employed in engineering and
     related positions; 332 were employed as inspectors; 310 were employed as
     project support staff; 211 were employed in technical production positions;
     95 were employed in administration, finance and management information
     systems and 25 were employed in sales and marketing. 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.


                                       16
<PAGE>


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.

         Our indebtedness could limit our ability to finance future operations
         or engage in other business activities. As of December 31, 2006, we had
         $24 million of total outstanding indebtedness against our revolving
         line of credit currently limited to $30 million. Significant factors
         that could increase our indebtedness and/or limit our ability to
         finance future operations include:

          o    our inability to collect accounts receivable within contractual
               terms;
          o    client demands for extending contractual payment terms;
          o    material losses and/or negative cash flows on significant
               projects;
          o    client's ability to pay our invoices due to economic conditions;
               and
          o    our ability to meet current credit facility financial ratios and
               covenants.

         Although we are in compliance with all current credit facility
         covenants, our indebtedness could limit our ability to finance future
         operations or engage in other business activities.

         Force majeure events such as natural disasters have negatively impacted
         and could further negatively impact the economy and the industries we
         service, which may affect our financial condition, results of
         operations and cash flows.
         Force majeure events such as Hurricanes Katrina and Rita that affected
         the Gulf Coast in August and September of 2005 could negatively impact
         the economies in which we operate. For example, these two hurricanes
         caused considerable damage along the Gulf Coast not only to the
         refining and petrochemical industry but also the commercial segment
         which competes for labor, materials and equipment resources needed
         throughout the entire United States. We typically remain obligated to
         perform our services after such a natural disaster and even though our
         contract may contain force majeure clause. If we are not able to react
         quickly and/or negotiate contractual relief under a force majeure
         event, our operations may be affected significantly, which would have
         a negative impact on our financial condition, results of operation and
         cash flows.


                                       16
<PAGE>


ITEM 1A.       RISK FACTORS (Continued)

          Our future revenues depend on our ability to consistently bid and win
          new contracts and to maintain and renew existing contracts and,
          therefore, our failure to effectively obtain future contracts could
          adversely affect our profitability.
          Our future revenues and overall results of operations require us to
          successfully bid on new contracts and renew existing contracts.
          Contract proposals and negotiations are complex and frequently involve
          a lengthy bidding and selection process, which is affected by a number
          of factors, such as market conditions, financing arrangements and
          required governmental approvals. For example, a client may require us
          to provide a bond or letter of credit to protect the client should we
          fail to perform under the terms of the contract. If negative market
          conditions arise, or if we fail to secure adequate financial
          arrangements or the required governmental approval, we may not be able
          to pursue particular projects, which could adversely affect our
          profitability.

          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 attract and retain
          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.

          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 they reach critical
          mass, that industry trends have been misread or delayed or that they
          Company is unable to successfully execute on these initiatives. In
          these cases, continued funding could have a negative impact on long
          term earnings.

          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 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.

          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.

          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


                                       18
<PAGE>


ITEM 1A.       RISK FACTORS (Continued)

          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 2006, approximately 17.9%
          of our net revenue was derived from fixed-price contracts, and we
          recorded losses of $13 million on two significant fixed-price EPC
          projects.

          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
          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 need 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 2006, approximately 15%
          of our revenues were from ConocoPhillips, approximately 14% of our
          revenues were from ExxonMobil and another 10% were from Motiva. 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. Also, the majority of
          our contracts can be terminated at will. 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.

          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.


                                       18
<PAGE>


ITEM 1A.       RISK FACTORS (Continued)

          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, 2006, our backlog was approximately $192 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, reducing
          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.

          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.

          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.

          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
          factors, our first an fourth quarters may be less robust than our
          second and third quarters.

          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.


                                       19
<PAGE>


ITEM 1A.       RISK FACTORS (Continued)

          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.
          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. As of
          December 31, 2006, directors, executive officers and principal
          stockholders of ENGlobal and their affiliates, beneficially owned
          approximately 41% 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.

          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 47,518,533 shares of common stock and an
          additional 2,000,000 shares of blank check preferred stock as of the
          date of filing. 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 or under a new equity
          incentive 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.


ITEM 1B.       UNRESOLVED STAFF COMMENTS

          Not applicable.


ITEM 2.        PROPERTIES

     Facilities
     We lease space in 23 buildings in the U.S. and Canada totaling
     approximately 458,600 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
     commercially reasonable rental rates. On May 26, 2006, the Company entered
     into an exclusive agreement with a third-party, national real estate firm
     for tenant representation services that covers most of our facilities.

     Our principal office locations are in Houston and Beaumont, Texas, and
     Tulsa, Oklahoma. We have other offices in Clear Lake, Freeport, and
     Midland, Texas; Baton Rouge and Lake Charles, Louisiana; Cleveland and
     Blackwell, Oklahoma; Denver, Colorado; and Calgary, Alberta Canada.
     Approximately 357,000 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.

     On May 25, 2006, the Company, through its wholly-owned subsidiary ENGlobal
     Corporate Services, Inc., purchased a one-third partnership interest in PEI
     Investments, A Texas Joint Venture ("PEI"), from Michael L. Burrow, the
     Company's President and CEO, and another one-third interest from a
     stockholder who owns less than 1% of the Company's common stock. The
     partnership interests were purchased for a total of $69,000. The


                                       20
<PAGE>


ITEM 2.        PROPERTIES (Continued)

     remaining one-third interest was already held by the Company through its
     wholly-owned subsidiary EEI. PEI owns the land on which our Beaumont, Texas
     office building, destroyed by Hurricane Rita in September 2005, was
     located. The remains of the building were razed in July 2006. In September
     2006, the Company acquired approximately 1.2 acres immediately adjacent to
     the former facility and is developing plans to construct a new facility
     utilizing both parcels of land.

     On February 16, 2007, the Company, through its wholly-owned subsidiary, RPM
     Engineering, Inc. ("RPM"), entered into an agreement (the "Agreement") to
     sell the Company's property located in Baton Rouge, Louisiana. The purchase
     price is approximately $1.9 million with 20% of the purchase price being
     paid at closing and the balance self-financed for a period no longer than
     60 months, amortized over 180 months, payable in equal monthly installments
     and one irregular installment consisting of the interest and principal due
     at the end of the 60 months. The initial interest rate is 8.5% based on an
     agreed rate of NY prime plus .25%. Under certain conditions, prior to
     closing and up to 60 days from the last signing of the Agreement, the
     Purchaser is entitled to terminate the agreement and demand the return in
     full of any deposit held by RPM. The financed portion of the purchase price
     is secured by a first mortgage on the property. The Company's basis in the
     property, together with the building and all improvements, is approximately
     $1.4 million. The Company expects to close this transaction May 31, 2007.
     The Company has leased approximately 31,000 square feet of space in two
     separate facilities to house its EEI and EAG operations in Baton Rouge.

     On March 2, 2007, the Company, through its wholly-owned subsidiary,
     ENGlobal Automation Group, Inc. ("EAG"), entered into a 39 month lease
     agreement for approximately 4,489 square feet of office space in
     Alpharetta, Georgia (a suburb of Atlanta).


ITEM 3.        LEGAL PROCEEDINGS

     From time to time, we are involved in various legal proceedings arising in
     the ordinary course of business alleging, among other things, breach of
     contract or tort in connection with the performance of professional
     services, the outcome of which cannot be predicted with certainty. As of
     the date of this filing, we are party to several legal proceedings that
     have been reserved for or are covered by insurance, or that, if determined
     adversely to us individually or in the aggregate, would not have a material
     adverse effect on our results of operations or financial position.


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
                                  -------------------------------------------
                                          2006                    2005
                                  -------------------------------------------
                                   High        Low          High       Low
                                  -------------------------------------------

        First Quarter             14.61       9.14          2.87       2.04
        Second Quarter            14.70       6.91          4.03       2.01
        Third Quarter              8.88       5.71          9.10       3.69
        Fourth Quarter             8.15       5.92          8.75       5.87

     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.
     The Company's stockholders at its June, 2006 meeting approved the
     elimination of the 2,265,167 shares of available and unissued Series A
     Preferred Stock from its capital structure, and approved the authorization
     of a like number of "blank check" preferred stock.

     The Company's stockholders, at the Company's June, 2006 meeting, approved a
     new class of capital stock of the Company consisting of 2,000,000 shares of
     Preferred Stock, par value $0.001 per share (the "Preferred Stock"). The
     Preferred Stock is referred to as a "blank check" because the Board of
     Directors, in their discretion, will be authorized to provide for the
     issuance of all or any shares of the stock in one or more classes or
     series, specifying the terms of the shares, subject to the limitations of
     Nevada law. The Board of Directors would make a determination as to whether
     to approve the terms and issuance of any shares of Preferred Stock based on
     its judgment as to the best interests of the Company and its stockholders.

     As of December 31, 2006, approximately 314 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)

     The following line graph compares the total returns (assuming reinvestment
     of dividends) to our Common Stock, the AMEX US Index and the S&P 600
     SmallCap Index for the five-year period ended December 31, 2006. This
     comparison assumes the investment of $100 on December 31, 2000 and the
     reinvestment of all dividends.

<TABLE>
<CAPTION>

                                    2001         2002        2003        2004       2005        2006
                                    ----         ----        ----        ----       ----        ----
<S>                                 <C>          <C>         <C>        <C>        <C>         <C>
       ENGlobal (ENG)               100.00       57.14       82.29      136.00     225.14      354.29
   S&P 600 SmallCap Index           100.00       84.68      116.47      141.61     151.03      172.29
        Amex US Index               100.00       81.74      110.63      127.83     138.33      160.48
</TABLE>


                                       23
<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, 2006. 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>                              <C>
     Equity compensation plans             1,422,494          (1)             $5.16                            150,806
        approved by security
        holders
                                    -------------------------                                        -----------------------------
</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, and
     operating and financial position and on 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. The
     Company's stockholders eliminated this series of preferred stock at its
     June, 2006 stockholders meeting.


-----------------------------
(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.


                                       24
<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, 2006, 2005, and 2004 have been derived from
     the audited financial statements appearing elsewhere in this document. The
     data as of December 31, 2003 and 2002 and for the years ended December 31,
     2003 and 2002 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.

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     This, along with the sale of Thermaire in 2003, has caused reclassification
     to provide comparative results. Revenues and expenses have been
     reclassified between the segments to provide comparative results. Amounts
     will tie in total to prior reporting, however, individual segments will
     vary from prior reports.
<TABLE>
<CAPTION>

                                                                                   Years Ended December 31,
                                                              --------------------------------------------------------------------
                                                                 2006          2005          2004          2003          2002
                                                              --------------------------------------------------------------------
                                                                           (in thousands, except per share amounts)
                                                              --------------------------------------------------------------------
<S>                                                           <C>           <C>           <C>            <C>          <C>
     Statement of Operations
         Revenues
              Engineering                                     $   278,157   $   219,426   $   134,778   $   110,535   $    75,817
              Systems                                              24,933        14,159        14,110        13,184        13,305
                                                               ------------  ------------  ------------  ------------  ------------
                  Total revenues                                  303,090       233,585       148,888       123,719        89,122
                                                               ------------  ------------  ------------  ------------  ------------

         Costs and expenses
              Engineering                                         254,031       192,264       118,805        95,021        63,322
              Systems                                              22,795        13,048        11,891        11,725        11,395
              Selling, general and administrative                  29,885        19,689        13,700        12,439        10,632
                                                               ------------  ------------  ------------  ------------  ------------
                  Total costs and expenses                        306,711       225,001       144,396       119,185        85,349
                                                              ------------  ------------  ------------  ------------  ------------
          Operating income (loss)                                  (3,621 )       8,584         4,492         4,534         3,773
         Interest income (expense), net                            (1,312 )        (800 )        (590 )        (784 )        (821 )
         Other income (expense), net                                  652           116           118          (355 )         143
         Foreign currency gain (loss)                                 (19 )          (2 )           -             -             -
                                                              ------------  ------------  ------------  ------------  ------------
         Income (loss) from continuing operations before
            provision for income taxes                             (4,300 )       7,898         4,020         3,395         3,095
         Provision for income taxes                                  (814 )       3,116         1,656         1,110         1,197
                                                              ------------  ------------  ------------  ------------  ------------
         Income (loss) from operations                             (3,486 )       4,782         2,364         2,285         1,898
         Income (loss) from discontinued operations, net of
            taxes                                                       -             -             -          (154 )        (146 )
         Income (loss) from disposal of discontinued
            operations                                                  -             -             -            26             -
                                                              ------------  ------------  ------------  ------------  ------------
                  Net income (loss)                           $    (3,486 ) $     4,782   $     2,364   $     2,157   $     1,752
                                                              ============  ============  ============  ============  ============


                                                                          25
<PAGE>


ITEM 6.        SELECTED FINANCIAL DATA (Continued)

                                                                                   Years Ended December 31,
                                                              --------------------------------------------------------------------
                                                                 2006          2005          2004          2003          2002
                                                              --------------------------------------------------------------------
                                                                           (in thousands, except per share amounts)
                                                              --------------------------------------------------------------------
     Per Share Data
         Basic earnings (loss) per share
              Continuing operations                           $     (0.13 ) $      0.20   $      0.10   $      0.09   $      0.07
              Discontinued operations                                   -             -             -             -             -
                                                              ------------  ------------  ------------  ------------  ------------
                  Net income per share                        $     (0.13 ) $      0.20   $      0.10   $      0.09   $      0.07
                                                              ============  ============  ============  ============  ============

         Weighted average common
            shares outstanding - basic                             26,538        24,300        23,455        23,301        22,861

         Diluted earnings (loss) per share
              Continuing operations                           $     (0.13 ) $      0.19   $      0.10   $      0.09   $      0.07
              Discontinued operations                                   -             -             -             -             -
                                                              ------------  ------------  ------------  ------------  ------------
                  Net income per share                        $     (0.13 ) $      0.19   $      0.10   $      0.09   $      0.07
                                                              ============  ============  ============  ============  ============


         Weighted average common
            shares outstanding - diluted                           26,538        25,250        23,786        23,734        23,013

     Cash Flow Data
         Operating activities, net                            $    (8,953 ) $      (920 ) $    (2,391 ) $     6,557   $     1,302
         Investing activities, net                                 (9,330 )      (2,417 )      (1,811 )        (471 )      (1,290 )
         Financing activities, net                                 19,553         3,492         4,170        (6,122 )      (1,182 )
         Exchange rate changes                                        (26 )          (4 )           -             -             -
                                                              ------------  ------------  ------------  ------------  ------------
              Net change in cash and cash equivalents         $     1,244   $       151   $       (32 ) $       (36 ) $    (1,170 )
                                                              ============  ============  ============  ============  ============

     Balance Sheet Data
         Working capital                                      $    35,187   $    21,825   $    14,503   $     6,505   $     8,416
         Property and equipment, net                          $     8,725   $     6,861   $     5,262   $     4,302   $     4,779
         Total assets                                         $   106,227   $    75,936   $    57,261   $    42,530   $    40,068
         Long-term debt, net of current portion               $    27,162   $     5,228   $    15,585   $     7,506   $    12,580
         Long-term capital leases, net of current portion     $         -   $         -   $         -   $        12   $        17
         Stockholders' equity                                 $    40,862   $    39,865   $    20,051   $    18,175   $    13,389
</TABLE>


                                                                     26
<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 contain 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, inspection services, land management and
     environmental compliance services. Our systems segment designs, assembles,
     integrates and services control and instrumentation systems for specific
     applications in the energy and process 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, and 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.


                                       27
<PAGE>


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.

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     Revenues and expenses have been reclassified between the segments to
     provide comparative results. Amounts will tie in total to prior reporting,
     however, individual segments will vary from prior reports.
<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                          ------------------------------------------------------------------------
                                                                  2006                      2005                     2004
                                                          ---------------------     ---------------------    ---------------------
                                                             Amount       %           Amount        %           Amount       %
                                                          ------------------------------------------------------------------------
                                                                                      (in thousands)
                                                          ------------------------------------------------------------------------
<S>                                                      <C>              <C>        <C>            <C>       <C>            <C>
     Revenue
         Engineering                                      $    261,389    86.3      $   207,368     88.8     $    124,362    83.5
         Systems                                                24,933     8.2           14,159      6.0           14,110     9.5
         Acquisition                                            16,768     5.5           12,058      5.2           10,416     7.0
                                                          ------------- -------     ------------  -------    ------------- -------
              Total revenue                               $    303,090   100.0      $   233,585    100.0     $    148,888   100.0
                                                          ============              ===========              ============

     Gross profit
         Engineering                                      $     21,737     8.3      $    25,940     12.5     $     14,300    11.5
         Systems                                                 2,138     8.6            1,111      7.8            2,219    15.7
         Acquisition                                             2,389    14.2            1,222     10.1            1,673    16.1
                                                          ------------              -----------              ------------
              Total gross profit                          $     26,264     8.7      $    28,273     12.1     $     18,192    12.2
                                                          ============              ===========              ============

     Selling, general and administrative
         Non-acquisition                                  $     28,211     9.9      $    18,863      8.5     $     11,866     8.6
         Acquisition                                             1,674    10.0              826      6.9            1,834    17.6
                                                          ------------              -----------              ------------
              Total                                       $     29,885     9.9      $    19,689      8.4     $     13,700     9.2
                                                          ============              ===========              ============

     Net income (loss)                                    $     (3,486)   (1.2)     $     4,782      2.1     $      2,364     1.6
                                                          ============  =======     ===========   =======    ============= =======
</TABLE>

     Total revenue increased 29.8% or $69.5 million from 2005 to 2006.

     Overall gross profit decreased 7.1%, or $2.0 million from 2005 to 2006.

     Total SG&A expense increased 51.8%, or $10.2 million from 2005 to 2006.

     Income from continuing operations decreased 172.9%, or $8.3 million from
     2005 to 2006.


                                                             28
<PAGE>


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

     Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     Revenues and expenses have been reclassified between the segments to
     provide comparative results. Amounts will tie in total prior to reporting,
     however, individual segments will vary from prior reports.

         Total Revenue
         -------------
         Engineering revenue accounted for 91.8% of our total revenue for the
         year, increasing $58.8 million from $219.4 million in 2005 to $278.2
         million in 2006.

         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. Capital spending in the pipeline area
         is also trending higher, with numerous projects in North America
         currently underway to deliver crude oil, natural gas, petrochemicals
         and refined products. Renewable energy appears to be an emerging area
         of activity and potential growth, with the Company currently performing
         a variety of services for ethanol, biodiesel, coal to liquids,
         petroleum coke to ammonia, and other biomass processes. The
         acquisitions of WRC in the second quarter of 2006, together with our
         clients' increased demand for in-plant and inspection resources,
         stimulated growth in our staffing services division where revenues
         increased 90.6%, or $50.9 million, from $56.2 million in 2005 to $107.1
         million in 2006.

         Revenue from procurement services decreased 67.6%, or $40.2 million,
         from $59.5 million in 2005 to $19.3 million in 2006. This significant
         decrease is primarily related to three projects, two of which began in
         2003 and one of which began in 2005 and were materially completed in
         2006. The level of procurement services is expected to vary over time
         depending on the volume of procurement activity our customers choose to
         do themselves as opposed to using our services on larger EPC contracts.

         In 2005, the Company was awarded two significant fixed-price
         engineering, procurement and construction ("EPC") projects in the
         refining industry that included procurement and subcontractor
         activities within our scope of work. This accounts for the higher level
         in that year. Together these two fixed-price EPC projects accounted for
         approximately $20.2 million of the engineering segment revenues during
         2006 compared to approximately $1.8 million during 2005. The current
         combined contract value of these two projects is approximately $24.6
         million and both are currently scheduled for completion by the end of
         the second quarter of 2007. As a result of revised estimates of the
         percentage of completion of these projects, the Company suffered a
         reversal of $6.6 million in the third quarter of 2006 and $7.1 million
         in the fourth quarter of 2006. Due to losses incurred in the execution
         of these contracts, we anticipate that we will enter into this type of
         contract only on a very limited basis, if at all.

         The systems segment contributed 8.2% of our total revenue for the year,
         as its revenue increased $10.7 million, or 75.4%, from $14.2 million in
         2005 to $24.9 million in revenue in 2006. A general turnaround in the
         oil and gas industry, together with the acquisition of ATI in January
         2006 has increased the demand for ESI's services. Another factor
         positively affecting ESI's business is that the computer-based
         distributed control systems equipment used for facility plant
         automation becomes technologically obsolete over time, which supports
         ongoing replacement of these systems. Backlog for ESI at December 31,
         2006 reached $10.0 million, compared to $9.1 million at December 31,
         2005.

         Gross Profit
         ------------
         Primarily due to losses on two EPC fixed-price contracts in our
         engineering segment, as discussed above, total gross profit decreased
         $2.0 million, or 7.1%, from $28.3 million in 2005 to $26.3 million in
         2006 and, as a percentage of total revenue, decreased from 12.1% to
         8.7% during the same period.


                                       29
<PAGE>


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

         Due to the material financial impact of the losses on two significant
         fixed-price EPC projects* during 2006, the following "non-GAAP"
         proforma financial is being presented to demonstrate the performance of
         the historical core business within the Engineering segment.
<TABLE>
<CAPTION>

                      Non-GAAP Proforma                                 Years Ended December 31,
                                                 ------------------------------------------------------------------------
                    Financial Information                2006                      2005                     2004
                                                 ---------------------     ---------------------    ---------------------
                                                   Amount        %           Amount        %          Amount        %
                                                 ------------------------------------------------------------------------
                                                                             (in thousands)
                                                 ------------------------------------------------------------------------
<S>                                              <C>              <C>        <C>            <C>       <C>           <C>
              Revenue
                  Engineering - Actual           $   261,389               $    207,368              $   124,362
                  Less fixed-price projects*          20,155                         -                        -
                                                 -----------               ------------             ------------
                  Engineering - Revised          $   241,234     85.3      $    207,368    88.8      $   124,362     83.5

                  Systems                             24,933      8.8           14,159      6.0           14,110      9.5
                  Acquisition                         16,768      5.9           12,058      5.2           10,416      7.0
                                                 -----------   -------     ------------  -------    ------------  -------
                       Total revenue             $   282,935    100.0      $    233,585   100.0     $    148,888    100.0
                                                 ===========               ============             ============

              Gross profit
                  Engineering - Actual           $    21,737               $     25,940             $     14,300
                  Less fixed-price projects*         (13,740 )                       -                        -
                  Engineering - Revised          $    35,477     14.7      $     25,940    12.5     $     14,300     11.5

                  Systems                              2,138      8.6            1,111      7.8            2,219     15.7
                  Acquisition                          2,389     14.2            1,222     10.1            1,673     16.1
                                                 -----------               ------------             ------------
                       Total gross profit        $    40,004     14.1      $     28,273    12.1     $     18,192     12.2
                                                 ===========               ============             ============
</TABLE>

         * Excluding revenues on two significant fixed-price EPC projects, our
         Engineering segment, exclusive of acquisition revenue, would have
         accounted for 85.3% of our total revenue for the year, increasing $33.8
         million from $207.4 million in 2005 to $241.2 million in 2006, or an
         increase of 16.3%.

         * Again, excluding the recorded losses on two significant fixed-price
         EPC projects, our Engineering segment, net of acquisition gross profit,
         would have reported a gross profit of $35.5 million, an increase of
         $9.6 million from $25.9 million in 2005, or an increase year-over-year
         of 37.1%. As a percentage of revenue, the proforma gross profit for our
         Engineering segment, exclusive of gross profit from acquisitions, would
         have increased by 17.6%, increasing from 12.5% in 2005 to 14.7% in
         2006.

         * Also, excluding the recorded losses on the two significant
         fixed-price EPC projects, our total gross profit would have increased
         $11.7 million from $28.3 million in 2005 to $40.0 million in 2006, or
         an increase year-over-year of 41.3%. As a percentage of revenue, total
         gross profit, again, excluding the recorded losses on two significant
         fixed-price EPC projects, would have increased 16.5%, increasing from
         12.1% in 2005 to 14.1% in 2006.

         Due to the significant losses on these two projects the Company plans
         to limit the size and scope of fixed-price EPC contracts in the future.
         Both of the significant fixed-price EPC projects are scheduled for
         completion by the end of the second quarter of 2007.

         Also during the past year, the Company has shifted a portion of its
         services to developer type work for customers that are typically
         smaller than its historical customer base. The viability of these
         projects and the creditworthiness of these types of customers must be
         carefully analyzed to assure profitable results. In the future, the
         Company intends to analyze these projects much more carefully before
         accepting them.

         The Company has also engaged in a number of entrepreneurial ventures
         over the past several years, not all of which have been profitable. In
         the future, the Company intends to scrutinize these projects much more
         carefully before engaging in them and exit them more quickly if they
         are not successful.


                                       30
<PAGE>


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

         Gross profit from engineering, including the breakout of acquisitions,
         decreased $3.1 million, or 11.4%, from $27.2 million in 2005 to $24.1
         million in 2006 and, as a percentage of revenue, decreased from 12.4%
         in 2005 to 8.7% in 2006 primarily due to estimated losses of
         approximately $13.7 million on two EPC fixed-price contracts. Both
         projects are currently scheduled for completion by the end of the
         second quarter of 2007.

         The staffing services division , consisting of our in-plant staffing,
         land management and inspection operations, increased gross profit $7.4
         million, or 113.8%, from $6.5 million in 2005 to $13.9 million in 2006.

         We earn a lower margin on procurement services as compared to the
         margin we earn on our core engineering services. As an example,
         procurement services for 2005 produced a 1.7% gross profit margin.
         Comparably, in 2006 gross profit margin on core engineering services
         was 8.3%. Our level of procurement revenue has recently trended down,
         from $59.5 million or 25.5% of total revenue for 2005 to $19.3 million
         or 6.4% of total revenue for 2006.

         Any shift from engineering only to EPC projects that include material
         procurement and construction responsibility will negatively impact
         engineering gross profit as a percentage of revenue. In this case,
         lower gross profit will occur 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.

         At December 31, 2006, we had outstanding unapproved change
         orders/claims of approximately $17.4 million, net of reserves of $1.2
         million associated with ongoing fixed-price EPC projects. If in the
         future we determine collection of the unapproved change orders/claims
         is not probable, it will result in a charge to earnings in the period
         such determination is made.

         Gross profit for our systems segment increased $1.0 million, or 90.9%,
         from $1.1 million in 2005 to $2.1 million in 2006. However, as a
         percent of revenue, gross profit increased by 0.8% from 7.8% in 2005 to
         8.6% in 2006.

         Selling, General and Administrative ("SG&A") Expenses
         Selling, general and administrative expenses increased $10.2 million,
         or 51.8%, from $19.7 million in 2005 to $29.9 million in 2006,
         primarily due to increases in salaries and burdens, facilities and
         office expenses, amortization expense and travel. As a percent of
         revenue, SG&A increased 1.5% from 8.4% in 2005 to 9.9% in 2006.

         Salaries and burden expenses increased $5.0 million in 2006 over 2005
         of which $2.2 million of this increase was related to stock
         compensation expense recorded during the year. The Company did not
         record stock compensation expense during 2005, as the Company adopted
         SFAS No. 123R on January 1, 2006 (see Note 11). An additional $0.6
         million of the increase was due to increases in corporate salaries, as
         employees were added, primarily in Business Development, Accounting and
         IT, 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 and EAG's continued growth
         during the year.

         Facilities and office expenses increased $2.4 million in 2006 over 2005
         due to the expansion of EEI's offices in Tulsa, Houston, and Beaumont
         to meet both current and projected growth requirements, plus the
         additional cost of facilities utilized by acquisitions made throughout
         the year.

         Amortization expense increased approximately $700,000 primarily as a
         result of our completing the valuation of intangible assets acquired in
         acquisitions completed during 2006 (see Note 16).


                                       31
<PAGE>


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

         Increased business development activity pushed marketing and travel
         expenses up by over $600,000 in 2006 over similar expenses in 2005.

         Operating Profit
         ----------------
         Operating profit decreased $12.2 million to $(3.6) million in 2006 as
         compared to $8.6 million in 2005, decreasing, as a percentage of total
         revenue, from 3.7% in 2005 to (1.2)% in 2006. This decrease was
         primarily the result of the Company's performance on two fixed-price
         contracts.

         Other Income (Expense)
         ----------------------
         Other income increased from $116,000 in 2005 to $651,500 in 2006. The
         income in 2005 resulted from a legal settlement. The income in 2006 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.


                                       32
<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

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     Revenues and expenses have been reclassified between the segments to
     provide comparative results. Amounts will tie in total to prior reporting,
     however, individual segments will vary from prior reports.

         Total Revenue
         -------------
         Engineering revenue accounted for 94.0% of our total revenue for 2005,
         an increase of $84.6 million from $134.8 million in 2004 to $219.4
         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 54.4%, or $19.8 million,
         from $36.4 million in 2004 to $56.2 million in 2005.

         Revenue from procurement services increased 55.8%, or $21.3 million,
         from 2004 to 2005 and contributed 25.7%, or $21.3 million, of the
         increase in total engineering revenue during the same period. The level
         of procurement services varies 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 systems segment contributed 6.0% of our total revenue for the year,
         as its revenue increased $0.1 million, or 0.7%, from $14.1 million in
         2004 to $14.2 million in revenue in 2005. 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.

         Acquisition revenue, represented only 5.2% of total revenue for 2005,
         increased 16.3%, or $1.7 million, during the comparable periods,
         primarily from nine months of revenue generated in 2005 through
         acquisitions completed in the 4th quarter of 2004.

         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 $11.2 million, or 70.0%, from
         $16.0 million in 2004 to $27.2 million in 2005 and, as a percentage of
         revenue, increased from 11.5% in 2004 to 12.5% 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 $2.2 million, or 51.2%, from $4.3 million in
         2004 to $6.5 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.


                                       33
<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 decreased $1.1 million, or 50.0%,
         from $2.2 million in 2004 to $1.1 million in 2005. Also, as a percent
         of revenue, gross profit decreased by 7.9% from 15.7% in 2004 to 7.8%
         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 drove down margins on projects overall. Corrective measures
         were taken during the first quarter of 2006 to replace all contract
         labor with more stable, direct-hire employees and additional staffing
         and systems within the estimating and proposal group should improve
         proposal pricing.

         During the fourth quarter of 2005, 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 was completed in 2006, resulting in a corresponding
         delay in our recognition of revenues and profits.

         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
         0.8% 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.

         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.


                                       34
<PAGE>


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

         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.

     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 26, 2009. The loan
         agreement positions Comerica as senior to all other debt. The line of
         credit is limited to $30.0 million subject to loan covenant
         restrictions. The Comerica Credit Facility is collateralized by
         substantially all the assets of the Company. As of December 31, 2006,
         the outstanding balance on the line of credit was $24.0 million and we
         had working capital of $35.2 million. Our total long-term debt
         outstanding on December 31, 2006 was $27.2 million (see Note 8), an
         increase from $5.2 million as of December 31, 2005. Under the terms and
         conditions of our revolving credit facility, as of December 31, 2006,
         we have additional borrowing capacity of approximately $6.0 million
         after consideration of borrowing base limitations with no letters of
         credit outstanding at December 31, 2006.

         The following table summarizes our contractual obligations as of
         December 31, 2006:

<TABLE>
<CAPTION>
                                                                              Payments Due by Period
                                                 ---------------------------------------------------------------------------------
                                                    2007          2008          2009          2010        2011 and       Total
                                                                                                         thereafter
                                                 ------------  ------------  ------------  ------------ ------------- ------------
                                                                                  (in thousands)
                                                 ---------------------------------------------------------------------------------
<S>                                              <C>                 <C>          <C>              <C>                <C>
     Long-term debt(1)                           $     4,747   $     3,683  $     27,140  $        441    $       -    $   36,011
     Operating leases                                  4,366         2,754         2,165         1,938        1,423        12,646
                                                 -----------   -----------  ------------  ------------    ---------    ----------
         Total contractual cash obligations      $     9,113   $     6,437  $     29,305  $      2,379    $   1,423    $   48,657
                                                 ===========   ===========  ============  ============    =========    ==========
</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, 2006. The
         Company's interest rate on its revolving credit facility fluctuates
         with the prime rate.

     Cash Flow
         We believe that we have sufficient available cash required for
         operations for the next 12 months. However, cash and the availability
         of cash could be materially restricted if circumstances prevent the
         timely internal processing of invoices, if amounts billed are not
         collected or are not collected in a timely manner, if project mix
         shifts from cost reimbursable to fixed costs contracts during
         significant periods of growth, if the Company was to lose one or more
         of its major customers, if the Company experiences further costs
         overruns on fixed- price contract, or if we not able to meet the
         covenants of the Comerica Credit Facility. If any such event occurs, we
         would be forced to consider alternative financing options.


                                       35
<PAGE>


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

     Operating Activities:
     Operating activities required the use of $9.0 million, $0.9 million, and
     $2.4 million in net cash in 2006, 2005 and 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.

     The primary factors impacting the increase in our need for cash and the
     year-over-year increase in average accounts receivable days outstanding
     were:

                1) a past due accounts receivable balance of approximately $3.7
                million as of December 31, 2006 related to delays in receipts
                for services on the start-up of a major alliance agreement that
                began during the second quarter of this year;

                2) a decrease in billings in excess of costs from approximately
                $3.8 million to $540,000 as of December 31, 2005 and 2006
                respectively; and

                3) an increase in costs and estimated earnings-in-excess of
                billings from approximately $4.1 million to $5.4 million as of
                December 31, 2005 and 2006, respectively.

     Although the above factors are all within rights and restrictions of
     contractual terms and conditions within client contracts, we are taking
     measures to remediate each of these factors and at this time do not expect
     their impact to continue beyond the first quarter of 2007.

     Investing Activities:
     Investing activities used cash totaling $9.3 million in 2006, compared to
     $2.4 million in 2005 and $1.8 million in 2004. In 2006, our investing
     activities consisted of capital additions of $3.4 million primarily for
     computers and leasehold improvements to our offices and software
     implementations. In the fourth quarter, $500,000 was used to complete the
     acquisition of Watco Management, Inc. 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, 2006, we amended
     our line of credit to permit an increase in annual capital expenditure
     limits from $3.25 million to $3.5 million.

     Financing Activities:
     Financing activities provided cash totaling $19.6 million, $3.5 million,
     and $4.2 million in 2006, 2005, and 2004, respectively. Our primary
     financing mechanism is our revolving line of credit. The line of credit has
     been used principally to finance acquisitions and accounts receivable.
     During 2006, our borrowings, on the line of credit were $143.8 million, and
     we repaid an aggregate of $123.6 million on our short-term and long-term
     bank and other debt.

     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 $4.7 million.

     In 2006, non-cash transactions included $216,000 notes receivable issued
     for sale of assets and $3.9 million notes payable issued for acquisitions.
     Also in 2006, $1.4 million of stock was issued associated with the
     acquisition of WRC. 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. We also acquired insurance with notes payable of $1.3
     million, $198,000, and $1.1 million in 2006, 2005, and 2004, respectively.


                                       36
<PAGE>


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

     Due to significant losses incurred on two fixed-price projects during the
     third and fourth quarter, the Company requested and was successful in
     obtaining a waiver and subsequent amendment to its credit agreement with
     Comerica Bank in order to meet the monthly fixed charge ratio. If we had
     not been able to obtain a waiver or amendment of the covenant, we may have
     been unable to make further borrowings and may have been 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 $60.2
     million from $46.2 million as of December 31, 2006 and 2005, respectively.
     The number of days outstanding for trade accounts receivable increased from
     59 days at December 31, 2005, to 62 days at December 31, 2006. Our actual
     bad debt expense has been approximately .03% and .01% of revenues for the
     years ending December 31, 2006 and 2005. We increased our allowance for
     doubtful accounts from $503,000 to $670,000 or 1.1% of trade accounts
     receivable balance for each of the years 2005 and 2006, respectively.

     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 sole or 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. However, in 2006, the Company
         suffered reversals due to its failure to accurately estimate revenue
         recognition on our two significant fixed-price EPC contracts.

         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. However, timing of accounts receivable collections has
         resulted in a serious impact in the Company's liquidity. Also, the
         Company is engaging in more development contracts with smaller
         companies. We anticipate that collection risk will be a larger risk on
         these projects.

         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),
         of which have not-to-exceed provisions that place a cap on the revenue
         that we may receive under a particular contract.


                                       37
<PAGE>


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

         These time and material billings are produced every two weeks. Most of
         the contracts with not-to-exceed provisions are minor in nature.

         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
         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.

         Change Orders
         -------------
         Change orders are modifications of an original contract that
         effectively change deliverables under a 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. In those
         cases, we are taking a risk that the customer will not sign a change
         order or at a later time the customer will seek to negotiate the
         pricing of the additional work. 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.


                                       38
<PAGE>


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

     Recent Accounting Pronouncements
     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
     This statement establishes a framework for measuring fair value in
     generally accepted accounting principles and expands disclosures about fair
     value measurements. SFAS No. 157 is effective for financial statements
     issued for fiscal years beginning after November 15, 2007, and interim
     periods within those fiscal years. The provisions of SFAS No. 157 should be
     applied prospectively as of the beginning of the fiscal year in which SFAS
     No. 157 is initially applied, except in limited circumstances. The Company
     expects to adopt SFAS No. 157 beginning January 1, 2008. The Company is
     currently evaluating the impact that this interpretation may have on its
     consolidated financial statements.

     In September 2006, the SEC released Staff Accounting Bulletin No. 108,
     "Considering the Effects of Prior Year Misstatements when Quantifying
     Misstatements in Current Year Financial Statements" (SAB No. 108), which
     provides interpretive guidance on how the effects of the carryover or
     reversal of prior year misstatements should be considered in quantifying a
     current year misstatement. The SEC staff believes that registrants should
     quantify errors using both a balance sheet and an income statement approach
     and evaluate whether either approach results in quantifying a misstatement
     that, when all relevant quantitative and qualitative factors are
     considered, is material. The provisions of SAB No. 108 are effective for
     the Company beginning in the first quarter of 2007. The Company does not
     expect any impact to its consolidated financial statements upon adoption of
     SAB No. 108.

     In June 2006, FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty
     in Income Taxes", an interpretation of FASB Statement 109 Accounting for
     Income Taxes, was issued. FIN No. 48 describes accounting for uncertainty
     in income taxes, and includes a recognition threshold and measurement
     attribute for recognizing the effect of a tax position taken or expected to
     be taken in a tax return. FIN No. 48 is effective for fiscal years
     beginning after December 15, 2006. The Company adopted FIN No. 48 on
     January 1, 2007, and the Company expects that it will not have a material
     effect on the its' financial condition, results of operations, or cash
     flows.

     In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation"
     was revised ("SFAS No. 123R"). SFAS No. 123R focuses primarily on
     accounting for transactions in which an entity obtains employee services in
     share-based payment transactions and requires that companies record
     compensation expense for employee stock option awards. SFAS No. 123R is
     effective for annual periods beginning after June 15, 2005. The Company
     adopted SFAS No, 123R on January 1, 2006 using the modified prospective
     method. See Note 11.

     In March 2005, FASB Interpretation No. 47, "Accounting for Conditional
     Asset Retirement Obligations - An interpretation of FASB Statement No.
     143", was issued. FIN No. 47 clarifies the term conditional asset
     retirement obligation as used in SFAS No. 143, "Accounting for Asset
     Retirement Obligations", and clarifies when an entity would have sufficient
     information to reasonably estimate the fair value of an asset retirement
     obligation. FIN No. 47 was effective for the year ended December 31, 2005,
     but did not have a material effect on the Company's financial condition,
     results of operations or cash flows.

     In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
     Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and
     140". SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities", and SFAS No. 140, "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities". This Statement also resolves issues addressed in Statement
     No. 133 Implementation Issue No. D1, "Application of Statement 133 to
     Beneficial Interests in Securitized Financial Assets." SFAS No. 155 permits
     fair value re-measurement for any hybrid financial instrument that contains
     an embedded derivative that otherwise would require bifurcation and
     clarifies which interest-only strips and principal-only strips are not
     subject to the requirements of SFAS No. 133. SFAS No. 140 is amended to
     eliminate the prohibition on a qualifying special-purpose entity from
     holding a derivative financial instrument that pertains to a beneficial
     interest other than another derivative financial instrument. SFAS No. 155
     is effective for all financial instruments acquired or issued during fiscal
     years beginning after September 15, 2006. The Company does not expect this
     statement to have a material impact on its consolidated financial
     statements.


                                       39
<PAGE>


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, 2006 and 2005, 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 $24.0 million and $3.8 million as
     of December 31, 2006 and 2005, 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 8.25% as of December 31, 2006, to an
     average interest rate of 9.08%, annual interest expense would have been
     approximately $115,000 higher in 2006 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, 2006.

     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 SUPPLEMENTARY DATA

     The audited consolidated balance sheets for ENGlobal Corporation, as of
     December 31, 2006 and 2005 and statements of income, cash flows and
     stockholders' equity for the three-year period ended December 31, 2006, are
     attached hereto and made part hereof.


                                       40
<PAGE>


                                      INDEX


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


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON INTERNAL CONTROL OVER FINANCIAL REPORTING                           42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   ON CONSOLIDATED FINANCIAL STATEMENTS                                 44

CONSOLIDATED BALANCE SHEETS
     December 31, 2006 and 2005                                         45

CONSOLIDATED STATEMENTS OF OPERATIONS
     Years Ended December 31, 2006, 2005 and 2004                       46

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
     Years Ended December 31, 2006, 2005 and 2004                       47

CONSOLIDATED STATEMENTS OF CASH FLOW
     Years Ended December 31, 2006, 2005 and 2004                       48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              50

SCHEDULE II
     Valuation and Qualifying Accounts                                  76


                                       41

<PAGE>


   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
                            OVER FINANCIAL REPORTING


Board of Directors
Englobal Corporation
Houston, Texas

We were engaged to audit management's assessment included in the accompanying
Management's Report on Internal Control over Financial Reporting that ENGlobal
Corporation and Subsidiaries (the "Company") did not maintain effective internal
control over financial reporting as of December 31, 2006, because of the effect
of material weaknesses described therein, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting.

The scope of our audit of management's assessment and the effectiveness of
internal control over financial reporting was limited as a result of
management's substantial delay in the performance of and delivery to us of its
completed assessment. Specifically, we were provided substantially all of the
documentation related to management's assessment subsequent to December 31, 2006
and, as a result, we were unable to obtain sufficient evidence that the controls
were designed and operating effectively at December 31, 2006.

A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. The following material weaknesses have been identified
and included in management's assessment as of December 31, 2006:

          1.   Deficiencies in the Company's Control Environment. Our control
               environment did not sufficiently promote effective internal
               control over financial reporting throughout the organization.
               Specifically, the Company had a shortage of support and resources
               in our accounting department, which resulted in insufficient: (i)
               documentation and communication of our accounting policies and
               procedures; and (ii) internal audit processes of our accounting
               policies and procedures.

          2.   Deficiencies in the Company's Information Technology Access
               Controls. The Company did not maintain effective controls over
               preventing access by unauthorized personnel to end-user
               spreadsheets and other information technology programs and
               systems.

          3.   Deficiencies in the Company's Accounting System Controls. The
               Company did not effectively and accurately close the general
               ledger in a timely manner and we did not provide complete and
               accurate disclosure in our notes to financial statements, as
               required by generally accepted accounting principles.

          4.   Deficiencies in the Company's Controls Regarding Purchases and
               Expenditures. The Company did not maintain effective controls
               over the tracking of our commitments and actual expenditures with
               third-party subsidiaries on a timely basis.

          5.   Deficiencies in the Company's Controls Regarding Fixed-Price
               Contract Information. The Company did not maintain effective
               controls over the complete, accurate, and timely processing of
               information relating to the estimated cost of fixed-price
               contracts.

          6.   Deficiencies in the Company's Revenue Recognition Controls. The
               Company did not maintain effective policies and procedures
               relating to revenue recognition of fixed price contracts.

                                       42

<PAGE>


          7.   Deficiencies in the Company's Controls over Income Taxes. The
               Company did not maintain sufficient internal controls to ensure
               that amounts provided for in the financial statements for income
               taxes accurately reflected the Company's income tax position as
               of December 31, 2006.

          8.   Deficiency in Completing Management's Assessment of Internal
               Control over Financial Reporting in a Timely Manner. The Company
               did not meet the documentation and testing requirements under
               section 404 of the Sarbanes-Oxley Act of 2002 as of December 31,
               2006. As a result, management was unable to assess the
               effectiveness of the Company's internal control over financial
               reporting as of December 31, 2006 as required by the
               Sarbanes-Oxley Act of 2002 in sufficient time for an audit of
               management's assessment to be completed as of December 31, 2006.


These material weaknesses were considered in determining the nature, timing, and
extent of the audit tests applied in our audit of the 2006 consolidated
financial statements, and this report does not affect our report dated March 15,
2007 on those consolidated financial statements.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with accounting principles generally accepted in the United States
of America. A company's internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

Since management failed to provide us with timely documentation of the Company's
internal control over financial reporting and we were unable to apply other
procedures to satisfy ourselves as to the effectiveness of the Company's
internal control over financial reporting, the scope of our work was not
sufficient to enable us to express, and we do not express, an opinion on either
management's assessment or on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006.

We do not express an opinion or any other form of assurance on management's
statements referring to any and all remediation steps taken.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
ENGlobal Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 2006.
Our report thereon dated March 15, 2007 expressed an unqualified opinion.


Hein & Associates LLP
Houston, Texas

March 15, 2007


                                       43
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES
           Report of Independent Registered Public Accounting Firm on
                        Consolidated Financial Statements

Board of Directors
ENGlobal Corporation
Houston, Texas

We have audited the accompanying consolidated balance sheets of ENGlobal
Corporation and subsidiaries (the"Company") as of December 31, 2006 and 2005,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
2006. We have also audited the schedule listed in the accompanying Item 16.
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements and
schedule, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
consolidated financial statements and schedule. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ENGlobal Corporation
and subsidiaries at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth, therein in relation to the financial statements taken
as a whole.

We were also engaged to audit, in accordance with the standards of Public
Company Accounting Oversight Board (United States), management's assessment and
the effectiveness of ENGlobal Corporation and subsidiaries internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Our report dated March 15, 2007, did
not express an opinion on management's assessment and the effectiveness of
internal control over financial reporting.

As discussed in Note 11 to the consolidated financial statements, the Company
adopted Statement of Accounting Standards No. 123 (revised 2004), "Share-Based
Payment", during the year ended December 31, 2006.




Hein & Associates LLP
Houston, Texas
March 15, 2007

       See accompanying notes to these consolidated financial statements.
                                       44
<PAGE>
<TABLE>
<CAPTION>
                                                 ENGLOBAL CORPORATION AND SUBSIDIARIES

                                                      CONSOLIDATED BALANCE SHEETS
                                                       DECEMBER 31, 2006 AND 2005


                                                             ASSETS
                                                             ------
Current Assets                                                                                      2006                2005
                                                                                               ---------------     ---------------
<S>                                                                                            <C>                 <C>
     Cash                                                                                      $    1,402,880      $      159,414
     Trade receivables, net                                                                        60,247,612          46,248,458
     Prepaid expenses and other current assets                                                      1,723,907           1,600,369
     Current portion of notes receivable                                                               52,031                   -
     Costs and estimated earnings in excess of billings on uncompleted contracts                    5,390,111           4,148,275
     Deferred tax asset                                                                             2,310,106             305,258
     Inventories                                                                                            -             153,968
     Federal income taxes receivable                                                                1,148,014              52,818
                                                                                               --------------      --------------
         Total Current Assets                                                                      72,274,661          52,668,560
Property and Equipment, net                                                                         8,724,902           6,861,361
Goodwill and Other Intangibles                                                                     19,202,197          15,454,583
Other Intangible Assets, net                                                                        5,426,824             413,596
Long term notes receivable, net of current portion                                                    129,105                   -
Non-current Deferred Tax Asset                                                                              -              74,892
Other Assets                                                                                          468,864             462,938
                                                                                               --------------      --------------

         Total Assets                                                                          $  106,226,553      $   75,935,930
                                                                                               ==============      ==============


                                                    LIABILITIES AND STOCKHOLDERS' EQUITY
                                                    ------------------------------------
Current Liabilities
     Accounts payable                                                                          $   14,672,165          15,211,331
     Accrued compensation and benefits                                                             12,806,919           9,799,074
     Notes payable                                                                                  1,109,772                   -
     Current portion of long-term debt                                                              1,418,029             547,934
     Deferred rent                                                                                    678,583             361,292
     Billings in excess of costs and estimated earnings on uncompleted contracts                      539,910           3,775,625
     Other liabilities                                                                              5,862,634           1,148,079
                                                                                               --------------      --------------
         Total Current Liabilities                                                                 37,088,012          30,843,335
Long-Term Debt, net of current portion                                                             27,162,263           5,227,976
Deferred Tax Liability                                                                              1,114,224                   -
                                                                                               --------------      --------------

         Total Liabilities                                                                         65,364,499          36,071,311
                                                                                               --------------      --------------
Commitments and Contingencies (Notes 9, 10, 12, 16, 19 and 20)
Stockholders' Equity
     Common stock - $0.001 par value; 75,000,000 shares authorized; 26,807,460
        and 26,289,567 shares outstanding and 26,807,460 and 26,941,944 issued
        at December
        31, 2006 and 2005, respectively                                                                27,459              26,941
     Additional paid-in capital                                                                    31,147,343          27,230,332
     Retained earnings                                                                              9,717,354          13,203,208
     Treasury stock  - 0 and 652,377 shares at cost, at December 31, 2006 and 2005,
        respectively                                                                                        -            (592,231)
     Accumulated other comprehensive income (loss)                                                    (30,102)             (3,631)
                                                                                               --------------      --------------

         Total Stockholders' Equity                                                                40,862,054          39,864,619
                                                                                               --------------      --------------

         Total Liabilities and Stockholders' Equity                                            $  106,226,553      $   75,935,930
                                                                                               ==============      ==============

                                      See accompanying notes to these consolidated financial statements.
                                                                  45
<PAGE>


                                           ENGLOBAL CORPORATION AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                                 Years Ended December 31,
                                                                            -------------------------------------------------------
                                                                                2006                  2005                 2004
                                                                            -------------        -------------        -------------
Operating Revenues
     Engineering                                                            $ 278,157,053        $ 219,425,730        $ 134,778,281
     Systems                                                                   24,933,308           14,159,103           14,109,960
                                                                            -------------        -------------        -------------
         Total Revenue                                                        303,090,361          233,584,833          148,888,241
                                                                            -------------        -------------        -------------

Direct Costs
     Engineering                                                              254,031,157          192,263,673          118,804,896
     Systems                                                                   22,794,971           13,048,500           11,891,287
                                                                            -------------        -------------        -------------
         Total Direct Costs                                                   276,826,128          205,312,173          130,696,183

                                                                            -------------        -------------        -------------

Gross Profit                                                                   26,264,233           28,272,660           18,192,058

Selling, General, and Administrative Expenses                                  29,884,682           19,688,765           13,700,088
                                                                            -------------        -------------        -------------

Operating Income (Loss)                                                        (3,620,449)           8,583,895            4,491,970
     Interest Expense                                                          (1,311,794)            (800,072)            (590,227)
     Other income                                                                 632,880              114,538              118,409
                                                                            -------------        -------------        -------------
         Income (Loss) before Provision for Income Taxes                       (4,299,363)           7,898,361            4,020,152

Provision for Income Taxes                                                       (813,510)           3,115,980            1,655,763
                                                                            -------------        -------------        -------------

Net Income (Loss)                                                           $  (3,485,853)       $   4,782,381        $   2,364,389
                                                                            =============        =============        =============

Basic Earnings per Share                                                    $       (0.13)       $        0.20        $        0.10

Weighted Average Common Shares Outstanding for Basic                           26,538,290           24,300,114           23,454,545
                                                                            =============        =============        =============

Diluted Earnings per Share                                                  $       (0.13)       $        0.19        $        0.10

Weighted Average Common Shares Outstanding for Diluted                         26,538,290           25,250,487           23,785,939
                                                                            =============        =============        =============


                         See accompanying notes to these consolidated financial statements.
                                                          46
<PAGE>


                                          ENGLOBAL CORPORATION AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                     FOR YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

                                                                           Accumulated
                                        Common Stock          Additional  Comprehensive                                    Total
                                   ----------------------      Paid-In     Translation      Retained      Treasury     Stockholders'
                                     Shares       Stock        Capital     Gain/(Loss)      Earnings        Stock         Equity
                                   ----------   ---------    ----------    -----------     -----------    ---------     ----------
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
     Exercise of options              329,273         329       729,580              -               -            -        729,909
     Shares issued at acquisition
       for WRC                        175,000         175     1,399,825              -               -            -      1,400,000
     Common stock issued through
       employee stock purchase
       plan                            13,620          14       102,954              -               -            -        102,968
     Common stock issued through
       private placement                    -           -       (40,000)             -               -                     (40,000)
     Stock based compensation               -           -     2,176,162              -               -                   2,176,162
     Treasury shares retirement                                (592,231)                             -      592,231              -
     Tax benefit of non-qualified
       options exercised                    -           -       140,721              -               -            -        140,721
       Net income                           -           -             -              -      (3,485,853)           -     (3,485,853)
                  Rounding
       difference                           -           -             -              -             (1)            -             (1)
     Comprehensive income:
       Foreign currency
           translation adjustment           -           -             -        (26,471)              -            -        (26,471)
                                   ----------    --------    ----------    -----------    ------------   ----------    -----------

BALANCES-DECEMBER 31, 2006         26,807,460    $ 27,459   $31,147,343    $   (30,102)   $  9,717,354            -    $ 40,862,054
                                   ==========    ========   ===========    ===========    ============   ==========    ===========


                                    See accompanying notes to these consolidated financial statements.
                                                                     47
<PAGE>


                                           ENGLOBAL CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                               Years Ended December 31,
                                                                                ---------------------------------------------------
                                                                                     2006               2005               2004
                                                                                -------------      -------------      -------------
Cash Flows from Operating Activities
     Net income (loss)                                                          $  (3,485,853)     $   4,782,381      $   2,364,389
     Adjustments to reconcile net income (loss) to net cash
        provided by (used in) operating activities -
         Depreciation and amortization                                              3,369,244          1,836,376          1,246,532
         Stock based compensation                                                   2,176,162               --                 --
         Deferred income tax expense                                               (2,317,275)          (313,150)           254,000
         (Gain) Loss on disposal of property, plant and equipment                      42,315           (131,732)             2,564
     Changes in current assets and liabilities, net of acquisitions -
         Trade receivables                                                         (9,825,423)       (15,462,947)       (10,595,425)
         Inventories                                                                  153,968             18,747            (54,375)
         Costs and estimated earnings in excess of billings                        (1,244,902)        (2,980,859)           (90,604)
         Prepaid expenses and other assets                                            509,362            630,559            231,401
         Accounts payable                                                          (1,235,758)         4,699,207            691,093
         Accrued compensation and benefits                                          2,261,018          3,739,853          1,713,253
         Billings in excess of costs and estimated earnings                        (3,235,715)         1,461,670          1,939,616
         Other liabilities                                                          5,078,829            326,655            128,114
         Income taxes receivable (payable)                                         (1,198,936)           473,523           (221,610)
                                                                                -------------      -------------      -------------
              Net cash provided by (used in) operating activities                  (8,952,964)          (919,717)        (2,391,052)
                                                                                -------------      -------------      -------------
Cash Flows from Investing Activities
     Purchase of property and equipment                                            (3,405,141)        (3,229,925)        (1,195,588)
     Additional consideration for acquisitions                                           --              (26,368)          (625,000)
     Proceeds from insurance                                                           68,317               --                 --
     Partnership distributions                                                        350,000               --                 --
     Acquisitions of businesses, net of cash acquired                              (6,528,583)              --                 --
     Proceeds from sale of assets                                                     185,106             15,400              9,897
     Proceeds from sale of Thermaire                                                     --              823,350               --
                                                                                -------------      -------------      -------------
              Net cash used in investing activities                                (9,330,301)        (2,417,543)        (1,810,691)
                                                                                -------------      -------------      -------------
Cash Flows from Financing Activities
     Borrowings on line of credit                                                 143,820,724         92,151,545        134,571,349
     Payments on line of credit                                                  (123,631,669)      (101,907,187)      (126,597,915)
     Proceeds from issuance of common stock                                           933,598         15,034,940            103,918
     Proceeds from notes receivable                                                    38,119               --                 --
     Short-term borrowings (repayments)                                                  --           (1,037,399)        (1,071,885)
     Capital lease repayments                                                            --               (4,371)           (12,478)
     Long-term debt repayments                                                     (1,607,959)          (745,229)        (2,822,679)
                                                                                -------------      -------------      -------------
              Net cash provided by (used in) financing activities                  19,552,813          3,492,299          4,170,310

Effect of Exchange Rate Changes on Cash                                               (26,082)            (3,631)              --
                                                                                -------------      -------------      -------------
              Net Change in Cash and Cash Equivalents                               1,243,466            151,408            (31,433)
Cash and Cash Equivalents - beginning of year                                         159,414              8,006             39,439
                                                                                -------------      -------------      -------------
Cash and Cash Equivalents - end of year                                         $   1,402,880      $     159,414      $       8,006
                                                                                =============      =============      =============


                                       See accompanying notes to these consolidated financial statements.
                                                                       48
<PAGE>


                                                 ENGLOBAL CORPORATION AND SUBSIDIARIES


Supplemental Cash Flow Information                                                               Years Ended December 31,
                                                                                   ------------------------------------------------

                                                                                       2006               2005             2004
                                                                                   ------------        -----------      -----------
Non-Cash Transactions
     Issuance of note for insurance                                                   1,347,232            197,794         1,092,096
     Retirement of treasury stock                                                       592,231               --                --
     Acceptance of note for Constant Power assets                                      (216,000)              --                --
     Issuance of common stock for purchase of WRC Corporation                         1,400,000               --                --
     Acquisition of treasury stock with note payable                                       --                 --             592,231
         Issuance of note for ATI assets                                              1,000,000               --                --
         Issuance of note for purchase of WRC Corporation                             2,400,000               --                --
         Issuance of note for Watco assets                                              500,000               --                --
         Issuance of notes payable for assets of EDG, AmTech, CIS
   and Infotech                                                                            --                 --           2,575,000
Supplemental Cash Flow Information
     Cash paid during the year for -
         Interest                                                                   $   976,841        $   890,266       $   420,627
         State and federal income taxes                                               2,464,848          2,959,133         1,196,761
         Refund from state franchise taxes                                                 --               48,531              --




                                       See accompanying notes to these consolidated financial statements.
                                                                        49
</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 pipeline
          inspection services to the oil and gas, utility and pipeline
          industries and turnaround, asset management, and start-up services for
          the petrochemical 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.

         WRC Corporation ("WRC") - primarily provides land management,
         right-of-way services, environmental compliance, and governmental
         regulatory services to pipeline, utility and telecom companies and
         other owner/operators of "infrastructure" facilities.

          WRC Canada - provides land management and inspection services.


                                       50
<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, 2006. The Company's banking
     system provides for daily replenishment of major bank accounts for
     check-clearing requirements. Accordingly, there were negative book balances
     of $2.7 million on December 31, 2006 and $2.0 million on December 31, 2005.
     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.

     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 2006 and 2005, pass-through transactions totaled $8.9 million
     and $20.6 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 in
     contract costs 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.

     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


                                       51

<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     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 five 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").

     Cost-Plus, Not-To-Exceed
     ------------------------
     Under cost-plus, not-to-exceed contracts, clients are charged on the same
     basis as either cost-plus, labor plus fixed mark-up, or cost-plus fixed
     labor rate contracts. The contract is awarded with a set maximum aggregate
     revenue, referred to as the not-to-exceed amount. The Company does not earn
     revenue over the not-to-exceed amount unless we obtain a change order. The
     Company is not obligated to complete the contract once the not-to-exceed
     amount has been reached.

     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").

     Guaranteed Max
     --------------
     Under a guaranteed max contract, clients are charged on the same basis as
     either cost-plus, labor plus fixed markup or cost-plus fixed labor rate.
     The contract is awarded with a set maximum aggregate revenue amount
     referred to as the guaranteed max amount. The Company is required to
     complete the scope of contract even if they have reached the guaranteed max
     amount. Therefore, the Company recognizes revenue on guaranteed max
     contracts using the percentage of completion method described above and
     commonly treats them the same as fixed-price contracts. In order to


                                       52
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     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 deliverables under 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 required or requested 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.

     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.

     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.


                                       53
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Intangible Assets and Goodwill
     ------------------------------
     Intangible assets is comprised of non-compete covenants and customer
     relationships acquired through acquisitions. As of December 31, 2006 and
     December 31, 2005, the cost and accumulated amortization of our intangible
     assets were as follows:

<TABLE>
<CAPTION>

                                                          Non-Compete                     Customer
                                                           Covenants       Use of Name  Relationships     Total
                                                         -------------    ------------- ------------  -----------
<S>                                                      <C>              <C>           <C>           <C>
     As of December 31, 2006
     Intangible assets                                   $       3,846    $        10   $      2,547  $     6,403
         Less: accumulated amortization                            704              6            266          976

                                                         -------------    -----------   ------------  -----------
         Intangible assets, net                          $       3,142    $         4   $      2,281  $     5,427
                                                         =============    ===========   ============  ===========

         As of December 31, 2005
         Intangible assets                               $         550    $        10   $          -  $       560
         Less: accumulated amortization                            142              4              -          146
                                                         -------------    -----------   ------------  -----------
         Intangible assets, net                          $         408    $         6   $          -  $       414
                                                         =============    ===========   ============  ===========


     Intangible assets are amortized using the straight-line method based on the
     estimated useful life of the intangible assets. Expected amortization
     expense of our amortizable intangible assets is as follows:

                                                           Non-Compete                   Customer
     Years Ending, December 31                              Covenants       Use of Name Relationships   Total
---------------------------------------------            --------------    ------------- ----------- ----------

         2007                                            $          683    $        2   $       457  $    1,142
         2008                                                       671             2           456       1,129
         2009                                                       650             -           456       1,106
         2010                                                       570             -           456       1,026
         2011                                                       568             -           456       1,024
                                                         --------------    ----------   -----------  ----------
                                                         $        3,142    $        4   $     2,281  $    5,427
                                                         ==============    ==========   ===========  ==========
         Weighted Average Amortization
         Period Remaining at December 31, 2006 (years)              4.8           2.0          5.0
</TABLE>


     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."


                                       54
<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, 2005 and 2006
     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
     primarily from earn-outs related to acquisitions. In 2006, goodwill
     increased $3.0 million primarily from the deferred tax benefit realized on
     acquisitions of WRC plus additional earn-outs related to acquisitions.

     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.

     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.

     In June 2006, FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty
     in Income Taxes", an interpretation of FASB Statement 109 Accounting for
     Income Taxes, was issued. FIN No. 48 describes accounting for uncertainty
     in income taxes, and includes a recognition threshold and measurement
     attribute for recognizing the effect of a tax position taken or expected to
     be taken in a tax return. FIN No. 48 is effective for fiscal years
     beginning after December 15, 2006. The Company adopted FIN No. 48 on
     January 1, 2007, and will not have a material effect on the Company's
     financial condition, results of operations, or cash flows.

     Stock Based Compensation
     ------------------------
     The Company currently sponsors a stock-based compensation plan as described
     below. Effective January 1, 2006, the Company adopted the provisions of
     Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised),
     "Share-Based Payment" ("SFAS No. 123(R)"). Under the fair value recognition
     provisions of SFAS No. 123 (R), stock-based compensation is measured at the
     grant date based on the value of the awards and is recognized as expense
     over the requisite service period (usually a vesting period). The Company
     selected the modified prospective method of adoption described in SFAS No.
     123(R). The fair values of the stock awards recognized under SFAS No.
     123(R) are determined based on the vested portion of the awards; however,
     the total compensation expense is recognized on a straight-line basis over
     the vesting period.

                                       55

<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Prior to January 1, 2006, the Company accounted for stock-based
     compensation using the intrinsic value method prescribed in Accounting
     Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
     Employees," and related interpretations. Under APB Opinion No. 25, no
     compensation expense was recognized for stock options issued to employees
     because the grant price equaled, or was above, the market price on the date
     of grant for options issued by the Company.

     Earnings Per Share
     Earnings per share was computed as follows:
<TABLE>
<CAPTION>
                                                                 Reconciliation of Earnings per Share Calculation
                                                 ---------------------------------------------------------------------------------
                                                           2006                       2005                        2004
                                                 -------------------------- --------------------------  --------------------------
                                                    Basic        Diluted       Basic        Diluted        Basic        Diluted
                                                 ------------  ------------ ------------- ------------  ------------  ------------
<S>                                              <C>            <C>          <C>           <C>           <C>           <C>
     Net Income (Loss)                           $ (3,485,853)  $(3,485,853) $ 4,782,381   $ 4,782,381   $ 2,364,389   $ 2,364,389
                                                 ============   ===========  ============  ===========   ===========   ===========
     Weighted average number of shares
        outstanding for basic                      26,538,290                 24,300,114                  23,454,545
     Weighted average number of shares
        outstanding for diluted                                  26,538,290                 25,250,487                  23,785,939
     Net income (loss) per share available
        for common stock
         Net Income (Loss)                       $      (0.13)        (0.13) $      0.20   $      0.19   $      0.10   $      0.10

     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, 2006, 2005 and 2004.

                                                                              2006                 2005                 2004
                                                                        -----------------    -----------------    ----------------
     Common stock issued - beginning of year                                  26,289,567           23,466,839          24,034,288
     Weighted average common stock issued (repurchased)                          248,723              833,275            (579,743)
                                                                        ----------------     ----------------     ---------------
         Shares used in computing basic earnings per share                    26,538,290           24,300,114          23,454,545
     Assumed conversion of dilutive stock options                                      -              950,373             331,394
                                                                        ----------------     ----------------     ---------------
     Shares used in computing diluted earnings per share                      26,538,290           25,250,487          23,785,939
                                                                        ================     ================     ===============
</TABLE>

     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.


                                       56
<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.

NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
     This statement establishes a framework for measuring fair value in
     generally accepted accounting principles and expands disclosures about fair
     value measurements. SFAS No. 157 is effective for financial statements
     issued for fiscal years beginning after November 15, 2007, and interim
     periods within those fiscal years. The provisions of SFAS No. 157 should be
     applied prospectively as of the beginning of the fiscal year in which SFAS
     No. 157 is initially applied, except in limited circumstances. The Company
     expects to adopt SFAS No. 157 beginning January 1, 2008. The Company is
     currently evaluating the impact that this interpretation may have on its
     consolidated financial statements.

     In September 2006, the SEC released Staff Accounting Bulletin No. 108,
     "Considering the Effects of Prior Year Misstatements when Quantifying
     Misstatements in Current Year Financial Statements" (SAB No. 108), which
     provides interpretive guidance on how the effects of the carryover or
     reversal of prior year misstatements should be considered in quantifying a
     current year misstatement. The SEC staff believes that registrants should
     quantify errors using both a balance sheet and an income statement approach
     and evaluate whether either approach results in quantifying a misstatement
     that, when all relevant quantitative and qualitative factors are
     considered, is material. The provisions of SAB No. 108 are effective for
     the Company beginning in the first quarter of 2007. The Company does not
     expect any impact to its consolidated financial statements upon adoption of
     SAB No. 108.

     In June 2006, FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty
     in Income Taxes", an interpretation of FASB Statement 109 Accounting for
     Income Taxes, was issued. FIN No. 48 describes accounting for uncertainty
     in income taxes, and includes a recognition threshold and measurement
     attribute for recognizing the effect of a tax position taken or expected to
     be taken in a tax return. FIN No. 48 is effective for fiscal years
     beginning after December 15, 2006. The Company is in the process of
     assessing the impact on its financial statements, but does not expect any
     material impact on the Company's financial condition, results of
     operations, or cash flows.

     In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation"
     was revised ("SFAS No. 123R"). SFAS No. 123R focuses primarily on
     accounting for transactions in which an entity obtains employee services in
     share-based payment transactions and requires that companies record
     compensation expense for employee stock option awards. SFAS No. 123R is
     effective for annual periods beginning after June 15, 2005. The Company
     adopted SFAS No, 123R on January 1, 2006 using the modified prospective
     method. See Note 11.

     In March 2005, FASB Interpretation No. 47, "Accounting for Conditional
     Asset Retirement Obligations - An interpretation of FASB Statement No.
     143", was issued. FIN No. 47 clarifies the term conditional asset
     retirement obligation as used in SFAS No. 143, "Accounting for Asset
     Retirement Obligations", and clarifies when an entity would have sufficient
     information to reasonably estimate the fair value of an asset retirement
     obligation. FIN No. 47 was effective for the year ended December 31, 2005,
     but did not have a material effect on the Company's financial condition,
     results of operations or cash flows.


                                       57
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

     In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
     Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and
     140". SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
     Instruments and Hedging Activities", and SFAS No. 140, "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities". This Statement also resolves issues addressed in Statement
     No. 133 Implementation Issue No. D1, "Application of Statement 133 to
     Beneficial Interests in Securitized Financial Assets." SFAS No. 155 permits
     fair value remeasurement for any hybrid financial instrument that contains
     an embedded derivative that otherwise would require bifurcation and
     clarifies which interest-only strips and principal-only strips are not
     subject to the requirements of SFAS No. 133. SFAS No. 140 is amended to
     eliminate the prohibition on a qualifying special-purpose entity from
     holding a derivative financial instrument that pertains to a beneficial
     interest other than another derivative financial instrument. SFAS No. 155
     is effective for all financial instruments acquired or issued during fiscal
     years beginning after September 15, 2006. The Company does not expect this
     statement to have a material impact on its consolidated financial
     statements.

NOTE 4 - COMPREHENSIVE INCOME (LOSS)

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

      Accumulated other comprehensive income is as follows:

<TABLE>
<CAPTION>
                                                                                             2006         2005         2004
                                                                                          ----------   ----------    ---------
                                                                                                       (in thousands)
                                                                                          -------------------------------------
<S>                                                                                          <C>       <C>           <C>
              Net income (loss) Before Foreign Currency Translation                          (3,486)   $   4,782     $    2,364
                  Other comprehensive income:                                                     -           -              -
                  Foreign Currency Translation Adjustment                                       (26)          (4)            -
                                                                                          ---------    ---------     ----------
              Comprehensive Income (Loss)                                                    (3,512)   $   4,778     $    2,364
                                                                                          =========    =========     ==========

NOTE 5 - PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following at December 31, 2006 and 2005:

                                                                                           2006          2005
                                                                                         ---------      ---------
                                                                                                 (in thousands)
                                                                                         -------------------------
              Land                                                                       $     418      $      202
              Building                                                                        1,331          1,359
              Computer equipment and software                                                 9,048          6,374
              Shop equipment                                                                  1,093            904
              Furniture and fixtures                                                            628            477
              Building and leasehold improvement                                              2,018          1,561
              Autos and trucks                                                                  260            191
                                                                                         ----------     ----------
                                                                                             14,796         11,068
              Accumulated depreciation and amortization                                      (6,536)        (4,254)
                                                                                         ----------     ----------
                                                                                              8,260          6,814
              Project controls and software upgrade in process                                  465             47
                                                                                         ----------     ----------
                  Property and equipment, net                                            $    8,725     $     6,861
                                                                                         ==========     ==========
</TABLE>


                                                                58
<PAGE>


                                       ENGLOBAL CORPORATION AND SUBSIDIARIES

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>

     The components of trade receivables as of December 31, 2006 and 2005 are as follows:

                                                                                          2006                   2005
                                                                                        --------               --------
                                                                                                (in thousands)
                                                                                        -------------------------------
<S>                                                                                     <C>                    <C>
              Amounts billed                                                            $ 43,655               $ 28,964
              Amounts billable
                billed January of the following year                                      15,689                 16,523
              Retainage                                                                    1,573                  1,265
              Less: Allowance for uncollectible accounts                                    (670)                  (503)
                                                                                        --------               --------
                  Trade receivables, net                                                $ 60,247               $ 46,249
                                                                                        ========               ========

     The components of other liabilities as of December 31, 2006 and 2005 are as follows:

                                                                                            2006             2005
                                                                                         ------------     ------------
                                                                                                (in thousands)
                                                                                         -----------------------------
              Reserve for known contingencies                                            $ 4,724                  $  --
              Accrued interest                                                               297                     144
              Federal and State Taxes Payable                                                510                     408
              Other                                                                          332                     596
                                                                                          ------                  ------
                  Other liabilities                                                       $5,863                  $1,148
                                                                                          ======                  ======

NOTE 7 - FIXED-PRICE CONTRACTS

     Costs, estimated earnings and billings on uncompleted contracts consisted of the following at December 31, 2006 and 2005:

                                                                                           2006                 2005
                                                                                         --------             --------
                                                                                                (in thousands)
                                                                                         -----------------------------
Costs incurred on uncompleted contracts                                                  $ 75,317             $ 23,426
              Estimated earnings (losses) on uncompleted contracts                         (7,390)               4,437
                                                                                         --------             --------
              Earned revenues                                                              67,927               27,863
              Less:  Billings to date                                                      63,077               27,490
                                                                                         --------             --------
                  Net costs and estimated earnings in excess of
                     billings on uncompleted contracts                                   $  4,850             $    373
                                                                                         ========             ========

              Costs and estimated earnings in excess of
                billings on uncompleted contracts                                        $  5,390             $  4,148
              Billings in excess of costs and estimated
                earnings on uncompleted contracts                                            (540)              (3,775
                                                                                         --------             --------
                  Net costs and estimated earnings in excess of
                     billings on uncompleted contracts                                   $  4,850             $    373
                                                                                         ========             ========
</TABLE>


                                                         59

<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - LINE OF CREDIT AND DEBT

     The Company has a Credit Facility with Comerica Bank ("Comerica").
     Effective July 27, 2006, the Company and Comerica entered into an amendment
     to the Company's existing Credit Facility (the "Comerica Credit Facility").
     The maturity date of the Comerica Credit Facility was extended to July 26,
     2009 and the limit on the revolving note was increased from $22 million to
     $30 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, 2006 and
     2005 was $24.0 million and $3.8 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, 2006 and 2005, respectively, were $6.0 and $12.0 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, and the Company must comply with
     an annual limitation on capital expenditures. Due to additional losses
     incurred on two fixed-price projects during the fourth quarter, the Company
     requested and was successful in obtaining a waiver and subsequent amendment
     to its credit agreement with Comerica Bank in order to meet the monthly
     fixed charge ratio. The Company was in compliance with all covenants under
     the Comerica Credit Facility as of December 31, 2006.

     Letters of credit
     -----------------
     As of December 31, 2006, the Company had no standby letters of credit
     outstanding. Standby letters of credit had previously been issued to a
     refining client to cover contractual obligations funded by the client for
     progress payments made to equipment manufacturers for major project items.
     That contractual obligation expired in August 2006.


                                       60

<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - LINE OF CREDIT AND DEBT (Continued)

     Long-term debt consisted of the following at December 31, 2006 and 2005:
<TABLE>
<CAPTION>

                                                                                             2006            2005
                                                                                          ----------      ----------
                                                                                                 (in thousands)
                                                                                          --------------------------
<S>                                                                                       <C>             <C>
         Comerica Credit Facility - Line of credit, prime (8.25% at December 31,          $   23,963      $    3,774
            2006), maturing in July 2009
         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                                                                 120             195
              Significant PEI Shareholders (See Note 19)                                           -             188
              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                                                       1,109           1,444
              InfoTech Engineering, Inc. - Note payable, interest at 5%, principal
                payments in installments of $65,000 plus interest due annually,
                maturing in December 2007                                                         75             130
              ATI Technologies - Note payable, interest at 6%, principal payments in
                installments of $30,422 including interest due monthly, maturing in
                January 2009                                                                     713               -
              Michael Lee - Note payable, interest at 5%, principal payments in
                installments of $150,000 plus interest due quarterly, maturing in July
                2010                                                                           2,100               -
              Watco Management, Inc. - Note payable, interest at 4%, principal
                payments in installments of $137,745 including interest annually,
                maturing in October 2010                                                         500               -
              Miscellaneous                                                                        -              45
                                                                                          ----------      ----------

                  Total long-term debt                                                        28,580           5,776

                  Less:  Current maturities                                                   (1,418)           (548)
                                                                                          ----------      ----------

                  Long-term debt, net of current portion                                  $   27,162      $    5,228
                                                                                          ==========      ==========
</TABLE>

     Maturities of long-term debt as of December 31, 2006, are as follows:

                                                               Maturities
                                                             ------------
                                                                 (in
                                                               thousands)
                                                             ------------
              Years Ending December 31,
                  2007                                        $    1,418
                  2008                                             1,535
                  2009                                            25,109
                  2010                                               432
                                                              ----------
                      Total long-term debt                     $  28,580
                                                              ==========


                                       61
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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,
     2006 are as follows:

                                                         Operating
                                                        ------------
                                                            (in
                                                          thousands)
                                                        ------------
              Years Ending December 31,
                  2007                                  $    4,366
                  2008                                       2,754
                  2009                                       2,165
                  2010                                       1,938
                  2011 and after                             1,423
                                                        ----------
                      Total minimum lease payments      $   12,646
                                                        ==========

     Rent expense for the years ended December 31, 2006, 2005 and 2004 was
     $5,502,000, $2,167,000 and $1,754,000, 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 $1,310,000,
     $401,000, and $221,000, respectively, for the years ended December 31,
     2006, 2005, and 2004. Effective April 1, 2006, the Company increased 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
     exert maximum efforts for the success of the Company. ENGlobal intended
     that options to purchase stock granted under the Plan would qualify as
     options granted under an "employee stock purchase plan" as defined in
     Section 423(b) of the Code. The Plan was 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, although not significant, was used to meet the Company's cash
     requirements or was 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 result, the Company elected to terminate the Plan
     effective December 31, 2005.


                                       62
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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. All stock option grants
are for a ten-year term. Stock options issued to executives and management
generally vest over a four-year period; one-fifth at grant date and one-fifth at
December 31 of each year until they are fully vested. Stock options issued to
directors vest one-half on grant date and the remaining half upon the first
anniversary of grant date. In 2006 one grant was issued fully vested following
termination of a series under which the employee held a similar amount of
shares. All stock options grants are issued at the market value of the Company's
stock on the date of the grant.

Effective January 1, 2006, the Company adopted SFAS No. 123(R). This statement
requires compensation expense relating to share-based payments to be recognized
in net income using a fair-value measurement method. Under the fair value
method, the estimated fair value of awards is charged over the requisite service
period, which is generally the vesting period. The Company elected the modified
prospective method as prescribed in SFAS No. 123(R) and therefore, prior periods
were not restated. Under the modified prospective method, this statement was
applied to new awards granted after the time of adoption.
<TABLE>
<CAPTION>

Options Granted in 2006 Fair Values, Assumptions, and Impact on Net Income
--------------------------------------- --------------------- --------------------- ---------------------- -----------------------
                                                                                                                         Weighted
                                                                                                                          Average
Series                                            $    11.97             $    9.15              $    6.83              Fair Value
                                        ---------------------    ------------------        ---------------       ----------------
<S>                                                <C>  <C>               <C> <C>               <C>  <C>
Grant Date                                         4/17/2006              6/1/2006              12/4/2006

Number of Options Granted(1)                         205,000               150,000                175,000                 530,000

Strike Price                                      $    11.97             $    9.15              $    6.83
Market Price - Date of Grant                      $    11.97             $    9.15              $    6.83

Total Compensation at Grant Date                   1,622,494               906,090                754,606               3,283,189

Compensation Recognized
  Vesting In 2006                                    630,079               453,045                754,606               1,837,729

Amount Remaining to Be
Recognized in Compensation                           992,415               453,045                      -               1,445,460

Weighted Average Fair Value
  At Grant Date                                    $    7.91              $   6.04              $    4.31                $   6.19

Assumptions

Expected Life (months)                                 70.42                 63.75                  60.00
Risk-Free Rate of Return                                4.93%                 5.05%                  5.20%
Expected Volatility                                    73.75%                74.45%                 75.06%
Expected Dividend Yield                                 0.00%                 0.00%                  0.00%
Expected Forfeiture Rate                                2.80%                 0.00%                  2.80%

(1)      The 11.97 Series had 193,000 options remaining at year end due to
         employee termination and forfeiture. Compensation recognized for 2006
         was adjusted to reflect the forfeitures.

Stock compensation expenses will be recognized over a weighted average remaining
life of 2.41 years.

                                       63

<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - STOCK OPTION PLAN (Continued)

         Amount of Compensation Expense                     2006 Grants           Pre-2006 Grants             Total Compensation
---------------------------------------------------     --------------------    ---------------------       -----------------------

                                              2006         $      1,837,729           $   338,433              $      2,176,162
                                              2007                  758,625               293,095                     1,051,719
                                              2008                  305,580               119,862                       425,441

                                              2009                  305,580                     -                       305,580
                                                           $      3,207,514           $   751,389              $      3,958,903


No compensation cost has been recognized for grants under the Option Plan prior
to 2006 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 and 2004
would have been changed to the pro forma amount indicated below:

                                                                                                    2005                2004
                                                                                              ---------------     --------------
         Net income available for common stock-as reported                                    $    4,782,381      $    2,364,389
         Compensation expenses if the fair value method had been applied to the
            grants, net of taxes                                                                    (538,273)           (112,830)
                                                                                              --------------      --------------
              Net income available for common stock-pro forma                                 $    4,244,108      $    2,251,559
                                                                                              ==============      ==============

         Net income per share-as reported
              Basic                                                                           $         0.20      $         0.10
              Diluted                                                                         $         0.19      $         0.10
         Net income available per share-pro forma
              Basic                                                                           $         0.17      $         0.10
              Diluted                                                                         $         0.17      $         0.10
</TABLE>

     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 the pro-forma years 2005 and 2004,
     dividend yield of 0%, expected volatility of 73.8% to 75.1%, and risk-free
     interest rates of 4.93% to 5.20%, 5% and 5% for each year presented, and
     expected lives of two to six years based on the simplified-method
     calculation. The maximum term of each option is ten years.

     The Company's policy for exercising options begins with the option holder
     submitting an "Exercise Notice" to the Investor Relations Officer ("IRO").
     The IRO determines the option holder's eligibility and current employment
     status. The IRO then prepares the "Option Exercise Notification Form".
     Options holders at the "Named Executive" level must be approved to exercise
     their options by the Compensation Committee. Any required notice is then
     filed with the SEC. The options holder may then purchase shares at the
     exercise price.


                                       64
<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, 2003 through December 31, 2006:
<TABLE>
<CAPTION>

                                                                                          Weighted
                                                             Number of Shares             Average
                                                                Outstanding           Exercise Price
                                                             ------------------
<S>                                                              <C>                       <C>
     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                 3.91
         Exercised                                                    (493,019)                 .98
         Canceled or expired                                           (21,164)                1.43
                                                             -----------------
     Balance at December 31, 2005                                    1,437,967                 3.07
         Granted                                                       530,000                 9.47
         Exercised                                                    (329,273)                2.22
         Canceled or expired                                          (216,200)                6.33
                                                             -----------------
     Balance at December 31, 2006                                    1,422,494                 5.16
                                                             =================

     The following table summarizes information concerning outstanding and
     exercisable Company common stock options at December 31, 2006.


                                                              Average            Options                           Un-Vested Options
                            Options             Average      Remaining         Fully-Vested         Market Value
          Exercise       Outstanding at        Exercise     Contractual      And Exercisable at          At           Balance at
           Prices       December 31,2006         Price          Life         Dece,ber 31,  2006     Grant Date     December 31, 2006
        -----------     -----------------     ----------    -----------      ------------------    -------------   -----------------

        $      0.96            104,656        $     0.96           3.8                104,656       $      0.96                   -
        $      1.00             20,000        $     1.00           4.2                 20,000       $      1.00                   -
        $      1.25             60,000        $     1.25           3.0                 60,000       $      1.25                   -
        $      1.81             40,000        $     1.81           7.5                 40,000       $      1.81                   -
        $      1.87             34,000        $     1.87           6.3                 34,000       $      1.87                   -
        $      1.97             25,000        $     1.97           7.2                 25,000       $      1.97                   -
        $      2.05            171,650        $     2.05           7.2                122,250       $      2.05              49,400
        $      2.32             40,000        $     2.32           6.4                 40,000       $      2.32                   -
        $      2.39             80,000        $     2.39           8.1                 40,000       $      2.39              40,000
        $      2.50             75,000        $     2.50           8.2                 45,000       $      2.50              30,000
        $      3.75            150,000        $     3.75           8.5                150,000       $      3.75                   -
        $      6.24              4,188        $     6.24           1.0                  4,188       $      6.24                   -
        $      6.71            100,000        $     6.71           8.9                 60,000       $      6.71              40,000
        $      6.83            175,000        $     6.83           9.9                175,000       $      6.83                   -
        $      9.15            150,000        $     9.15           9.4                 75,000       $      9.15              75,000
        $     11.97            193,000        $    11.97           9.3                 77,200       $     11.97             115,800
                        --------------                                         --------------                       ---------------
                             1,422,494                                              1,072,294                               350,200
                        ==============                                         ==============                       ===============


                                                                       65
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - STOCK OPTION PLAN (Continued)

     Total intrinsic value of options outstanding at December 31, 2006 (000's)                   $   4,738
     Total intrinsic value of options exercisable at December 31, 2006 (000's)                   $   4,031
     Total intrinsic value of options exercised during 2006 (000's)                              $   2,466
     Available for grant at December 31, 2006                                                      150,806
     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 remaining life of all options outstanding at December 31, 2006             7.9 years
</TABLE>

     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

     On May 25, 2006, the Company, through its wholly-owned subsidiary ENGlobal
     Corporate Services, Inc., purchased a one-third partnership interest in PEI
     Investments, A Texas Joint Venture ("PEI"), from Michael L. Burrow, the
     Company's President and CEO, and another one-third interest from a
     stockholder who owns less than 1% of the Company's common stock. The
     partnership interests were purchased for a total of $69,000. The remaining
     one-third interest was already held by the Company through its wholly-owned
     subsidiary EEI. PEI owns the land on which our Beaumont, Texas office
     building, destroyed by Hurricane Rita in September 2005, was located. The
     remains of the building were razed in July 2006. In September 2006, the
     Company acquired approximately 1.2 acres immediately adjacent to the former
     facility and is developing plans to construct a new facility utilizing both
     parcels of land.

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, 2006, 2005, and 2004, the Company had
     sales in the engineering segment totaling approximately $42.5 million,
     $84.8 million and $87.9 million attributable to a single customer. In 2006,
     approximately 16% of our revenues were from one client, approximately 15%
     of our revenues were from another client and another 10% were from a third
     client. During 2005 and 2004, a single customer represented approximately
     44% and 59% of total sales, respectively. As of December 31, 2006 the
     Company had amounts due from 2 customers totaling $11.7 million with 1
     customer exceeding 10% of trade receivables. At December 31, 2005, the
     Company had amounts due from two customer 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.


                                       66
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 14 - RETIREMENT OF TREASURY SHARES AND REDEEMABLE PREFERRED STOCK

     Treasury stock was recorded on our books at $592,231. Upon
     retirement/cancellation of the shares in 2006 our Paid in Capital account
     was reduced by $592,231 and the treasury stock account was credited to
     reduce it to zero.

     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. This
     class of preferred stock was eliminated by a vote of the Company's
     stockholders in June, 2006.

     A new class of capital stock of the Company, consisting of 2,000,000 shares
     of Preferred Stock, par value $0.001 per share (the "Preferred Stock") was
     approved by the Company's stockholders at its June 2006 meeting. The Board
     of Directors have the authority to approve the issuance of all or any
     shares of these shares of Preferred Stock in one or more series, to
     determine the number of shares constituting any series and to determine any
     voting powers, conversion rights, dividend rights, and other designations,
     preferences, limitations, restrictions and rights relating to such shares
     without any further action by the stockholders. The designations,
     preferences, limitations, restrictions and rights of any series of
     Preferred Stock designated by the Board of Directors will be set forth in
     an amendment to the Amended and Restated Articles of Incorporation
     ("Amended Articles") filed in accordance with Nevada law.

     Blank Check Authority
     ---------------------

     The Preferred Stock is referred to as a "blank check" because the Board of
     Directors, in their discretion, will be authorized to provide for the
     issuance of all or any shares of the stock in one or more classes or
     series, specifying the terms of the shares, subject to the limitations of
     Nevada law. The Board of Directors would make a determination as to whether
     to approve the terms and issuance of any shares of Preferred Stock based on
     its judgment as to the best interests of the Company and its stockholders.

     Reason for the Authorization of "Blank Check" Preferred Stock. The reason
     for authorizing blank check Preferred Stock is to provide the Company with
     the flexibility in connection with its future growth. Although the Company
     presently has no intentions of issuing shares of Preferred Stock,
     opportunities may arise that require the Board to act quickly, such as
     businesses becoming available for acquisition or favorable market
     conditions for the sale of a particular type of Preferred Stock. The Board
     believes that the authorization to issue Preferred Stock is advisable in
     order to enhance the Company's ability to respond to these and similar
     opportunities.


                                       67
<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, 2006, 2005 and 2004 were as follows:
<TABLE>
<CAPTION>

                                                        2006                 2005                2004
                                                  -----------------    -----------------    ---------------
                                                                       (in thousands)
                                                  ---------------------------------------------------------
<S>                                                <C>                  <C>                   <C>
         Current
              Federal                             $          1,047     $          3,016     $           975
              Foreign                                           53                    -                   -
              State                                            403                  413                 427
                                                  -----------------    ----------------     ---------------
                                                             1,503                3,429               1,402
                                                  -----------------    ----------------     ---------------
         Deferred
              Federal                                       (1,917)                (313)                254
              Foreign                                          (38)                   -                   -
              State                                           (362)                   -                   -
                                                  -----------------      --------------      --------------
                                                            (2,317)                (313)                254
                                                  -----------------      --------------      --------------

                  Total tax provision             $           (814)    $          3,116     $         1,656
                                                  =================    ================     ===============

     The components of the deferred tax asset (liability) consisted of the
following at December 31, 2006 and 2005:

                                                                              2006                 2005
                                                                        -----------------    -----------------
                                                                                   (in thousands)
                                                                         -------------------------------------
         Deferred tax asset
              Allowance for doubtful accounts                           $            255     $            171
              Net operating loss carry-forward                                       665                  474
              Accruals not yet deductible for tax purposes                         2,636                  310
              Stock Options                                                          235
              Alternative minimum tax credit carry-forward                             -                  194
                                                                        ----------------     ----------------
                                    Deferred tax assets                            3,791                1,149
                                                                        ----------------     ----------------
                           Less:  Valuation Allowance                                308                    -
                  Deferred tax assets                                              3,483                    -
                                                                        ----------------     ----------------

         Deferred tax liabilities
              Depreciation                                                          (403)                (436)
              Prepaid expenses                                                      (477)                (293)
              Goodwill                                                            (1,407)                 (40)
                                                                        ----------------     ----------------
                  Deferred tax liability                                          (2,287)                (769)
                                                                        ----------------     ----------------

                  Deferred tax asset, net                               $          1,196     $            380
                                                                        ================     ================


                                       68
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - FEDERAL INCOME TAXES (Continued)

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

                                                                              2006                 2005                2004
                                                                        -----------------    -----------------    ---------------
                                                                                             (in thousands)
                                                                        ---------------------------------------------------------
         Federal income tax expense at 34%                              $         (1,462)    $          2,685     $         1,147
         State and foreign taxes, net of tax effect                                  (16)                 273                 212
         Nondeductible expenses                                                      102                    9                  53
         Stock compensation expense                                                  530                    -                   -
         Valuation allowance                                                         308                    -                   -
         Prior year correction                                                      (169)                   -                   -
         Other                                                                      (107)                 149                 244
                                                                        ----------------     ----------------     ---------------
                                                                        $           (814)    $          3,116     $         1,656
                                                                        ================     ================     ===============
</TABLE>

     The Company has a federal net operating loss carryforward at December 31,
     2006 of approximately $1,049,000. 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 carry-forward that will be
     available for utilization in 2007 through 2010.

     The Company also has a foreign net operating loss carryforward at December
     31, 2006 of approximately $770,000. This loss is available for utilization
     in 2007 through 2016.

     The Company is unsure of its ability to fully utilize the foreign net
     operating loss. Therefore, the Company has set up a valuation allowance of
     $308,000 against the entire net operating loss.

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 Operations since the 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.

     During 2006, the Company acquired Denver-based WRC Corporation ("WRC") and
     certain assets of Analyzer Technology International, Inc. ("ATI"), and
     accounted for the acquisitions using the purchase method of accounting for
     business combinations. In both cases, the purchase price and costs
     associated with the acquisitions exceeded the preliminary estimated fair
     value of net assets acquired by approximately $5.6 million and $1.8 million
     respectively, which was preliminarily assigned to goodwill. During early
     2007, the Company completed the valuation of the intangible assets acquired
     in both the WRC and the ATI transactions and pursuant to those valuations
     has re-assigned approximately $4.0 million and $1.8 million respectively
     from goodwill to non-compete agreements and customer relationships with
     such assets being amortized over 5-6 years.

     On October 6, 2006, the Company, through its wholly-owned subsidiary,
     ENGlobal Construction Resources, Inc. ("ECR"), acquired certain assets of
     WATCO Management, Inc. ("WATCO"), a Houston-based business providing
     construction management, turnaround management, asset management, and
     project commissioning and start-up services, and related services for
     projects and facilities located in process plants. The addition of WATCO
     will provide ECR with opportunities to expand its current services to
     existing WATCO clients in addition to a complementary business allowing
     expansion of current services to both existing and future clients. The
     aggregate purchase price was $1.0 million, including $500,000 in cash and
     an unsecured promissory note in the principal amount of $500,000 payable in
     four equal annual installments, bearing interest at the rate of 4% per
     annum. The estimated fair values of the acquired assets include
     approximately $800,000 in intellectual property, $52,000 in fixed assets


                                       69
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 16 - ACQUISITIONS (Continued)

     and $148,000 in goodwill. The Company is in the process of obtaining
     third-party valuations of the intangible assets; thus the allocation of the
     purchase price is subject to adjustment.

     The Company purchased Denver-based WRC Corporation ("WRC") on May 25, 2006.
     WRC provides integrated land management, engineering, and related services
     to the pipeline, power, and transportation industries, among others. WRC
     has become a wholly-owned subsidiary of ENGlobal and will now serve as the
     Company's provider of land management, environmental compliance and
     governmental regulatory services. WRC currently has approximately 200
     employees, with revenues in the 12 months prior to the acquisition
     exceeding $20 million. The Company expects to utilize WRC's Denver facility
     as a beachhead for expansion of its services into the Rocky Mountain and
     Western U.S. regions. ENGlobal purchased all of the outstanding capital
     stock of WRC in exchange for consideration of cash, a promissory note of
     $2.4 million to be paid over four years, 175,000 shares of ENGlobal common
     stock and the repayment of certain obligations of WRC as part of the
     transaction. At June 30, 2006, goodwill from this transaction was estimated
     to be $1.5 million.

     In January 2006, one of the Company's subsidiaries, ENGlobal Systems, Inc.
     ("ESI") acquired certain assets of Analyzer Technology International, Inc.
     ("ATI"), a Houston-based analyzer systems provider of online process
     analyzer systems. ATI relocated 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 anlayzer sector, especially for
     larger downstream opportunities of foreigh grassroots projects.

     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.

     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
     constructionmanagement 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.

     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 believes that the acquisition of
     these assets enhance its capabilities related to various government and
     public sector facilities. ETS's most active sector is the Automated Fuel
     Handling Systems which serves 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% per annum 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
     five years following the acquisition. 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


                                       70
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - ACQUISITIONS (Continued)

     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.

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.



                                       71
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     NOTE 18 - SEGMENT INFORMATION  (Continued)

     Segment information for 2006, 2005 and 2004 was as follows:

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     Revenues and expenses have been reclassified between the segments to
     provide comparative results. Amounts will tie in total to prior reporting,
     however, individual segments will vary from prior reports.
<TABLE>
<CAPTION>


                                                                       Intercompany
                            Engineering      Systems     Corporate     Eliminations           Total
                                                       (in thousands)
                       -------------------------------------------------------------------------------
<S>                      <C>          <C>           <C>            <C>                 <C>
                   2006
                   ----
Net sales from external
              customers  $  278,157     $   24,933     $        -     $            -       $  303,090
Operating profit (loss)       9,084            (14)       (12,690)                 1           (3,620)
       Depreciation and
           amortization       1,419            344            512                  -            2,275
        Tangible assets      65,339         15,122          6,563                  -           87,024
               Goodwill      18,224            978              -                  -           19,202
   Capital expenditures       3,286            185            674                  -            4,145

                   2005
                   ----
Net sales from external
              customers  $  219,426     $   14,159     $        -     $            -       $  233,585
Operating profit (loss)      18,911           (851)           733            (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  $  134,778     $   14,110     $        -     $            -       $  148,888
Operating profit (loss)      10,461            636          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
</TABLE>


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.


                                       72

<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 have been
         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 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, 2006, all payments due to Significant PEI Shareholders had
     been made.

     Employment Agreements
     ---------------------
     The Company has employment agreements with certain of its executive
     officers and certain other officers, the terms of which expire in January
     2009. Such agreements provide for minimum salary levels. 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 in exchange for an extension of the
     non-compete. These agreements are renewable for one year at the Company's
     option.


                                       73
<PAGE>


                      ENGLOBAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19 - COMMITMENTS AND CONTINGENCIES (Continued)

     Litigation
     ----------
     From time to time, we are involved in various legal proceedings arising in
     the ordinary course of business alleging, among other things, breach of
     contract or tort in connection with the performance of professional
     services, the outcome of which cannot be predicted with certainty. As of
     the date of this filing, we are party to several legal proceedings that
     have been reserved for or are covered by insurance, or that, if determined
     adversely to us individually or in the aggregate, would not have a material
     adverse effect on our results of operations or financial position.

     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 $175,000 per occurrence and approximately $12.1million in aggregate in
     each policy year being covered by a separate insurance policy.

NOTE 20 - SUBSEQUENT EVENTS

     In December 2006, ENGlobal Engineering, Inc. began its plan to merge its
     Dallas, Texas operations with operations being performed at the Tulsa,
     Oklahoma and Houston, Texas offices. The transfer of activities at the
     Dallas office was the result of a decision to consolidate the Company's
     Texas-based operations while streamlining or reducing overhead costs. A
     large number of the 25 Dallas employees were offered transfers to
     ENGlobal's Tulsa, Oklahoma or Houston, Texas offices. Certain employees
     were asked to remain with the Company in Dallas through March 31, 2007 to
     allow for an orderly transfer of on-going projects.

     On February 14, 2007, the Company ceased operations through its Dallas
     office and transferred all remaining operational support to its Tulsa
     office. At the same time, the Company entered into a sublease commencing on
     March 1, 2007, for approximately 75% of the continuing lease obligations
     and sold a majority of the assets which were valued at approximately
     $90,000. The Company will calculate the remaining obligations related to
     the move from the Dallas area and record a charge during the first quarter
     of 2007. The Company estimates the charge will range from $100,000 to
     $125,000.

     On February 16, 2007, the Company, through its wholly-owned subsidiary, RPM
     Engineering, Inc. ("RPM"), entered into an Agreement to Purchase and Sell
     the property (the "Agreement"), together with the building and all
     improvements thereon located in Baton Rouge, Louisiana for approximately
     $1.9 million with 20% of purchase price being paid at closing and the
     balance self-financed for a period no longer than 60 months, amortized over
     180 months, payable in equal monthly installments and one irregular
     installment consisting of the interest and principle due at the end of the
     60 months. The interest rate is based on NY prime plus .25%, initially to
     be 8.5%. Under certain conditions prior to closing and up to sixty days for
     the last signing of the Agreement, the purchaser may be entitled to the
     return in full of any deposit held by RPM. The financed portion of the
     purchase price is secured by a first mortgage on the property. The
     Company's basis in the property, together with the building and all
     improvements is approximately $1.4 million at December 31, 2006. It is
     intended that the closing shall take place on or about April 30, 2007.


                                       74
<PAGE>


NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  For the Quarters Ended - 2006
                                            March                  June               September               December
                                         -------------          ------------        --------------           ------------
                                                            (in thousands, except per share amounts)
<S>                                      <C>             <C>       <C>         <C>       <C>           <C>
     Revenues per segment
         Engineering                     $     62,587    93.9%   $    69,752   92.9%  $     76,617    92.9%   $    69,201    87.7%
         Systems                                4,040     6.1%         5,314    7.1%         5,887     7.1%         9,692    12.3%
                                         -------------           -----------          ------------            -----------
              Total                      $     66,627   100.0%   $    75,066  100.0%  $     82,504   100.0%   $    78,893   100.0%
                                         =============           ===========          ============            ===========

     Gross profit per segment
         Engineering                     $      7,796    12.5%   $    10,189   14.6%  $      4,426     5.8%   $     1,715     2.5%
         Systems                                  426    10.5%   $       539   10.1%           123     2.1%         1,050    10.8%
                                         -------------           -----------          ------------            -----------
              Total                      $      8,222    12.3%   $    10,728   14.3%  $      4,549     5.5%   $     2,765     3.5%
                                         =============           ===========          ============            ===========

         Net income (loss)               $      1,234            $     2,331          $     (1,570)           $    (5,481)
                                         =============           ===========          ============            ===========

     Earnings per share - basic          $       0.05            $      0.09          $      (0.06)           $     (0.21)

     Earnings per share - diluted        $       0.05            $      0.09          $      (0.06)           $     (0.21)


                                                                  For the Quarters Ended - 2005
                                            March                  June               September               December
                                         -------------          ------------        --------------           ------------
                                                            (in thousands, except per share amounts)
     Revenues per segment
         Engineering                     $     41,226    92.4%  $     54,962   92.5%  $     55,923   94.4%   $    67,315    95.8%
         Systems                                3,403     7.6%         4,457    7.5%         3,343    5.6%         2,956     4.2%
                                         ------------           ------------          ------------           -----------
              Total                      $     44,629   100.0%  $     59,419  100.0%  $     59,266  100.0%   $    70,271   100.0%
                                         ============           ============          ============           ===========

     Gross profit per segment
         Engineering                     $      5,405    13.1%  $      6,925   12.6%  $      7,635   13.7%   $     7,197    10.7%
         Systems                                  294     8.6%           354    7.9%           203    6.1%           260     8.8%
                                         ------------           ------------          ------------           -----------
              Total                      $      5,699    12.8%  $      7,279   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
</TABLE>

     Note: Previously, within the Systems Segment, ESI provided products and
     services supporting the advanced automation and integrated controls fields.
     In January 2006, EAG assumed responsibility for these services, which
     resulted in a move of this division of ESI to the Engineering Segment.
     Revenues and expenses have been reclassified between the segments to
     provide comparative results. Amounts will tie in total to prior reporting,
     however, individual segments will vary from prior reports.


                                       75
<PAGE>
<TABLE>
<CAPTION>

                                                          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

<S>                                                  <C>              <C>               <C>              <C>
     For year ended December 31, 2006               $         503    $          251    $          (84)  $          670

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

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

</TABLE>

                                                                  76
<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

Disclosure controls and procedures are controls and other procedures of a
registrant designed to ensure that information required to be disclosed by the
registrant in the reports that it files or submits under the Exchange Act is
properly recorded, processed, summarized, and reported, within the time periods
specified in the Securities and Exchange Commission's ("SEC") rules and forms.
Disclosure controls and procedures include processes to accumulate and evaluate
relevant information and communicate such information to a registrant's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosures.

We evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2006, as required by Rule 13a-15 of
the Exchange Act. As described below, under "Management's Report on Internal
Control Over Financial Reporting," material weaknesses were identified in our
internal control over financial reporting as of December 31, 2006, relating to
our control environment, information technology access, accounting system,
purchases and expenditures, fixed-price contract information, and revenue
recognition. Based on the evaluation described above, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of December 31,
2006, our disclosure controls and procedures were not effective to ensure (1)
that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized, and reported, within
the time periods specified in the SEC's rules and forms, and (2) information
required to be disclosed by us in our reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.

     (b) Management's Report on Internal Control over Financial Reporting

Effective June 30, 2006, ENGlobal Corporation met the definition of "accelerated
filer," as described by Rule 12b-2 of the Exchange Act. As an accelerated filer,
we are required by the Sarbanes-Oxley Act of 2002 to include an assessment of
our internal control over financial reporting for the year ended December 31,
2006. Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with generally accepted
accounting principles.

Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk.

A material weakness in internal control over financial reporting (as defined in
Auditing Standard No. 2 of the Public Company Accounting Oversight Board) is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. A significant
deficiency is a control deficiency, or combination of control deficiencies,


                                       77
<PAGE>


ITEM 9A. CONTROLS AND PROCEDURES (continued)

that adversely affects a company's ability to initiate, authorize, record,
process, or report external financial data reliably in accordance with generally
accepted accounting principles, such that there is more than a remote likelihood
that a misstatement of the company's annual or interim financial statements that
is more than inconsequential will not be prevented or detected.

Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2006, the end of the fiscal period
covered by this report, but management did not complete its assessment until
March 2, 2007. Due to the lack of adequate time to permit Hein to audit
management's assessment, Hein is unable to render an opinion on our assessment
of the effectiveness of our internal control over financial reporting as of
December 31, 2006. Accordingly, management has identified this as a material
weakness. Management's assessment process did not conclude in adequate time to
permit Hein to audit management's assessment due to a number of factors,
including: (i) our failure to prepare and plan for a timely completion of
management's assessment, including adding the resources necessary to do so; and
(ii) our failure to ensure that our accounting department was adequately staffed
and sufficiently trained to meet deadlines.

Management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006, using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control--Integrated Framework. In assessing the effectiveness of our internal
control over financial reporting, management identified the following additional
material weaknesses in internal control over financial reporting as of December
31, 2006:

          1.   Deficiencies in the Company's Control Environment. Our control
               environment did not sufficiently promote effective internal
               control over financial reporting throughout the organization.
               Specifically, we had a shortage of support and resources in our
               accounting department, which resulted in insufficient: (i)
               documentation and communication of our accounting policies and
               procedures; and (ii) internal audit processes of our accounting
               policies and procedures.

          2.   Deficiencies in the Company's Information Technology Access
               Controls. We did not maintain effective controls over preventing
               access by unauthorized personnel to end-user spreadsheets and
               other information technology programs and systems.

          3.   Deficiencies in the Company's Accounting System Controls. We did
               not effectively and accurately close the general ledger in a
               timely manner and we did not provide complete and accurate
               disclosure in our notes to financial statements, as required by
               generally accepted accounting principles.

          4.   Deficiencies in the Company's Controls Regarding Purchases and
               Expenditures. We did not maintain effective controls over the
               tracking of our commitments and actual expenditures with
               third-party subsidiaries on a timely basis.

          5.   Deficiencies in the Company's Controls Regarding Fixed-Price
               Contract Information. We did not maintain effective controls over
               the complete, accurate, and timely processing of information
               relating to the estimated cost of fixed-price contracts.

          6.   Deficiencies in the Company's Revenue Recognition Controls. We
               did not maintain effective policies and procedures relating to
               revenue recognition of fixed price contracts, which accounted for
               approximately 11% of the Company's revenues in 2006.

          7.   Deficiencies in the Company's Controls over Income Taxes. We did
               not maintain sufficient internal controls to ensure that amounts
               provided for in our financial statements for income taxes
               accurately reflected our income tax position as of December 31,
               2006.


                                       78
<PAGE>


ITEM 9A. CONTROLS AND PROCEDURES (continued)

As a result of the material weaknesses described above, our management concluded
that we did not maintain effective internal control over financial reporting as
of December 31, 2006, based on the criteria established by COSO.

     (c) Changes in Internal Controls Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth
quarter of fiscal 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Management and
the Audit Committee of the Company's Board of Directors have begun to develop
remedial measures to address the internal control deficiencies identified above.
The Company will monitor the effectiveness of planned actions and will make any
other changes and take such other actions as management or the Audit Committee
determines to be appropriate.

     (d) Remediation Initiatives

During 2007, we plan to implement a number of remediation measures to address
the material weaknesses described above. The Company's remediation plans
include:

          1.   We plan to hire additional personnel to assist us with
               documenting and communicating our accounting policies and
               procedures to ensure the proper and consistent application of
               those policies and procedures throughout the Company. Recruitment
               for this position(s) has begun and the selection process is
               expected to be completed during the second quarter of 2007.

          2.   We plan to implement formal processes requiring periodic
               self-assessments, independent tests, and reporting of our
               personnel's adherence to our accounting policies and procedures.

          3.   We plan to design effective policies and procedures to control
               security of and access to spreadsheet information. If necessary,
               we will also consider implementing a software solution with
               automatic control checkpoints for day-to-day business processes.

          4.   We plan to (i) require additional training for our current
               accounting personnel; (ii) to hire additional accounting
               personnel to enable the allocation of job functions among a
               larger group of accounting staff; (iii) to engage outside
               consultants with technical accounting expertise, as needed; and
               (iv) to consider restructuring our accounting department, each to
               increase the likelihood that our accounting personnel will have
               the resources, experience, skills, and knowledge necessary to
               effectively perform the accounting system functions assigned to
               them.

          5.   We plan to improve procurement and operational efficiencies by
               implementing a software system and a matrix organization to more
               completely, accurately, and timely track commitments on
               Company-wide purchase and expenditure transactions.

          6.   We plan to improve revenue recognition policies and procedures
               relating to fixed-price contracts by evaluating the level of
               economic success achieved by past fixed-price contracts and by
               stressing throughout the Company the importance of (i) accurately
               estimating costs, (ii) timely updating cost estimates to reflect
               the accuracy of the cost savings, (iii) accurately estimating
               expected profit, (iv) timely identifying when a project's scope
               changes, (v) promptly reporting man hours and costs in excess of
               those originally estimated; and (vi) closely scrutinizing the bid
               process.


                                       79
<PAGE>


ITEM 9A. CONTROLS AND PROCEDURES (continued)

          7.   We plan to train personnel to effectively implement and evaluate
               the overall design of the Company's fixed-price project control
               processes. Specifically, we plan to enhance and tighten controls
               as they relate to the initial bid process and the attendant
               recognition and management of risk by only bidding on large
               procurement and construction activities on a cost plus basis.

Management recognizes that many of these enhancements require continual
monitoring and evaluation for effectiveness. The development of these actions is
an iterative process and will evolve as the Company continues to evaluate and
improve our internal controls over financial reporting.

Management will review progress on these activities on a consistent and ongoing
basis at the Chief Executive Officer and senior management level in conjunction
with our Audit Committee. We also plan to take additional steps to elevate
Company awareness about and communication of these important issues through
formal channels such as Company meetings, departmental meetings, and training.


                                       80
<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 2007 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, and Report of the
              Compensation Committee on Executive Compensation and Comparative
              Stock Performance Graph contained in our definitive proxy
              statement for our 2007 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 2007 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 2007 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 2007 annual
              meeting of stockholders to be filed with the SEC pursuant to
              Regulation 14A under the Exchange Act is incorporated herein by
              reference.


                                       81
<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.

       (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


                                       82
<PAGE>

<TABLE>
<CAPTION>

                                                            EXHIBIT INDEX

                                                                                    Incorporated by Reference to:
------------ ---------------------------------------------------- ------------ ----------------------------------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
Exhibit No.                      Description                        Form or    Exhibit No.  Filing Date     SEC File
                                                                   Schedule                   with SEC       Number
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
<S>     <C>                                                         <C>           <C>       <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 Merger     S-4/A        2.24      11/6/01       333-68288
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
        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 29,       S-3          4.5      10/31/05      333-129336
             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  1998 Incentive Plan                                      S-8         10.49     8/24/05       333-127803
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
       10.4  Amendment No. 1 to 1998 Incentive Plan                   S-8        10.65A     6/9/03        333 - 105966
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
       10.5  Amendment No. 2 to the 1998 Incentive Plan               S-8        10.65A     6/9/03        333 - 105966
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
       10.6  Amendment No. 3 to the 1998 Incentive Plan               S-8         10.52     8/24/05       333-127803
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
       10.7  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
       10.8  Lease Agreement between Petrocon Engineering, Inc.      10-Q         10.66     11/14/02      001-14217
             and Phelan Investments on July 25, 2002
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------


                                                                83

<PAGE>


                                                                                    Incorporated by Reference to:
------------ ---------------------------------------------------- ------------ ----------------------------------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
Exhibit No.                      Description                        Form or    Exhibit No.  Filing Date     SEC File
                                                                   Schedule                   with SEC       Number
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
       10.9  Lease Agreement between Petro-Chem Engineering and      10-Q         10.72     8/14/03       001-14217
             ENGlobal Engineering, Inc. dated June 4, 2003
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.10  Contract between BASF and ENGlobal Engineering,         10-Q         10.73     8/14/03       001-14217
             Inc. dated June 9, 2003
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.11  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.12  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.13  Second Amendment of the ENGlobal Engineering, Inc.      10-K         10.77     3/30/04       001-14217
             401(k) Plan dated January 1, 2004 (formerly called
             the "Petrocon Engineering, Inc. 401(k) Plan")
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.14  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.15  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.16  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.17  Master Revolving Note by and between Comerica Bank       8-K         10.3      8/9/04        001-14217
             and ENGlobal Corporation and its subsidiaries
             dated July 27, 2004
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      10.18  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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.19  Option to Purchase Share Agreement between Yong
             Choy Lin @ Yong Chai Lin and ENGlobal Engineering,
             Inc. effective September 8, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.20  Management Agreement between ENGlobal Engineering,
             Inc. and SchmArt Technologies Sdn. Bhd effective
             September 8, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.21  First Amendment of the ENGlobal 401(k) Plan
             effective December 21, 2001
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.22  Amended and Restated ENGlobal 401(k) Plan
             effective October 1, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.23  Second Amendment to the ENGlobal 401(k) Plan
             effective April 1, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.24  Third Amendment to the ENGlobal 401(k) Plan
             effective July 1, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------


                                                                84
<PAGE>


                                                                                    Incorporated by Reference to:
------------ ---------------------------------------------------- ------------ ----------------------------------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
Exhibit No.                      Description                        Form or    Exhibit No.  Filing Date     SEC File
                                                                   Schedule                   with SEC       Number
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.25  Regulations Amendment to the ENGlobal 401(k) Plan
             effective January 1, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.26  First Amendment to the Lease Agreement between
             Oral Roberts University and ENGlobal Engineering,
             Inc. dated April 5, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.27  Second Amendment to the Lease Agreement between
             Oral Roberts University and ENGlobal Engineering,
             Inc. dated June 15, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.28  Third Amendment to the Lease Agreement between
             Oral Roberts University and ENGlobal Engineering,
             Inc. dated December 28, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.29  Fourth Amendment to the Lease Agreement between
             Oral Roberts University and ENGlobal Engineering,
             Inc. dated February 27, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.30  Fifth Amendment to the Lease Agreement between
             Oral Roberts University and ENGlobal Engineering,
             Inc. dated July 28, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.31  First Amendment to Credit Agreement by and among Comerica Bank and
             ENGlobal Corporation and its subsidiaries dated September 30, 2004
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.32  Second Amendment to Credit Agreement by and among Comerica Bank and
             ENGlobal Corporation and its subsidiaries dated April 1, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.33  Third Amendment to Credit Agreement by and among Comerica Bank and
             ENGlobal Corporation and its subsidiaries dated July 31, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.34  Fourth Amendment to Credit Agreement by and among Comerica Bank and
             ENGlobal Corporation and its subsidiaries dated December 31, 2005
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.35  Fifth Amendment to Credit Agreement by and among Comerica Bank and
             ENGlobal Corporation and its subsidiaries dated July 26, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.36  Sixth Amendment to Credit Agreement by and among Comerica Bank and
             ENGlobal Corporation and its subsidiaries effective December 31,
             2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.37  ENGlobal Corporation Key Manager Incentive Plan
             effective January 1, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.38  ENGlobal Corporation Executive Level Incentive
             Plan effective January 1, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------


                                                                85

<PAGE>


                                                                                    Incorporated by Reference to:
------------ ---------------------------------------------------- ------------ ----------------------------------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
Exhibit No.                      Description                        Form or    Exhibit No.  Filing Date     SEC File
                                                                   Schedule                   with SEC       Number
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.39  ENGlobal Corporation Key Executive Employment
             Agreement - William A. Coskey effective January 1,
             2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.40  ENGlobal Corporation Key Executive Employment
             Agreement - Michael L.  Burrow effective January
             1, 2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.41  ENGlobal Corporation Key Executive Employment
             Agreement - Robert W. Raiford effective January 1,
             2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
     *10.42  ENGlobal Corporation Key Executive Employment
             Agreement - Michael M. Patton effective January 1,
             2006
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
      *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
------------ ---------------------------------------------------- ------------ ------------ ------------- -------------
</TABLE>


*  Filed herewith


                                       86
<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 15, 2007
                                        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


                                       87