<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005 OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM

                          ____________ TO ____________

                         COMMISSION FILE NUMBER 0-13667

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

<TABLE>
<S>                                                          <C>
                DELAWARE                                         22-2677298
     (State or other jurisdiction of                           (I.R.S. Employer
      incorporation or organization)                         Identification No.)
</TABLE>

<TABLE>
<S>                                                                <C>
     1386 BEULAH ROAD, BUILDING 801
        PITTSBURGH, PENNSYLVANIA                                    15235
(Address of principal executive offices)                          (Zip Code)
</TABLE>

                                  412-243-3200
              (Registrant's telephone number, including area code)

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

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

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

As of September 12, 2005, there were 15,052,801 shares of the registrant's
common stock outstanding.

<PAGE>

                    PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
PART I. FINANCIAL INFORMATION

   Item 1. Consolidated Financial Statements and Notes to Consolidated
           Financial Statements

      (a) Condensed Consolidated Balance Sheets as of July 31, 2005
          (unaudited) and January 31, 2005                                    3

      (b) Consolidated Statements of Operations for the Three Months
          Ended July 31, 2005 and 2004 (unaudited)                            4

      (c) Consolidated Statements of Operations for the Six Months Ended
          July 31, 2005 and 2004 (unaudited)                                  5

      (d) Consolidated Statements of Cash Flows for the Six Months Ended
          July 31, 2005 and 2004 (unaudited)                                  6

      (e) Notes to Consolidated Financial Statements (unaudited)              7

   Item 2. Management's  Discussion  and  Analysis of Financial Condition
           and Results of Operations                                         16

   Item 3. Quantitative and Qualitative Disclosures About Market Risk        20

   Item 4. Controls and Procedures                                           20

PART II. OTHER INFORMATION

   Item 1. Legal Proceedings                                                 22

   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds       22

   Item 6. Exhibits                                                          22

   Signature and Certification                                               23
</TABLE>


                                        2

<PAGE>

                          PART I. FINANCIAL INFORMATION
                    PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                       JULY 31,    JANUARY 31,
                                                         2005          2005
                                                     -----------   -----------
                                                     (UNAUDITED)
<S>                                                  <C>           <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents                            $   150,000   $   333,000
Accounts receivable - net of allowance of $214,000    18,663,000    14,907,000
Costs and estimated earnings in excess of billings
   on uncompleted contracts                            4,502,000     4,940,000
Inventory                                                735,000       590,000
Prepaid income taxes                                     186,000            --
Other current assets                                     772,000       226,000
                                                     -----------   -----------
TOTAL CURRENT ASSETS                                  25,008,000    20,996,000
                                                     -----------   -----------
PROPERTY, PLANT AND EQUIPMENT                          9,137,000     8,565,000
Less: accumulated depreciation                        (7,521,000)   (7,227,000)
                                                     -----------   -----------
                                                       1,616,000     1,338,000
                                                     -----------   -----------
GOODWILL                                               1,571,000     1,338,000
OTHER ASSETS                                             224,000       270,000
                                                     -----------   -----------
TOTAL ASSETS                                         $28,419,000   $23,942,000
                                                     ===========   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                     $ 4,812,000   $ 4,145,000
Billings in excess of costs and estimated earnings
   on uncompleted contracts                            2,389,000     2,222,000
Current portion of long-term debt                         92,000       192,000
Current income tax liabilities                                --       305,000
Accrued liabilities                                    3,133,000     2,937,000
                                                     -----------   -----------
TOTAL CURRENT LIABILITIES                             10,426,000     9,801,000
LONG-TERM DEBT                                         1,595,000     5,013,000
SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK        2,164,000            --
                                                     -----------   -----------
TOTAL LIABILITIES                                     14,185,000    14,814,000
                                                     -----------   -----------
STOCKHOLDERS' EQUITY
Common stock                                             296,000       260,000
Common stock warrants                                  1,750,000       153,000
Additional paid-in capital                            12,713,000     9,940,000
Deficit                                                 (487,000)   (1,187,000)
Less treasury stock, at cost                             (38,000)      (38,000)
                                                     -----------   -----------
TOTAL STOCKHOLDERS' EQUITY                            14,234,000     9,128,000
                                                     -----------   -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY           $28,419,000   $23,942,000
                                                     ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       3

<PAGE>

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

<TABLE>
<CAPTION>
                                                    FOR THE THREE MONTHS
                                                       ENDED JULY 31,
                                                 -------------------------
                                                     2005          2004
                                                 -----------   -----------
<S>                                              <C>           <C>
CONTRACT REVENUE                                 $16,320,000   $15,173,000
CONTRACT COSTS                                    13,836,000    13,234,000
                                                 -----------   -----------
Gross margin                                       2,484,000     1,939,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES       1,663,000     1,515,000
                                                 -----------   -----------
Income from operations                               821,000       424,000
OTHER INCOME (EXPENSE):
Interest expense                                     (97,000)      (93,000)
Interest expense for preferred dividends and
   accretion of discount                             (80,000)           --
Equity in income (losses) of equity investment            --       (14,000)
Interest and other income                              5,000         3,000
                                                 -----------   -----------
                                                    (172,000)     (104,000)
                                                 -----------   -----------
Income before income taxes                           649,000       320,000
INCOME TAX PROVISION                                (275,000)      (25,000)
                                                 -----------   -----------
NET INCOME                                       $   374,000   $   295,000
                                                 ===========   ===========
PER SHARE OF COMMON STOCK:
BASIC                                            $      0.03   $      0.03
                                                 ===========   ===========
DILUTIVE                                         $      0.03   $      0.02
                                                 ===========   ===========
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING      13,620,000    10,886,000
   AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
   OUTSTANDING                                     1,096,000     1,390,000
                                                 -----------   -----------
AVERAGE COMMON SHARES AND DILUTIVE COMMON
   EQUIVALENTS OUTSTANDING FOR EARNINGS PER
   SHARE CALCULATION                              14,716,000    12,276,000
                                                 ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       4

<PAGE>

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

<TABLE>
<CAPTION>
                                                            FOR THE SIX MONTHS
                                                              ENDED JULY 31,
                                                        -------------------------
                                                            2005          2004
                                                        -----------   -----------
<S>                                                     <C>           <C>
CONTRACT REVENUE                                        $30,271,000   $25,971,000
CONTRACT COSTS                                           25,487,000    22,347,000
                                                        -----------   -----------
Gross margin                                              4,784,000     3,624,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES              3,400,000     3,016,000
GAIN ON SALE OF FIXED ASSETS                                     --       110,000
                                                        -----------   -----------
Income from operations                                    1,384,000       718,000

OTHER INCOME (EXPENSE):
Interest expense                                           (197,000)     (182,000)
Interest expense for preferred dividends and
   accretion of discount                                    (80,000)           --
Gain on sale of equity investment                            48,000            --
Equity in income (losses) of equity investment                4,000       (16,000)
Interest and other income                                    19,000         6,000
                                                        -----------   -----------
                                                           (206,000)     (192,000)
                                                        -----------   -----------
Income before income taxes                                1,178,000       526,000
INCOME TAX PROVISION                                       (478,000)      (42,000)
                                                        -----------   -----------
NET INCOME                                              $   700,000   $   484,000
                                                        ===========   ===========
PER SHARE OF COMMON STOCK:
BASIC                                                   $      0.05   $      0.05
                                                        ===========   ===========
DILUTIVE                                                $      0.05   $      0.04
                                                        ===========   ===========
AVERAGE COMMON SHARE EQUIVALENTS OUTSTANDING             13,307,000    10,595,000
   AVERAGE DILUTIVE COMMON SHARE EQUIVALENTS
   OUTSTANDING                                            1,205,000     1,287,000
                                                        -----------   -----------
AVERAGE COMMON SHARES AND DILUTIVE COMMON EQUIVALENTS
   OUTSTANDING FOR EARNINGS PER SHARE CALCULATION        14,512,000    11,882,000
                                                        ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                        5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                             FOR THE SIX MONTHS
                                                                               ENDED JULY 31,
                                                                         -------------------------
                                                                             2005          2004
                                                                         -----------   -----------
<S>                                                                      <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                               $   700,000   $   484,000
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH:
   Depreciation and amortization                                             352,000       341,000
   Interest expense for preferred dividends and accretion of discount         80,000            --
   Gain on sale of fixed assets and equity investment                        (48,000)     (110,000)
   Stock based compensation                                                       --         6,000
   Equity in (income) losses of equity investment                             (4,000)       16,000
CHANGES IN ASSETS AND LIABILITIES
   OTHER THAN CASH:
   Accounts receivable                                                    (3,756,000)   (2,161,000)
   Costs and estimated earnings in excess of billings
      on uncompleted contracts                                               438,000    (1,404,000)
   Inventory                                                                (145,000)     (150,000)
   Prepaid income taxes                                                     (186,000)           --
   Other current assets                                                      413,000       318,000
   Accounts payable                                                          687,000     1,618,000
   Billings in excess of costs and estimated earnings
      on uncompleted contracts                                               167,000       879,000
   Current income tax liabilities                                           (305,000)      (11,000)
   Accrued liabilities                                                       (74,000)       97,000
                                                                         -----------   -----------
TOTAL ADJUSTMENT                                                          (2,761,000)     (814,000)
                                                                         -----------   -----------
NET CASH USED BY OPERATING ACTIVITIES                                     (1,681,000)      (77,000)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property, plant and equipment                                (564,000)     (331,000)
   Proceeds from sale of equity investment and fixed assets                   50,000       131,000
   Additional investment in joint venture                                    (18,000)      (15,000)
   Increase in other assets                                                  (12,000)      (24,000)
                                                                         -----------   -----------
NET CASH USED BY INVESTING ACTIVITIES                                       (544,000)     (239,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from private placement of common and preferred stock           6,443,000       473,000
   Proceeds from debt                                                        240,000       750,000
   Proceeds from exercise of stock options                                    47,000       115,000
   Redemption of preferred stock                                                  --       (13,000)
   Payment of accrued earnout liability                                     (294,000)     (140,000)
   Payment of premium financing                                             (628,000)     (468,000)
   Principal payments on debt                                             (3,766,000)     (411,000)
                                                                         -----------   -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                  2,042,000       306,000
                                                                         -----------   -----------
Change in Cash and Cash Equivalents                                         (183,000)      (10,000)
Cash and Cash Equivalents, Beginning of Period                               333,000        36,000
                                                                         -----------   -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                 $   150,000   $    26,000
                                                                         ===========   ===========
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY:
INCREASE IN GOODWILL AND ACCRUED LIABILITIES FOR EARNOUT LIABILITY       $   233,000   $   419,000
                                                                         ===========   ===========
FINANCING OF ANNUAL INSURANCE PREMIUM                                    $   959,000   $   891,000
                                                                         ===========   ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                        6

<PAGE>

                    PDG ENVIRONMENTAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     FOR THE SIX MONTHS ENDED JULY 31, 2005
                                   (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The consolidated financial statements include PDG Environmental, Inc. (the
"Corporation" or "Company") and its wholly-owned subsidiaries. In the quarter
ending April 30, 2002, the Corporation formed IAQ Training Institute ("IAQ
venture") a 50/50 joint venture to provide training in mold awareness and
remediation. The IAQ venture was accounted for by the equity method of
accounting whereby the Corporation records its proportionate shares of the IAQ
venture's income or loss as a component of Other Income(Expense). The
Corporation sold its investment in IAQ venture in the quarter ended April 30,
2005.

The condensed consolidated financial statements as of and for the three and six
month periods ended July 31, 2005 and 2004 are unaudited and are presented
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Accordingly, these condensed consolidated financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K, as
amended, for the year ended January 31, 2005 and the Company's Quarterly Report
on Form 10-Q, as amended, for the quarter ended April 30, 2005. In the opinion
of management, the accompanying condensed consolidated financial statements
reflect all adjustments (which are of a recurring nature) necessary for the fair
statement of the results for the interim periods.

Due to variations in the environmental and specialty contracting industry, the
results of operations for any interim period are not necessarily indicative of
the results expected for the full fiscal year.

Certain prior year amounts have been reclassified to conform to the current year
presentation.

NOTE 2 - FEDERAL INCOME TAXES

A federal income tax provision of $376,000 was provided for the six month period
ended July 31, 2005.

During the six month period ended July 31, 2004, the Corporation made no
provision for federal income taxes due to the utilization of net operating loss
carryforwards for financial reporting purposes.

At July 31, 2005 a valuation allowance for deferred taxes of $440,000 has been
provided due to the uncertainty as to the future realization of those deferred
income tax assets. While the Company has recently been profitable, the federal
net operating loss carryforward was only fully utilized in the quarter ended
January 31, 2005 and the Company's operations are subject to a high degree of
volatility due to the nature of its business. Management still believes that the
allowance is reasonable and will evaluate it prospectively at the end of each
quarter.

State income tax provisions of $102,000 and $42,000 were made in the current and
prior year periods, respectively, due to income in the current and prior year.

Income taxes paid by the Corporation for the six months ended July 31, 2005 and
2004 totaled approximately $624,000 and $37,000, respectively.

NOTE 3 - TERM DEBT

On August 3, 2000, the Corporation closed on a $4.7 million credit facility with
Sky Bank, an Ohio banking association, consisting of a 3-year $3 million
revolving line of credit, a 5-year $1 million equipment note, a 15-year $0.4
million mortgage and a 5-year $0.3 million commitment for future equipment
financing. The new financing repaid all of the Company's existing debt.

The line of credit, equipment note and commitment for future equipment financing
were initially at an interest rate of prime plus 1%. The mortgage is at an
interest rate of 9.15% fixed for three years and is then adjusted to 2.75% above
the 3-year Treasury Index every three years.


                                       7

<PAGE>

In January 2004 Sky Bank approved a permanent $500,000 increase in the Company's
line of credit to $5.5 million and in July 2004 Sky Bank approved a permanent
$1,000,000 increase in the Company's line of credit to $6.5 million

In April 2004 Sky Bank extended the maturity date on the line of credit until
June 6, 2006.

In October 2004 and December 2004 Sky Bank approved a temporary $1,000,000 and
$500,000, respectively, increase in the Company's line of credit to $8.0 million
until June 30, 2005. The increase in the line of credit was required to fund the
increase in revenues generated by the hurricane recovery work beginning in the
third quarter of fiscal 2005.

On May 18, 2005 Sky Bank permanently increased the line of credit to $8 million
and extended the maturity date to June 6, 2007. Additionally, the interest rate
on the line of credit was lowered to prime plus 1/4% and the Chief Executive
Officer's limited personnel guarantee was removed.

In May 2005 Sky Bank also approved an equipment financing note of a maximum of
$400,000 with a four year term and a 7.25% interest rate. As of July 31, 2005,
$240,000 of equipment had been financed on this equipment note.

The majority of the Corporation's property and equipment are pledged as security
for the above obligations.

On July 31, 2005, the balance on the line of credit was $1,100,000 with an
unused availability of $6,900,000.

The Corporation paid interest costs totaling approximately $223,000 and $221,000
during the six months ended July 31, 2005 and 2004, respectively.

On September 8, 2005 Sky Bank permanently increased the line of credit to $11
million, subject to finalization of the loan documentation. Additionally, the
interest rate on the line of credit may be lowered from the current prime plus
1/4% rate to a London Interbank Offer Rate ("LIBOR") based pricing upon the
attainment of certain operating leverage ratio. The initial LIBOR rate would be
LIBOR plus 2.75% but would decrease to LIBOR plus 2.25% upon the attainment of
improved operating leverage ratios.

NOTE 4 - PREFERRED STOCK

In March 2004 in conjunction with the private placement of the Company's common
stock, as discussed in Note 8, the remaining 6,000 shares of preferred stock
were converted into 24,000 shares Common Stock with the accrued but unpaid
dividends paid in cash.

NOTE 5 - NET EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                             FOR THE THREE MONTHS
                                                                ENDED JULY 31,
                                                          -------------------------
                                                              2005          2004
                                                          -----------   -----------
<S>                                                       <C>           <C>
NUMERATOR:
Net Income                                                $   374,000   $   295,000
                                                          ===========   ===========

DENOMINATOR:
Denominator for basic earnings per share--weighted
   average shares                                          13,620,000    10,886,000
Effect of dilutive securities:
   Convertible Preferred Stock                                     --            --
</TABLE>


                                       8

<PAGE>

<TABLE>
<S>                                                       <C>           <C>
   Warrants                                                   119,000       234,000
   Employee Stock Options                                     977,000     1,156,000
                                                          -----------   -----------
                                                            1,096,000     1,390,000
                                                          -----------   -----------
   Denominator for diluted earnings per share--adjusted
      weighted-average shares and assumed conversions      14,716,000    12,276,000
                                                          ===========   ===========
BASIC EARNINGS PER SHARE                                  $      0.03   $      0.03
                                                          ===========   ===========
DILUTED EARNINGS PER SHARE                                $      0.03   $      0.02
                                                          ===========   ===========
</TABLE>

At July 31, 2005 and 2004; 561,000 and 60,000 options, and 2,782,000 and
2,000,000 warrants, respectively, were not included in the calculation of
dilutive earnings per share as their inclusion would have been antidilutive. The
conversion of the Series C Redeemable Convertible Preferred Stock is not
included in the calculation of dilutive earnings per share as their inclusion
would have been antidilutive.

<TABLE>
<CAPTION>
                                                              FOR THE SIX MONTHS
                                                                ENDED JULY 31,
                                                          -------------------------
                                                              2005          2003
                                                          -----------   -----------
<S>                                                       <C>           <C>
NUMERATOR:
Net Income                                                $   700,000   $   484,000
                                                          ===========   ===========

DENOMINATOR:
Denominator for basic earnings per share--weighted
   average shares                                          13,307,000    10,595,000
Effect of dilutive securities:
   Convertible Preferred Stock                                     --            --
   Warrants                                                   138,000       180,000
   Employee Stock Options                                   1,067,000     1,107,000
                                                          -----------   -----------
                                                            1,205,000     1,287,000
                                                          -----------   -----------
   Denominator for diluted earnings per share--adjusted
      weighted-average shares and assumed conversions      14,512,000    11,882,000
                                                          ===========   ===========
BASIC EARNINGS PER SHARE                                  $      0.05   $      0.05
                                                          ===========   ===========
DILUTED EARNINGS PER SHARE                                $      0.05   $      0.04
                                                          ===========   ===========
</TABLE>

At July 31, 2005 and 2004; 561,000 and 60,000 options, and 2,000,000 and
2,000,000 warrants, respectively, were not included in the calculation of
dilutive earnings per share as their inclusion would have been antidilutive. The
conversion of the Series C Redeemable Convertible Preferred Stock is not
included in the calculation of dilutive earnings per share as their inclusion
would have been antidilutive.

NOTE 6 - STOCK OPTIONS

The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.


                                       9

<PAGE>

<TABLE>
<CAPTION>
                                                          FOR THE THREE MONTHS
                                                             ENDED JULY 31,
                                                          --------------------
                                                            2005       2004
                                                          --------   --------
<S>                                                       <C>        <C>
Net income, as reported                                   $374,000   $295,000
Deduct: Total stock-based employee compensation expense
   determined under fair value method for all awards,
   net of related tax effects of a $5,000 benefit and
   -0- for 2005 and 2004, respectively                      (8,000)   (40,000)
                                                          --------   --------
Pro forma net income                                      $366,000   $255,000
                                                          ========   ========

Earnings per share:
Basic-as reported                                         $   0.03   $   0.03
                                                          ========   ========
Basic-pro forma                                           $   0.03   $   0.02
                                                          ========   ========
Diluted-as reported                                       $   0.03   $   0.02
                                                          ========   ========
Diluted-pro forma                                         $   0.02   $   0.02
                                                          ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                           FOR THE SIX MONTHS
                                                             ENDED JULY 31,
                                                          --------------------
                                                             2005       2004
                                                          ---------   --------
<S>                                                       <C>         <C>
Net income, as reported                                   $ 700,000   $484,000
Deduct: Total stock-based employee compensation expense
   determined under fair value method for all awards,
   net of related tax effects of a $235,000 benefit and
   -0- for 2005 and 2004, respectively                     (384,000)   (50,000)
                                                          ---------   --------
Pro forma net income                                      $ 316,000   $434,000
                                                          =========   ========

Earnings per share:
Basic-as reported                                         $    0.05   $   0.05
                                                          =========   ========
Basic-pro forma                                           $    0.02   $   0.04
                                                          =========   ========
Diluted-as reported                                       $    0.05   $   0.04
                                                          =========   ========
Diluted-pro forma                                         $    0.02   $   0.04
                                                          =========   ========
</TABLE>

During the three months ended April 30, 2005, 250,500 stock options were issued
to employees of the Corporation with the achievement of performance measures and
250,000 stock options were issued to the employee director of the Company in
conjunction with his execution of a new employment agreement. The weighted
average fair value of the stock options granted during the three months ended
April 30, 2005 was $1.20 per share.

During the three months ended July 31, 2004, 40,000 stock options were issued to
the non-employee directors of the Company.

During the six months ended July 31, 2005 and 2004, 130,000 and 222,500 shares,
respectively, of the Corporation's common stock were issued due to the exercise
of stock options.

NOTE 7 - PRIVATE PLACEMENT OF SECURITIES - JULY 2005

COMMON PRIVATE PLACEMENT

SECURITIES PURCHASE AGREEMENT

On July 1, 2005, the Company executed a securities purchase agreement (the
"Common Purchase Agreement") with various institutional and accredited investors
(the "Common Investors") pursuant to which it agreed to sell in a private
placement transaction (the "Common Private Placement") for an aggregate purchase
price of


                                       10

<PAGE>

$1,500,000 (a) 1,666,667 shares of the Company's Common Stock, par value $0.02
per share (the "Common Shares"), (b) warrants to purchase 416,667 shares of the
Company's Common Stock at an exercise price of $1.11 per share ("First Common
Offering Warrants") and (c) warrants to purchase 416,667 shares of the Company's
Common Stock at an exercise price of $1.33 per share ("Second Common Offering
Warrants" and, together with the First Common Offering Warrants, the "Common
Offering Warrants"). The $0.90 purchase price per share for the Common Shares
approximately represents 80% of the average of the daily volume weighted average
price of the Common Stock for the 20 day period prior to the execution of the
Common Purchase Agreement. The Company closed the Common Private Placement on
July 6, 2005.

COMMON WARRANTS

The First Common Offering Warrants issued to each Common Investor provide such
Common Investor the right to purchase shares of the Company's Common Stock, in
aggregate, up to an additional 25% of the total number of Common Shares
purchased by such Common Investor in the Common Private Placement at an exercise
price of $1.11 per share. The First Common Offering Warrants contain a cashless
exercise provision, whereby if at any time after one year from the date of
issuance of this Warrant there is no effective Registration Statement
registering, or no current prospectus available for, the resale of the Warrant
Shares by the Warrant Holder, then the Warrant may also be exercised at such
time by means of a "cashless exercise" in which the Warrant Holder shall be
entitled to receive common shares for the number of Warrant Shares equal to the
appreciation in the warrant above the exercise price at the time of the
exercise. The First Common Offering Warrants expire five years from the date of
issuance and contain adjustment provisions upon the occurrence of stock splits,
stock dividends, combinations, reclassifications or similar events of the
Company's capital stock, issuances of the Company's securities for consideration
below the exercise price and pro rata distributions of cash, property, assets or
securities to holders of the Company's Common Stock. If the First Common
Offering Warrants are exercised in full in cash, the Company would receive upon
such exercise aggregate proceeds of $462,500.

The Second Common Offering Warrant issued to each Common Investors provides such
Common Investor the right to purchase shares of the Company's Common Stock, in
aggregate, up to an additional 25% of the total number of Common Shares
purchased by such Common Investor in the Common Private Placement at an exercise
price of $1.33 per share. The Second Common Offering Warrants contain a cashless
exercise provision, whereby if at any time after one year from the date of
issuance of this Warrant there is no effective Registration Statement
registering, or no current prospectus available for, the resale of the Warrant
Shares by the Warrant Holder, then the Warrant may also be exercised at such
time by means of a "cashless exercise" in which the Warrant Holder shall be
entitled to receive common shares for the number of Warrant Shares equal to the
appreciation in the warrant above the exercise price at the time of the
exercise. The Second Common Offering Warrants expire five years from the date of
issuance and contain adjustment provisions upon the occurrence of stock splits,
stock dividends, combinations, reclassifications or similar events of the
Company's capital stock, issuances of Company's securities for consideration
below the exercise price and pro rata distributions of cash, property, assets or
securities to holders of the Company's common stock. If the Second Common
Offering Warrants are exercised in full in cash, the Company would receive upon
such exercise aggregate proceeds of $554,167.

The net proceeds to the Corporation from the offering, after costs associated
with the Common Stock portion of the offering, of $1,367,000 have been allocated
among common stock and warrants based upon their relative fair values. The
Corporation used the Black-Scholes pricing model to determine the fair value of
the warrants to be $365,000.

PREFERRED PRIVATE PLACEMENT

SECURITIES PURCHASE AGREEMENT

On July 1, 2005, the Company executed a securities purchase agreement
("Preferred Purchase Agreement") with various institutional and accredited
investors (the "Preferred Investors") pursuant to which it agreed to sell in a
private placement transaction (the "Preferred Private Placement") for an
aggregate purchase price of $5,500,000 (a) 5,500 shares of the Company's Series
C Convertible Preferred Stock, stated value $1,000 per share (the "Preferred
Shares"), (b) warrants to purchase 1,375,000 shares of the Company's Common
Stock at an exercise price of $1.11 per share ("First Preferred Offering
Warrants"), (c) warrants to purchase 1,375,000


                                       11

<PAGE>

shares of the Company's Common Stock at an exercise price of $1.33 per share
("Second Preferred Offering Warrants" and, together with the First Preferred
Offering Warrants," the "Preferred Offering Warrants") and (d) warrants
("Over-Allotment Warrants") to purchase (1) up to 1,375 shares of Series C
Preferred Stock (the "Additional Preferred Shares"), (2) warrants to purchase up
to 343,750 shares of Common Stock at $1.11 per share ("First Additional
Warrants") and (3) warrants to purchase up to 343,750 shares of Common Stock at
$1.33 per share ("Second Additional Warrants" and, together with the First
Additional Warrants, the "Additional Warrants"). The Preferred Private Placement
closed on July 6, 2005.

Under the terms of the Preferred Purchase Agreement, the Company is required to
obtain stockholder approval to an amendment to its Certificate of Incorporation
(the "Certificate of Amendment") to increase the number of authorized shares of
Common Stock. Subject to certain permitted issuances under the Preferred
Purchase Agreement, the Company is also restricted from issuing additional
securities for a period of six (6) months following the effective date of the
Preferred Registration Statement without the prior written consent the holders
of the Preferred Shares.

PREFERRED WARRANTS

The First Preferred Offering Warrants issued to each Preferred Investor provide
such Preferred Investor the right to purchase shares of the Company's Common
Stock, in aggregate, up to an additional 25% of the total number of shares of
Common Stock issuable upon the conversion of the Preferred Stock purchased by
such Preferred Investor in the Preferred Private Placement at an exercise price
of $1.11 per share. The First Preferred Offering Warrants contain a cashless
exercise provision, whereby at any time the Warrant may also be exercised at
such time by means of a "cashless exercise" in which the Warrant Holder shall be
entitled to receive common shares for the number of Warrant Shares equal to the
appreciation in the warrant above the exercise price at the time of the
exercise. The First Preferred Offering Warrants expire five years from the date
of issuance and contain adjustment provisions upon the occurrence of stock
splits, stock dividends, combinations, reclassifications or similar events of
the Company's capital stock, issuances of Common Stock for consideration below
the exercise price and pro rata distributions of cash, property, assets or
securities to holders of the Company's common stock. If the First Preferred
Offering Warrants are exercised in full in cash, the Company would receive upon
such exercise aggregate proceeds of $1,526,250.

The Second Preferred Offering Warrants issued to each Preferred Investor provide
such Preferred Investor the right to purchase shares of the Company's Common
Stock, in aggregate, up to an additional 25% of the total number of shares of
Common Stock issuable upon the conversion of the Preferred Stock purchased by
such Preferred Investor in the Preferred Private Placement at an exercise price
of $1.33 per share. The Second Preferred Offering Warrants contain a cashless
exercise provision, whereby at any time the Warrant may also be exercised at
such time by means of a "cashless exercise" in which the Warrant Holder shall be
entitled to receive common shares for the number of Warrant Shares equal to the
appreciation in the warrant above the exercise price at the time of the
exercise. The Second Preferred Offering Warrants expire five years from the date
of issuance and contain adjustment provisions upon the occurrence of stock
splits, stock dividends, combinations, reclassifications or similar events of
the Company's capital stock, issuances of the Company's securities for
consideration below the exercise price as well as pro rata distributions of
cash, property, assets or securities to holders of the Company's common stock.
If the Second Preferred Offering Warrants are exercised in full in cash, the
Company would receive upon such exercise aggregate proceeds of $1,828,750.

The net proceeds to the Corporation from the offering, after costs associated
with the Preferred Stock portion of the offering, of $4,988,000 have been
allocated among common stock and warrants based upon their relative fair values.
The Corporation used the Black-Scholes pricing model to determine the fair value
of the warrants to be $1,232,000.

OVER-ALLOTMENT WARRANTS

The Over-Allotment Warrants issued to each Preferred Investor provides such
Preferred Investor the right to purchase at an exercise price of $1,000 per
share (a) Additional Preferred Shares, in aggregate, up to 25% of the total
number of shares of Series C Preferred Stock purchased by such Preferred
Investor in the Preferred Private Placement, (b) First Additional Warrants
exercisable for a number of shares of Common Stock in an amount, in aggregate,
up to 6.25% of the total number of shares of Common Stock issuable upon
conversion of


                                       12

<PAGE>

the Series C Preferred Stock purchased by such Preferred Investor in the
Preferred Private Placement at an exercise price of $1.11 per share and (c)
Second Additional Warrants exercisable for a number of shares of Common Stock in
an amount, in aggregate, up to 6.25% of the total number of shares of the Common
Stock issuable upon conversion of the Series C Preferred purchased by such
Purchaser in the Preferred Private Placement at an exercise price of $1.33 per
share. The Over-Allotment Warrants expire upon the later of (x) 90 days after
the effectiveness of the Preferred Registration Statement (as defined below) and
(y) the date upon which the Company obtains stockholder approval of the
Certificate of Amendment.

TERMS OF THE PREFERRED STOCK

The rights and preferences of the Preferred Shares are set forth in the
Certificate of Designation, Preferences and Rights of Series C Preferred Stock
(the "Certificate of Designation"). The Preferred Shares have a face value of
$1,000 per share and are convertible at any time at the option of the holder
into shares of Common Stock ("Conversion Shares") at the initial conversion
price of $1.00 per share (the "Conversion Price"), subject to certain
adjustments including (a) stock splits, stock dividends, combinations,
reclassifications, mergers, consolidations, sales or transfers of the assets of
the Company, share exchanges or other similar events, (b) certain anti-dilution
adjustments. For a complete description of the terms of the Preferred Shares
please see the Certificate of Designation.

After valuing the warrants for the purchase of the Corporation's common stock
issued with the convertible Preferred Shares ($1,232,000), the beneficial
conversion contained in the Preferred Shares ($1,672,000) and the estimated
costs associated with the Preferred Stock portion of the financing ($512,000)
the convertible preferred stock will initially be valued at $2,084,000. The
difference between this initial value and the face value of the Preferred Stock
of $3,416,000 will be accreted back to the Preferred Stock as preferred
dividends utilizing an effective interest rate of 24.5%. The accretion period is
the shorter of the four-year term of the preferred or until the conversion of
the preferred stock. For the three and six month periods ended July 31, 2005 the
accretion of the aforementioned discount was $43,000. In accordance with FAS
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," the accretion of the discount on the preferred stock is
classified as interest expense in the Statement of Consolidated Operations.

A cumulative premium (dividend) accrues and is payable with respect to each of
the Preferred Shares equal to 8% of the stated value per annum. The premium is
payable upon the earlier of: (a) the time of conversion in such number of shares
of Common Stock determined by dividing the accrued premium by the Conversion
Price or (b) the time of redemption in cash by wire transfer of immediately
available funds. For the three and six month periods ended July 31, 2005 the
accrued dividend was $37,000. In accordance with FAS 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," the accretion of the preferred stock dividend is classified as interest
expense in the Statement of Consolidated Operations.

The aforementioned private placement of common stock and preferred stock
initially resulted in a $4.378 million increase in the Company's Stockholders'
Equity for the amounts allocated to common stock, common stock warrants and
additional paid-in capital.

NOTE 8 - PRIVATE PLACEMENT OF SECURITIES - MARCH 2004

On March 4, 2004 the Corporation closed on a private placement transaction
pursuant to which it sold 1,250,000 shares of Common Stock, (the "Shares"), to
Barron Partners, LP (the "Investor") for an aggregate purchase price of
$500,000. In addition, the Corporation issued two warrants to the Investor
exercisable for shares of its Common Stock (the "Warrants"). The Shares and the
Warrants were issued in a private placement transaction pursuant to Rule 506 of
Regulation D and Section 4(2) under the Securities Act of 1933, as amended.
Offset against the proceeds is $51,000 of costs incurred in conjunction with the
private placement transaction, primarily related to the cost of the registration
of the common stock and common stock underlying the warrants, as discussed in
the fourth paragraph of this note.

The First Warrant provided the Investor the right to purchase up to 1,500,000
shares of the Corporation's Common Stock. During the year ended January 31, 2005
Barron exercised the First Warrant in full at an exercise price of $0.80 per
share warrants resulting in proceeds of $1,200,000 to the Corporation.


                                       13

<PAGE>

The Second Warrant provides the Investor the right to purchase up to 2,000,000
shares of the Corporation's Common Stock. The Second Warrant has an exercise
price of $1.60 per share resulting in proceeds of $3,200,000 to the Corporation
upon its full exercise and expires five years from the date of issuance. The
Corporation may require the Investor to exercise the Second Warrant in full at
any time until December 4, 2005 if the average price of the Corporation's Common
Stock exceeds $2.40 for ten consecutive trading days and the Corporation has a
Registration Statement effective during the same ten consecutive trading days.
The warrant holder may exercise through a cashless net exercise procedure after
March 4, 2005, if the shares underlying the warrant are either not subject to an
effective registration statement or, if subject to a registration statement,
during a suspension of the registration statement. The Corporation has reserved
sufficient shares of its common stock to cover the issuance of shares relative
to the unexercised warrants held by the Investor.

In connection with these transactions, the Corporation and the Investor entered
into a Registration Rights Agreement. Under this agreement, the Corporation was
required to file within ninety (90) days of closing a registration statement
with the U.S. Securities and Exchange Commission for the purpose of registering
the resale of the Shares and the shares of Common Stock underlying the Warrants.
The Company's registration statement was declared effective by the U.S.
Securities and Exchange Commission on June 30, 2004. In the event that the
Investor is not permitted to sell its Shares pursuant to the registration
statement as a result of a permitted Black-Out Period (as defined in the
Registration Statement) being exceeded or otherwise, then the Company will be
obligated to pay the Investor liquidated damages equal to 18% of the Investor's
purchase price per annum.

The Corporation utilized the proceeds from the sale of its Common Stock for
general business purposes and to partially fund its acquisition strategy.

The Corporation granted the Investor the right of first refusal on certain
subsequent offerings of the Corporation's securities and has agreed to maintain
a listing of its common stock on the OTC Bulletin Board or another publicly
traded market and cause its common stock to continue to be registered under
Section 12 (b) or (g) of the Exchange Act of 1934.

The net proceeds to the Corporation from the offering, after costs associated
with the offering, of $449,000 have been allocated among common stock and
warrants based upon their relative fair values. The Corporation used the
Black-Scholes pricing model to determine the fair value of the warrants to be
$287,000.

NOTE 9 - GOODWILL

At July 31, 2005 and January 31, 2005, the Corporation's goodwill was $1,571,000
and $1,338,000, respectively. The increase in goodwill during the current fiscal
period was primarily attributable to a contingent earnout obligation related to
an acquisition completed in fiscal 2002.

SFAS No. 142 "Goodwill and Other Intangible Assets" prescribes a two-phase
process for impairment testing of goodwill, which is performed annually, absent
any indicators of impairment. The first phase screens for impairment, while the
second phase (if necessary) measures impairment. The Corporation has elected to
perform its annual analysis during the fourth quarter of each year based upon
goodwill balances as of the end of the third quarter. Although no indicators of
impairment have been identified during fiscal 2005, there can be no assurance
that future goodwill impairment tests will not result in a charge to earnings.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

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

In June 2001, the Corporation acquired the net assets of Tri-State Restorations,
Inc. The terms of the acquisition provide for an "Earnout Payment" payable in
cash based upon a calculation of net profits earned through May 2005. As of July
31, 2005, $877,000 had been earned and accrued, of which $450,000 had been paid
under the agreement.


                                       14

<PAGE>

NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment" ("SFAS
123R"), a revision to SFAS No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123R establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services, including obtaining employee services
in share-based payment transactions. SFAS 123R applies to all awards granted
after the required effective date and to awards modified, repurchased, or
cancelled after that date. Adoption of the provisions of SFAS 123R is effective
as of the beginning of the first annual reporting period that begins after June
15, 2005. Should the Corporation issue employee stock options after January 31,
2006 a charge against earnings would be required as provided by SFAS 123R. The
magnitude of the charge would depend upon the number of employee stock options
issues, the exercise price of the stock options and the volatility of the share
price of the Corporation's common stock on the date the employee stock options
are issued.

NOTE 11 - SUBSEQUENT EVENT

On August 25, 2005, the Company, pursuant to an Asset Purchase Agreement, (the
"Agreement"), completed its acquisition of certain assets of Flagship Services,
Group, Inc., Flagship Reconstruction Partners, Ltd., Flagship Reconstruction
Associates - Commercial, Ltd., and Flagship Reconstruction Associates -
Residential, Ltd. ("Flagship"), for $5,250,000 in cash paid at closing, a
promissory note for $750,000 at an interest rate of 6% due one-year from the
closing, 236,027 shares of the Company's restricted common stock valued at
$250,000 ($1.06 per share), a warrant to purchase up to 250,000 shares of the
Company's restricted common stock at an exercise price of $1.00 and a warrant to
purchase up to 150,000 shares of the Company's restricted common stock at an
exercise price of $1.06. The warrants expire five years from the date of
closing. The Agreement also includes earn-out provisions over the first
eighteen-month period commencing on the closing date, pursuant to which the
Company is required to pay 35% of the net earnings of the former Flagship
operation in excess of $500,000. The owner of Flagship entered into an
eighteen-month employment and non-competition agreement with the Company.


                                       15

<PAGE>

                                     ITEM 2.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this Management's Discussion and Analysis of the
Consolidated Condensed Financial Statements and other sections of this Form 10-Q
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation, statements regarding the
Corporation's or Corporation management's expectations, hopes, beliefs,
intentions or strategies regarding the future. These forward-looking statements
are based on the Corporation's current expectations, estimates and projections
about our industry, management's beliefs and certain assumptions made by
management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," "may," and similar expressions are intended to
identify forward-looking statements. There can be no assurance that future
developments and actual actions or results affecting the Corporation will be
those that the Corporation has anticipated. These forward-looking statements
involve a number of risks, uncertainties (some of which are beyond the
Corporation 's control) or other assumptions that may cause actual results or
performance to be materially different from those expressed or implied by such
forward-looking statements. These risks and uncertainties include, but are not
limited to, the continuing validity of the underlying assumptions and estimates
of total forecasted project revenues, costs and profits and project schedules;
the outcomes of pending or future litigation, arbitration or other dispute
resolution proceedings; the availability of borrowed funds on terms acceptable
to the Corporation; the ability to retain certain members of management; the
ability to obtain surety bonds to secure the Corporation's performance under
certain construction contracts; possible labor disputes or work stoppages within
the construction industry; changes in federal and state appropriations for
infrastructure projects; possible changes or developments in worldwide or
domestic political, social, economic, business, industry, market and regulatory
conditions or circumstances; and actions taken or not taken by third parties
including the Corporation's customers, suppliers, business partners, and
competitors and legislative, regulatory, judicial and other governmental
authorities and officials; and other risks and uncertainties discussed under the
heading "Risk Factors" in the Corporation's Annual Report on Form 10-K, as
amended, for the year ended January 31, 2005 filed with the Securities and
Exchange Commission. The Corporation undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.

OVERVIEW

We provide environmental and specialty contracting services including asbestos
and lead abatement, insulation, microbial remediation, disaster response, loss
mitigation and reconstruction, demolition and related services throughout the
United States. During the current fiscal quarter and six-month period, the
Corporation derived the majority of its revenues from the abatement of asbestos
but has broadened its offering of services in recent years to include a number
of complementary services which utilize its existing infrastructure and
personnel. Cash flows from contracting services are primarily generated from
periodic progress billings on large contracts under which the Corporation
performs services and single project billings on small short duration projects.

The Corporation operates in a complex environment due to the nature of our
customers and our projects. 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. Depending on the contract, this poses challenges
to the Corporation's executive management team in overseeing contract
performance and in evaluating the timing of the recognition of revenues and
project costs, both initially and when there is a change in project status.
Thus, the Corporation's executive management team spends considerable time in
evaluating and structuring key contracts, in monitoring project performance, and
in assessing the financial impact of many of our contracts. Due to the
complexity in the revenue recognition for the Corporation's projects, executive
financial management is particularly attentive to developments in individual
contracts that may affect the timing and measurement of contract costs and
related revenues.

The Corporation continues to manage its projects to minimize risk and the
financial impact upon the Corporation. More information on risks and the
Corporation's efforts to manage risks is available in Item 1 under the caption
"Risk Factors" in the Corporation's Annual Report on Form 10-K, as amended, for
the year ended January 31, 2005, as amended, and supplemented elsewhere in this
report.


                                       16

<PAGE>

CRITICAL ACCOUNTING POLICIES

In general, there have been no significant changes in the Corporation's critical
accounting policies since January 31, 2005. For a detailed discussion of these
policies, please see Item 7 of the Corporation's Annual Report on Form 10-K, as
amended, for the year ended January 31, 2005.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 31, 2005

During the three months ended July 31, 2005 ("Fiscal 2006"), the Corporation's
contract revenues increased by 8% to $16.3 million compared to $15.2 million in
the three months ended July 31, 2004 ("Fiscal 2005"). The increase was due an
increase in contract activity at our New York, Rock Hill, Los Angeles and Tampa
offices as compared to the prior fiscal quarter. The increase was attributable
to an increase in volume of work placed under contract and performed by these
offices.

The Corporation's gross margin increased to $2.5 million in the second quarter
of fiscal 2006 compared to $1.9 million in the second quarter of fiscal 2005.
Gross margin as a percentage of revenue increased to 15.2% for the current
quarter from 12.8 % for the prior year quarter. The increase in gross margin of
$0.55 million is due to a higher volume of work performed at a greater gross
margin percentage. The current fiscal quarter had no negative contract
adjustments. The prior fiscal quarter had negative contract adjustments of $0.4
million, due to cost overruns and unexpected conditions, primarily at our New
York, Pittsburgh and Seattle offices.

Selling, general and administrative expenses increased to $1.66 million in the
current fiscal quarter as compared to $1.52 million in the three months ended
July 31, 2004. This increase was due to personnel and salary increases in the
current fiscal year as compared to the prior fiscal year and an overall increase
in various operating expenses. As a percentage of contract revenues, selling,
general and administrative expense remained relatively constant at 10.2% for the
current fiscal quarter vs. 10.0% for the prior year fiscal quarter.

The Corporation reported income from operations of $0.82 million for the three
months ended July 31, 2005 compared to income from operations of $0.42 million
for the three months ended July 31, 2004 as a direct result of the factors
discussed above.

Interest expense increased slightly to $0.10 million in the current quarter as
compared to $0.09 million in the same quarter of a year ago as a result of an
increase in the prime rate of interest, to which a majority of the Corporations
borrowings are tied, which more than offset the decrease in the balance
outstanding on the line of credit after the receipt of the approximate $6.4
million net proceeds from the private placement of the Company's securities in
early July 2005 which was utilized to reduce the outstanding balance on the line
of credit.

Interest expense for preferred dividends and accretion of the discount relates
to the private placement in July 2005 of $5.5 million of redeemable convertible
preferred stock. As the preferred shares are mandatorily redeemable, the actual
dividend of $37,000 and the accretion of the discount associated with the
preferred stock of $43,000 are required to be reflected as interest expense.

During the quarter ended July 31, 2005, the Corporation made a $0.22 million
provision for federal income taxes and a $0.06 million provision for state
income taxes. During the quarter ended July 31, 2004, the Corporation made no
provision for federal income taxes due to the utilization of net operating loss
carryforwards for financial reporting purposes and a state income tax provision
of $0.025 million. At July 31, 2005 a valuation allowance for deferred taxes of
$0.44 million had been provided due to the uncertainty as to the future
realization of those deferred income tax assets. While the Company has recently
been profitable, the federal net operating loss carryforward was only fully
utilized in the quarter ended January 31, 2005 and the Company's operations are
subject to a high degree of volatility due to the nature of its business.
Management still believes that the allowance is reasonable and will evaluate it
prospectively at the end of each quarter

SIX MONTHS ENDED JULY 31, 2005


                                       17

<PAGE>

During the six months ended July 31, 2005 ("Fiscal 2006"), the Corporation's
contract revenues increased by 17% to $30.3 million compared to $26.0 million in
the six months ended July 31, 2004 ("Fiscal 2005"). The increase was due an
increase in contract activity at our New York, Tampa and Rock Hill offices as
compared to the prior fiscal period. The increase was attributable to an
increase in volume of work placed under contract and performed by these offices.

The Corporation's gross margin increased to $4.8 million in the half of fiscal
2006 compared to $3.6 million in the first half of fiscal 2005. Gross margin as
a percentage of revenue increased to 15.8% for the current six-month period from
14.0% for the prior year period. The increase in gross margin of $1.16 million
is due to a higher volume of work performed at a greater gross margin
percentage. The current fiscal period had no negative contract adjustments. The
prior fiscal period had negative contract adjustments of $0.7 million, due to
cost overruns and unexpected conditions, primarily at our New York, Pittsburgh
and Los Angeles offices.

Selling, general and administrative expenses increased to $3.4 million in the
current fiscal period as compared to $3.0 million in the six months ended July
31, 2004. This increase was due to personnel and salary increases in the current
fiscal year as compared to the prior fiscal year, an overall increase in various
operating expenses and the inclusion of the PT&L operation, which was acquired
effective April 1, 2004. As a percentage of contract revenues, selling, general
and administrative expense decreased by 0.4% to 11.2% for the current fiscal
period from 11.6% for the prior year fiscal period.

The Corporation's six-month period ended July 31, 2004 included a $0.11 million
gain from the sale of fixed assets as the Company sold equipment that was
currently not being utilized.

The Corporation reported income from operations of $1.38 million for the six
months ended July 31, 2005 compared to income from operations of $0.72 million
for the six months ended July 31, 2004 as a direct result of the factors
discussed above.

Interest expense increased to $0.20 million in the current period as compared to
$0.18 million in the same period of a year ago as a result of an increase in the
prime rate of interest, to which a majority of the Corporations borrowings are
tied, which more than offset the decrease in the balance outstanding on the line
of credit after the receipt of the approximate $6.4 million net proceeds from
the private placement of the Company's securities in early July 2005 which was
utilized to reduce the outstanding balance on the line of credit.

Interest expense for preferred dividends and accretion of the discount relates
to the private placement in July 2005 of $5.5 million of redeemable convertible
preferred stock. As the preferred shares are mandatorily redeemable, the actual
dividend of $37,000 and the accretion of the discount associated with the
preferred stock of $43,000 are required to be reflected as interest expense.

The Corporation's other income for the six-month period ended July 31, 2005
included a $0.05 million gain from the Company's sale of its 50% interest in the
IAQ venture, which had been accounted for under the equity method of accounting.

During the six-month period ended July 31, 2005, the Corporation made a $0.38
million provision for federal income taxes and a $0.10 million for state income
taxes. During the six months ended July 31, 2004, the Corporation made no
provision for federal income taxes due to the utilization of net operating loss
carryforwards for financial reporting purposes and a state income tax provision
of $0.04 million. At July 31, 2005 a valuation allowance for deferred taxes of
$0.44 million had been provided due to the uncertainty as to the future
realization of those deferred income tax assets. While the Company has recently
been profitable, the federal net operating loss carryforward was only fully
utilized in the quarter ended January 31, 2005 and the Company's operations are
subject to a high degree of volatility due to the nature of its business.
Management still believes that the allowance is reasonable and will evaluate it
prospectively at the end of each quarter

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended July 31, 2005, the Corporation's cash decreased by
$0.18 million to $0.15 million.


                                       18

<PAGE>

The decrease in cash and short-term investments during the first six months of
fiscal 2006 is attributable to cash outflows from operations of $1.68 million
and cash outflows of $0.54 million associated with investing activities. These
cash outflows were partially offset by $2.04 million of cash inflows associated
with financing activities.

Cash utilized by operating activities totaled $1.68 million in the six months
ended July 31, 2005. Cash outflows included, a $3.76 million increase in
accounts receivable caused by the significant increase in billings in July 2005,
a $0.15 million increase in inventories, a $0.19 million increase in prepaid
income taxes, a $0.31 million decrease in current income tax liabilities and a
$0.07 million decrease in accrued liabilities related to the timing of payments
These cash outflows were partially offset by cash inflows including $0.70
million of net income in the current fiscal period, $0.08 million of preferred
stock dividends and accretion of the discount on the related preferred stock
which are non-cash in nature as the dividends on the preferred stock accumulate
until conversion or maturity, a $0.44 million decrease in costs and estimated
earnings in excess of billings on uncompleted contracts, a $0.41 million
decrease in other current assets, a $0.69 million increase in accounts payable,
a $0.17 million increase in billings in excess of costs and estimated earnings
on uncompleted contracts, and $0.35 million of depreciation and amortization.

Investing activities cash outflows included $0.56 million for the purchase of
property, plant and equipment and the $0.02 million of capital contributions in
the IAQ joint venture prior to the sale of its interest by the Company. These
cash outflows were partially offset by $0.05 million of proceeds from the sale
of the Company's equity investment in the IAQ joint venture.

Financing activities cash inflows consisted of $6.44 million from the private
placement of the Company's common and convertible preferred stock in July 2005
(which was net of $0.56 million of costs associated with the private placement),
$0.24 million of proceeds from a $0.4 million equipment line provided by the
Company's bank and $0.05 million from the exercise of employee stock options.
These cash inflows were partially offset by $4.4 million for the repayment of
debt and insurance premium financing, including a $3.6 million net reduction in
the Company's line of credit with the proceeds of the aforementioned private
placement of the Company's equity securities in July 2005 and $0.29 million of
earnout payments related to the acquisition of businesses acquired in prior
years. On August 25, 2005 the Company purchased the operations of Flagship and
reborrowed on the line of credit to fund the purchase price payable at closing.

At July 31, 2005, the Corporation's backlog totaled $37.5 million ($24.3 million
on fixed fee contracts and $13.2 million on time and materials or unit price
contracts).

During the six months ended July 31, 2004, the Corporation's cash decreased by
$0.01 million to $0.03 million.

The decrease in cash and short-term investments during the first six months of
fiscal 2005 is attributable to cash outflows from operations of $0.08 million
and cash outflows of $0.24 million associated with investing activities. These
cash outflows were partially offset by $0.31 million of cash inflows associated
with financing activities.

Cash utilized by operating activities totaled $0.08 million in the six months
ended July 31, 2004. Cash outflows included a $2.16 million increase in accounts
receivable caused by the significant increase in billings in the second quarter,
a $1.4 million increase in costs and estimated earnings in excess of billings on
uncompleted contracts and a $0.15 million increase in inventories. These cash
outflows were partially offset by cash inflows including $0.48 million of net
income in the current fiscal period, a $0.32 million decrease in other current
assets, a $1.62 million increase in accounts payable, a $0.88 million increase
in billings in excess of costs and estimated earnings on uncompleted contracts,
a $0.10 million increase in accrued liabilities related to the timing of
payments and $0.34 million of depreciation and amortization.

Investing activities cash outflows included $0.33 million for the purchase of
property, plant and equipment and the $0.02 million of additional investment in
the IAQ joint venture. These cash outflows were partially offset by $0.13
million of proceeds from the sale of fixed assets.

Financing activities cash inflows consisted of $0.47 million from the private
placement of the Company's common stock (which was net of $0.03 million of costs
associated with registering the Company's common stock related to the private
placement), $0.75 million of proceeds from debt consisting of net borrowings on
the line of credit and


                                       19

<PAGE>

$0.12 million from the exercise of employee stock options. These cash inflows
were partially offset by $0.88 million for the repayment of debt and insurance
premium financing and insurance premium financing and $0.14 million of earnout
payments related to the acquisition of businesses acquired in prior years.

The Corporation believes funds generated by operations, amounts available under
existing credit facilities and external sources of liquidity, such as the
issuance of debt and equity instruments, will be sufficient to finance capital
expenditures, the settlement of earnout obligations, the settlement of
commitments and contingencies (as fully described in Note 10 to the
Corporation's consolidated financial statements.) and working capital needs for
the foreseeable future. However, there can be no assurance that such funding
will be available, as our ability to generate cash flows from operations and our
ability to access funding under the revolving credit facilities may be impacted
by a variety of business, economic, legislative, financial and other factors
which may be outside the Corporation's control. Additionally, while the
Corporation currently has significant, uncommitted bonding facilities, primarily
to support various commercial provisions in the Corporation's contracts, a
termination or reduction of these bonding facilities could result in the
utilization of letters of credit in lieu of performance bonds, thereby reducing
the Corporation's available capacity under the revolving credit facilities.
There can be no assurance that such facilities will be available at reasonable
terms to service the Corporation's ordinary course obligations.

In January 2005 the Company executed a non-binding letter of intent to purchase
a restoration company in the southwestern United States. On August 25, 2005, the
Company pursuant to an Asset Purchase Agreement completed its acquisition of
certain assets of Flagship Services, Group, Inc., Flagship Reconstruction
Partners, Ltd., Flagship Reconstruction Associates - Commercial, Ltd., and
Flagship Reconstruction Associates - Residential, Ltd. ("Flagship"), for
$5,250,000 in cash paid at closing, a promissory note for $750,000 at an
interest of 6% due one-year from the closing, 236,027 shares of the Company's
restricted common stock valued at $250,000 ($1.06 per share), a warrant to
purchase up to 250,000 shares of the Company's restricted common stock at an
exercise price of $1.00 and a warrant to purchase up to 150,000 shares of the
Company's restricted common stock at an exercise price of $1.06. The warrants
expire five years from the date of closing. The Agreement also includes earn-out
provisions over the first eighteen-month period commencing on the closing date,
pursuant to which the Company is required to pay 35% of the net earnings of the
former Flagship operation in excess of $500,000. The owner of Flagship entered
into an eighteen-month employment and non-competition agreement with the
Company. The purchase of Flagship utilized the majority of the funds raised in
the July 2005 private placement of the Company's equity securities, which in the
period between the closing of the private placement and the purchase of
Flagship, had been utilized to reduce the outstanding balance on the Company's
line of credit and therefore the related interest costs.

ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The only market risk, as defined, that the Company is exposed to is interest
rate sensitivity. The interest rate on the equipment notes and revolving line of
credit fluctuate based upon changes in the prime rate. Each 1% change in the
prime rate will result in a $17,000 change in borrowing costs based upon the
balance outstanding at July 31, 2005

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures. that are designed to provide
reasonable assurance that the information required to be disclosed by us in
reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and that such information required to be disclosed in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our chief financial officer and chief executive officer,
to allow timely decisions regarding required disclosures

In connection with the year end audit of the Company's consolidated financial
statements for the year ended January 31, 2005, our external auditors notified
our management and Audit Committee of the existence of "material weaknesses" in
our internal controls relating to changes in the rules associated with the
advent of the Public Company Accounting Oversight Board ("PCAOB"). Specifically
our external auditors noted the following: (a) our period-end cut-off procedures
were inadequate to ensure that all Company liabilities were reflected in the
proper accounting period ; (b) our controls over the documentation and selection
of accounting principles were


                                       20

<PAGE>

inadequate due to the incomplete documentation relating to the selection and
application of applicable accounting policies and (c) our controls over
non-routine and non-systematic transactions were not properly documented so that
the proper recording of these transactions could be considered likely to be
effective. Our Chief Executive Officer and Chief Financial Officer concluded
that the material weaknesses cited did not compromise the financial reporting
process.

Our management has discussed these material weaknesses with the Audit Committee.
Our management is working with the Audit Committee to identify and remediate
control deficiencies as part of its efforts to complete the documentation and
testing of its internal controls over financial reporting as required by Section
404 of the Sarbanes-Oxley Act of 2002 and applicable rules of the Securities and
Exchange Commission and the PCAOB. This process only recently commenced.
Specifically, we are implementing the following measures: (a) we have instituted
a new corporate wide cut-off policy including an extension of time of the
cut-off period and written confirmation from our branch offices that all
liabilities that they are aware of have been properly recorded, (b) we are
proceeding with the documentation of all of our accounting policies and the
rationale behind the selection of each policy where various alternatives exist
and (c) as part of our Sarbanes-Oxley 404 internal control project, we are
documenting our controls over non-routine and non-systematic transactions. Our
analysis is continuing and we plan to complete the project before the end of the
initial assessment-reporting period ending January 31, 2007. Our external
auditors for the year ended January 31, 2005 have not confirmed our remediation
steps due to their resignation as our auditors as disclosed in our Current
Report on Form 8-K dated June 20, 2005 and the selection of new external
auditors as disclosed in our Current Report on Form 8-K dated July 13, 2005.

After considering the aforementioned, the Chief Executive Officer and Chief
Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our CEO and CFO have concluded that as of the end of such
period, our disclosure controls and procedures have been are designed to provide
reasonable assurance of achieving their objectives and our disclosure controls
and procedures are effective at that reasonable assurance level.

There have not been any changes in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended) occurred during our most recent fiscal quarter that has
materially affected or is reasonable likely to materially affect, our internal
control over financial reporting.

Our management, including the Chief Executive Officer and the Chief Financial
Officer, does not expect that our disclosure controls or our internal control
over financial reporting will prevent all errors and all fraud. A control
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls systems are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple errors or mistakes.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.


                                       21

<PAGE>

                           PART II-- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to dispute and litigation in the ordinary course of
business. None of these matters, in the opinion of management, is likely to
result in a material effect on the Registrant based upon information available
at this time.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

See the Company's Current Reports on Form 8-K filed with the SEC on July 7, 2005
and August 31, 2005.

ITEM 6. EXHIBITS

(a) Exhibits:

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                             PAGES OF SEQUENTIAL
                EXHIBIT NO. AND DESCRIPTION                    NUMBERING SYSTEM
                ---------------------------                  -------------------
<S>          <C>                                             <C>
Exhibit 31   Certification Pursuant to Rule 13a-14(a) of
             the Securities Act of 1934, as amended, and
             Section 302 Of The Sarbanes-Oxley Act of 2002

Exhibit 32   Certification Pursuant To 18 U.S.C. Section
             1350, As Amended Pursuant To Section 906 Of
             The Sarbanes-Oxley Act of 2002
</TABLE>


                                       22

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        PDG ENVIRONMENTAL, INC.


                                        By /s/ John C. Regan
                                           -------------------------------------
                                           John C. Regan
                                           Chairman, Chief Executive Officer and
                                           Chief Financial Officer

Date: September 14, 2005


                                       23