Securities
and Exchange Commission


Washington,
DC 20549





FORM
10-K





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





For the fiscal year
ended  December
31, 2007





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.  000-19761




OP-TECH
Environmental Services, Inc.


(Exact
name of registrant as specified in its charter)




Delaware              91-1528142


(State or other
jurisdiction of             (I.R.S. Employer
incorporation


or
organization)                Identification
No.)





6392 Deere Road, Syracuse,
NY            
    13206


(Address
of principal executive
office)          (Zip
Code)




(315) 463-1643


(Registrant's
telephone number, including area code)








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


None





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


Common Stock, $.01 par
value


(Title of
Class)





Indicate
by check mark if the registrant is a well known seasoned issuer as defined in
Rule 405 of the Securities Act:


Yes
[  ] or 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[  ]or No[X]





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such 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]or 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 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 [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:


Large
accelerated filer [   ]   Accelerated filer
[   ] Non-accelerated filer [  ] Smaller Reporting
Company [X]





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





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and ask price of such common equity as of the last
business day of the registrants most recently completed fiscal quarter: $2,984,260





Indicate
the number of shares outstanding of each of the Company’s classes of common
stock, as of March 3, 2008.  Common stock, $.01 par value: 11,937,038





1














PART
      I





SPECIAL
NOTICE REGARDING FORWARD-LOOKING STATEMENTS





The
Company is including the following cautionary statement in this Form 10-K to
make applicable and take advantage of the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company.  This 10-K, press
releases issued by the Company, and certain information provided periodically in
writing and orally by the Company’s designated officers and agents contain
statements which constitute 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.  The words expect, believe, goal, plan, intend,
estimate, and similar expressions and variations thereof used are intended to
specifically identify forward-looking statements.  Where any such
forward-looking statement includes a statement of the assumptions or basis
underlying such forward-looking statement, the Company cautions that, while it
believes such assumptions or basis to be reasonable and makes them in good
faith, assumed facts or basis almost always vary from actual results, and the
differences between assumed facts or basis and actual results can be material,
depending on the circumstances.  Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or
accomplished.








2











ITEM
1. BUSINESS





General





OP-TECH
Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware
corporation headquartered in Syracuse, New York, provides comprehensive
environmental and industrial cleaning and decontamination services predominately
in New York, New England, Pennsylvania, New Jersey, and Ohio.  The
Company performs industrial cleaning of hazardous and non-hazardous materials
and provides varying services relating to plant facility closure, including
interior and exterior demolition and asbestos removal.  In addition,
the Company provides remediation services for sites contaminated by hazardous
and non-hazardous materials and provides 24-hour emergency spill response
services.  The Company’s revenues are derived from state agencies,
industrial companies and municipalities facing complex environmental clean-up
problems associated with hazardous and non-hazardous materials as required by
various governmental agencies.  The Company’s services include
assessing the regulatory, technical, and construction aspects of the
environmental issue, and performing the necessary remediation
activities.  The Company seeks to provide its clients with remedial
solutions which integrate the various aspects of a project and are
well-documented, practical, cost effective, and acceptable to regulatory
agencies and the public.





Services





Transportation and Disposal
Services





The
Company provides transportation of bulk and containerized hazardous and
non-hazardous wastes from customer sites to customer-designated landfills and
disposal facilities.  The Company also provides liquid tank truck
transports equipped with vacuum pumps.





24-Hour Emergency Spill
Response





Many of
the Company’s decontamination and mitigation activities result from a response
to an emergency situation by one of its response teams.  These
incidents can result from transportation accidents involving chemical or
petroleum substances, fires at chemical facilities or hazardous waste sites,
transformer fires or explosions involving PCBs, and other unanticipated
events.  The substances involved may pose an immediate threat to
public health or the environment, such as possible groundwater
contamination.  The steps performed by the Company include rapid
response, containment and control procedures, sampling for analytical testing
and assessment, neutralization and treatment, and collection and transportation
of the substance to an appropriate treatment or disposal
facility.  The Company derives a material portion of its revenues from
an agreement with the New York State Department of Environmental Conservation
(NYSDEC) to provide emergency response services in certain areas of New York
State, payment of which is guaranteed by the NYSDEC.





Asbestos
Abatement





The
Company provides asbestos abatement contracting services to both the public and
private sectors.  The Company has expertise in all types of asbestos
abatement including removal, disposal and enclosure, and
encapsulation.  Asbestos removal is performed in commercial buildings,
industrial facilities, and governmental buildings.





Interior
Demolition/Structural Dismantling





The
Company provides interior demolition services such as removing walls, ceilings,
and flooring.  In addition, the Company offers structural dismantling
services and has experience in razing concrete, wood and steel structures,
concrete and brick chimneys, and concrete piers and foundations.








3


On-Site Industrial and Waste
Management Services





The
Company provides on-site industrial cleaning and waste management
services.  Specialized services for the handling, processing and
disposal of hazardous wastes are performed by vacuuming, soda blasting,
hydroblasting, dredging, dewatering and sludge processing, sludge pumping,
chemical cleaning, and tank cleaning.





Excavation and Site
Remediation Services





The
Company provides excavation and soil blending services for treatment of
contaminated soil using heavy equipment such as excavators and
loaders.  The Company primarily provides on-site soil blending to
public utilities and municipal customers.





Hydrogeological
Services





The
Company provides hydrogeological services to petroleum companies, engineering
firms and local and state public entities. The Company maintains several
geologists on staff.  Through performing hydrogeological assessments,
the Company evaluates and determines the need for ground water remediation
systems, pump and treatment systems and sub-surface petroleum product
recovery.  In addition, the Company provides air sparging systems,
long-term remediation system operations and maintenance as well as monitoring
well and recovery well installations.





Non-Hazardous Waste Transfer
and Storage Facility





The
Company operates a New York State permitted non-hazardous waste treatment,
storage and transfer facility in its Waverly, New York office.  The
Company accepts non-hazardous waste in bulk or containerized form, consolidates
the waste and then transfers it to a landfill or recycling
facility.





Technologies
Employed





The
Company utilizes a wide variety of physical and chemical treatment technologies
in performing its remediation activities.  Physical treatment
technologies generally involve filtration and aeration techniques and are used
to separate contaminants from soils, slurries, or water.  Chemical
treatment technologies generally involve flocculation, clarification,
precipitation, polymer addition, chemical oxidation, chemical absorption, and
stabilization.  Depending on the contaminants present and the site
characteristics, these technologies are combined into integrated treatment
systems which reduce contaminant concentrations to levels consistent with
prescribed regulatory standards.





4


Regulation





The
business of the Company and its clients is subject to extensive, stringent, and
evolving regulation by the EPA and various other federal, state, and local
environmental authorities.  These regulations directly impact the
demand for the services offered by the Company.  In addition, the
Company is subject to the Federal Occupational Safety and Health Act, which
imposes requirements for employee safety and health.  The Company
believes it is in material compliance with all federal, state, and local
regulations governing its business.





RCRA.  The Resources
Conservation and Recovery Act of 1976 (“RCRA”) is the principal federal statute
governing hazardous waste generation, treatment, storage, and
disposal.  RCRA or EPA-approved state programs may govern any waste
handling activities of substances classified as “hazardous.”  The 1984
amendments to RCRA substantially expanded its scope by, among other things,
providing for the listing of additional wastes as “hazardous” and providing for
the regulation of hazardous wastes generated in lower quantities than previously
had been regulated.  Additionally, the amendments impose restrictions
on land disposal of certain hazardous wastes, prescribe more stringent standards
for hazardous waste land disposal sites, set standards for underground storage
tanks and provide for “corrective” action at or near sites of waste management
units.  Under RCRA, liability and stringent operating requirements may
be imposed on a person who is either a “generator” or a “transporter” of
hazardous waste, or an “owner” or “operator” of a waste treatment, storage, or
disposal facility.





Regulation
of underground storage tanks legislation, in particular Subtitle I of RCRA,
focuses on the regulation of underground tanks in which liquid petroleum or
hazardous substances are stored and provides for the regulatory setting for a
portion of the Company’s work.  Subtitle I of RCRA requires owners of
all existing underground tanks to list the age, size, type, location, and use of
each tank with a designated state agency.  The EPA has published
performance standards and financial responsibility requirements for storage
tanks over a five year period.  These regulations also require all new
tanks which are installed to have protection against spills, overflows, and
corrosion.  Subtitle I of RCRA provides civil penalties of up to
$15,000 per violation for each day of non-compliance with tank requirements and
$10,000 for each tank for which notification was not given or was
falsified.  RCRA also imposes substantial monitoring obligations on
parties which generate, transport, treat, store, or dispose of hazardous
waste.





Superfund Act.  The
Comprehensive Environmental Response Compensation and Liability Act of 1980
(“Superfund Act”) generally addresses clean-up of inactive sites at which
hazardous waste treatment, storage, or disposal took place.  The
Superfund Act assigns joint and several liability for cost of clean-up and
damages to natural resources to any person who, currently, or at the time of
disposal of a hazardous substance who by contract, agreement, or otherwise
arranged for disposal or treatment, or arranged with a transporter for transport
of hazardous substances owned or possessed by such person for disposal or
treatment;  and to any person who accepts hazardous substances for
transport to disposal or treatment facilities or sites from which there is a
release or threatened release.  Among other things, the Superfund Act
authorized the federal government either to clean up these sites itself or to
order persons responsible for the situation to do so.  The Superfund
Act created a fund, financed primarily from taxes on oil and certain chemicals,
to be used by the federal government to pay for the clean-up
efforts.  Where the federal government expends money for remedial
activities, it may seek reimbursement from the potentially responsible
parties.





5


The
liabilities provided by the Superfund Act could, under certain factual
circumstances, apply to a broad range of possible activities by the Company,
including generation of hazardous substances, releases of hazardous substances
during transportation, failure to properly design a clean-up, removal or
remedial plan and failure to achieve required clean-up standards, leakage of
removed wastes in transit or at the final storage site, and remedial operations
on ground water.  Such liabilities can be joint and several where
other parties are involved.





Other.  The
Company’s operations are subject to other federal laws protecting the
environment, including the Clean Water Act and the Toxic Substances Control
Act.





Many
states have also enacted statutes regulating the handling of hazardous
substances, some of which are broader and more stringent than the federal laws
and regulations.




Competitive
Conditions





The
markets for environmental remediation, as well as demolition and asbestos
removal, continue to be very competitive.  The Company competes with
many different firms ranging from small local firms to large national firms,
many of which have greater financial and marketing resources than the
Company.  Competition in environmental services is based largely on
competitive pricing and quality of service provided.  Other
competitive factors include geographic location as well as
reputation.  Management believes the Company is one of the few firms
based in its market area that offers a high quality combination of environmental
services at the most competitive prices.  In addition, through its
wide range of environmental services, good reputation, and competitive pricing,
the Company hopes to maintain a competitive edge in the environmental services
business.





The
Company operates field offices in Syracuse, Massena, Rochester, Albany,
Plattsburgh, Waverly and Buffalo, New York, as well as Edison, New Jersey and
Cleveland, Ohio.




Seasonality





Typically,
during the first quarter of each calendar year there is less demand for
environmental remediation due to the cold weather, particularly in the Northeast
and Midwest regions.  In addition, factory closings for the year-end
holidays reduce the volume of industrial waste generated, which results in lower
volumes of waste handled by the Company during the first quarter of the
following year.





Customers





The
Company’s client base includes state agencies, industrial companies, railroads,
real estate developers, auto parts manufacturers, aluminum producers, utility
companies, waste disposal firms, municipalities, and engineering
firms.  During 2007, the Company performed services for approximately
900 clients.  These projects were substantially all short-term (three
months or less) in nature.  The largest business segment for the each
of the years ended December 31, 2007, 2006, and 2005 was Emergency Spill
Response services.  Emergency Spill Response accounted for 20%, 21%
and 33% of the Company’s revenues for the years ended December 31, 2007, 2006,
and 2005, respectively.  For the past three fiscal years, all of our
revenues were generated from customers in the United States.





6


During
2007, the Company had project revenue of approximately $7,212,000 related to
several contracts with the New York State Department of Environmental
Conservation, which totaled approximately 22% of the Company’s
revenues.  The spill response and remediation contracts with the New
York State Department of Environmental Conservation expire in April 2009 and
September 2008, respectively.  The loss of this project revenue could
have a material adverse effect on the Company.





Insurance





The
Company maintains commercial general liability, asbestos liability and pollution
liability insurance which provides aggregate coverage limits of $12
million.  In addition, the Company also maintains workers
compensation, comprehensive automobile, and Directors and Officers liability
insurance.  The Company’s insurance coverage is consistent with the
insurance requirements found in the environmental remediation
industry.





Employees





The
Company has entered into a contractual co-employment agreement with a third
party provider.  As of February 1, 2008, the Company had a total of
approximately 165 full-time employees under this contract.  The
Company’s ability to retain and expand its staff will be an important factor in
determining the Company’s future success.  The Company considers its
relations with its employees to be good, and the Company has never had a work
stoppage or threat of a work stoppage.








Available
Information





Our
internet address is www.op-tech.us.  There we make available, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with the Securities and
Exchange Commission (SEC).  The information found on our Web site is
not part of this or any other report we file with or furnish to the
SEC.





The
public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room located at 100 F Street NE, Washington, DC
20549.  The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC
also maintains electronic versions of our reports on its website at
www.sec.gov.





7











ITEM
      1A. RISK FACTORS





Operations
of the Company are funded by a working capital line of credit.  The
borrowing limit on the working capital line of credit is $6,000,000 and the
expiration date is January 15, 2009.  The loss of the availability of
this line of credit after January 15, 2009 could have an adverse effect on the
Company if alternate financing sources are not available.





Sales to
one customer, the New York State Department of Environmental Conservation (“NYS
DEC”) accounted for 22%, 24% and 28% of the Company’s revenues for the years
ended December 31, 2007, 2006 and 2005, respectively.  The Company’s
Spill Response and Remediation contracts with the NYS DEC expire in November
2008.  The loss of the NYS DEC contract after November 2008 could have
an adverse effect on the Company.

















ITEM
      2. PROPERTIES





The
Company leases its corporate headquarters in Syracuse, NY and its branch office
locations in Buffalo, Rochester, Massena, Waverly, Albany, and Plattsburgh, NY,
Edison, NJ and Cleveland, OH.  The Company leases an aggregate of
approximately 74,100 square feet of office and shop space at those
locations.  The leases expire at various times through May 31,
2012.  The current aggregate monthly lease payment is $40,144 plus
utilities.











Equipment





The
Company’s owned equipment consists primarily of construction equipment such as
vacuum trucks, dump trucks, tankers, excavation equipment, utility vehicles,
pumps, generators, and compressors, some of which have been specially modified
for the Company’s use.








8





ITEM
3. LEGAL PROCEEDINGS





The
Company has an accrued liability of $345,000 and $400,000 at December 31, 2007
and 2006, respectively.  The liability has been recorded to cover
potential legal costs and fees, and also any indemnity, settlement, or other
payments necessary to dispose of a claim against the Company.  The
reduction of the liability in 2007 was to pay legal expenses
incurred.






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








The
Company held its annual shareholders meeting on November 1, 2007.  The
shareholders voted on the ratification of Dannible & McKee, LLP as the
Company’s auditors, and the election of seven directors.  The
following votes were cast for each:


For
              AgainstRatification
      of Dannible & McKee, LLP asthe
      Company’s auditors
              
              6,215,118
              -0-Election
      of Directors:Robert
      J. Berger
              Director
              6,215,118
              -0-Richard
      L. Elander
              Director
              6,215,118
              -0-Cornelius
      B. Murphy, Jr.
              Director
              6,215,118
              -0-Steven
      A. Sanders
              Director
              6,215,118
              -0-George
      W. Lee
              Director
              6,215,118
              -0-Richard
      Messina
              Director
              6,215,118
              -0-Richard
      Jacobson
              Director
              6,215,118
              -0-










There
were no other matters submitted to a vote of the Company’s
shareholders.  After the meeting, we had no other directors other than
those elected at the meeting.





9





PART
II


ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS





(a)
            The
      shares of the Company’s common stock are listed on the Over the Counter
      Bulletin Board under the symbol
OTES.





The high
and low closing bid prices for the shares of the Company’s common stock were as
follows:


Quarter Ended
              High Bid
              Low BidMarch
      31, 2006
              $0.50
              $0.36June
      30, 2006
              $0.50
              $0.35September
      30, 2006
              $0.85
              $0.29December
      31, 2006
              $0.75
              $0.50March
      31, 2007
              $0.75
              $0.75June
      30, 2007
              $0.75
              $0.42September
      30, 2007
              $0.60
              $0.25December
      31, 2007
              $0.25
              $0.20First
      quarter throughMarch
      5, 2008
              $0.20
              $0.20







The
aforementioned prices reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual
transactions.





(b)
            At
      March 3, 2008, there were approximately 194 holders of record of the
      Company’s common stock.





(c)
            The
      Company has never paid any
dividends.








Equity
Compensation Plan Information





Plan
      Category
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights (1)
              
              (a)
            Weighted-average
      exercise price of outstanding options, warrants and rights
(1)
              
              (b)
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column (a))
      (1)
              
              (c)Equity
      compensation plans approved by security holders
            807,330
            $0.28
            95,002Equity
      compensation plans not approved by security holders
            -
            -
            -Total
            807,330
            $0.28
            95,002





(1) As of December 31,
2007.


10


ITEM
6. SELECTED FINANCIAL DATA








Statement of Operations
Data





Year Ended December
31





2007
            2006
            2005
            2004
            2003Project
      Billings
            32,483,687
            $35,069,989
            $21,784,096
            $18,170,103
            $15,037,888Net
      Income (loss)
            ($405,574)
            $207,973
            ($145,744)
            $200,086
            $1,959,031Net
      Income (loss) per Share-Basic
              -Diluted
            ($.03)
              ($.03)
            $.02
              $.02
            ($.01)
              ($.01)
            $.02
              $.02
            $.13
              $.12








In 2007
the Company recorded compensation expense of $57,227 in conjunction with the
adoption of Financial Accounting Standards Board Statement No. 123R “Share Based
Payment”.











Balance Sheet
Data







As of December
      312007
            2006
            2005
            2004
            2003Total
      Assets
            $16,254,072
            $18,470,167
            $13,185,755
            $12,241,068
            $9,124,305Long-Term
      Obligations
            $6,733,952
            $7,859,741
            $6,024,691
            $5,366,959
            $4,156,356

















11


ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS








LIQUIDITY
AND CAPITAL RESOURCES





At
December 31, 2007, the Company had cash and cash equivalents of $93,535 as
compared to $30,981 at December 31, 2006.  Cash in the Company’s
operating account is electronically transferred nightly to pay down the
Company’s revolving line of credit in order to minimize interest
expense.





At
December 31, 2007, the Company had working capital of $5,140,154 compared to
working capital of $6,757,545 at December 31, 2006.  The Company had a
current ratio of approximately 1.77 to 1 at the end of 2007 compared to 1.91 to
1 at the end of 2006.





Cash
provided by operating activities during 2007 was $1,461,129compared to cash used in
operating activities of $1,149,460 during 2006.  The increase in cash
provided by operating activities in 2007 was mainly attributable to a net
decrease in accounts receivable due to lower project volume and better
collections.





The
Company’s net cash used in investing activities of $766,659 during 2007 was
attributable to the purchase of various field and office equipment.





Cash used
in financing activities of $631,916in 2007 was primarily due
to the net pay downs on the Company’s line of credit.





The
Company has a loan agreement that provides for borrowings up to $6,000,000 on a
revolving basis, collateralized by all accounts receivable, inventory and
equipment now owned or acquired later.  The loan is payable on January
15, 2009, bears interest at a rate of prime plus .50 percent, is subject to
certain restrictive financial covenants, and is subject to default if there is a
material adverse change in the financial or economic condition of the
Company.  As of December 31, 2007, borrowing against the revolving
loan aggregated $4,862,207.





During
2007, all principal payments on the Company’s debt were made within payment
terms. The Company was not in compliance with all financial covenants at
December 31, 2007, and has obtained a covenant waiver for the period then
ending.





The
Company has an interest rate swap agreement that has been designated as a
hedge.  The swap will be evaluated for effectiveness on a quarterly
basis and any ineffective portion will be charged to earnings.  The
effect of the swap is to fix the rate being paid on the term loan at
7.80%.





The
Company expects, based on budgeted operating results and the continued
availability of its line of credit, that it will be able to meet obligations as
they come due.








12





RESULTS
OF OPERATIONS





This
financial review should be read in conjunction with the accompanying
Consolidated Financial Statements and accompanying notes.




FACTORS
THAT MAY AFFECT FUTURE RESULTS





The
Company’s future operating results may be affected by a number of factors,
including the Company’s ability to successfully increase market share in its
existing service territory while expanding its services into other markets,
realize benefits from cost reduction programs, and utilize its facilities and
work force profitably in the face of intense price competition.





EFFECT
OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In July
2006 the Financial Accounting Standards Board issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”.  The interpretation is
required to be adopted in the first quarter of 2007.  There was no
significant impact on its financial position, results of operations or cash
flows as a result of the adoption of the interpretation in 2007.








OFF
BALANCE SHEET ARRANGEMENTS





The
Company has no off balance sheet arrangements at December 31, 2007 or December
31, 2006 that require disclosure under this item.







CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Management
has identified the following critical accounting policies that affect the
Company's more significant judgments and estimates used in the preparation of
the Company's consolidated financial statements.  The preparation of
the Company's financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company's
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities.  On an on-going basis, management
evaluates those estimates, including those related to assets held for sale,
valuation allowances on deferred tax assets, revenue recognition, allowance for
doubtful accounts and contingencies and litigation. The Company states these
accounting policies in the notes to the consolidated financial statements and in
relevant sections in this discussion and analysis. These estimates are based on
the information that is currently available to the Company and on various other
assumptions that management believes to be reasonable under the
circumstances.  Actual results could vary from those
estimates.





The
Company believes that the following critical accounting policies affect
significant judgments and estimates used in the preparation of its consolidated
financial statements:





Contracts are predominately short-term
in nature (less than three months) and revenue is recognized as costs are
incurred.  Project costs are generally billed in the month they are
incurred and are shown as current assets.  Revenues recognized in
excess of amounts billed are recorded as an asset.  In the event
interim billings exceed costs and estimated profit, the net amount of deferred
revenue is shown as a current liability.  Estimated losses are
recorded in full when identified.




The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, which
results in bad debt expense.  Management determines the adequacy of
this allowance by continually evaluating individual customer receivables,
considering the customer's financial condition, credit history and current
economic conditions.  If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.  Additionally, management
estimates a general allowance based on historical charge offs covering other
amounts that may not be collectible.





The
Company maintains a valuation allowance on its deferred tax asset based on the
amount of net operating losses that management believes it will not utilize
prior to the expiration dates of these losses.  Management determines
the adequacy of this allowance by continually evaluating its ongoing
profitability and its ability to generate taxable income in the future
sufficient to utilize the net operating losses.  If the profitability
of the Company were to change, it could effect the amount of net operating
losses that could be utilized and require an adjustment to the valuation
allowance.





The
Company establishes accruals for loss contingencies related to litigation and
claims.  These estimates are prepared using information available to
management at the time of the accrual and at each reporting
period.  Events and circumstances could change requiring management to
revise or adjust amounts accrued for loss contingencies.





13





2007
COMPARED TO 2006





Revenues





During
the year ended December 31, 2007, the Company’s revenues decreased 7.4% to
$32,483,687 as compared to $35,069,989 for the year ended December 31,
2006.





When
comparing 2007 to 2006, the overall decrease in project revenue is due to a
decrease in the amount of larger low margin projects performed by the
Company.  The Company has made a concerted and planned effort to bid
on projects at a higher gross margin percentage in order to increase overall
gross margin dollars.








Project Costs and Gross
Margin





Project
costs for the year ended December 31, 2007 decreased 11% to $24,739,420 from
$28,007,851 for the year ended December 31, 2006.  Project costs as a
percentage of revenues were 76% for the year ended December 31, 2007, compared
to 80% for the year ended December 31, 2006.  The gross profit margin
for the year ended December 31, 2007 was 24% compared to 20% for the year ended
December 31, 2006.  Gross profit in dollars increased 10% to
$7,744,267 from $7,062,138 in 2006.  Project costs paid to St.
Lawrence Industrial Services, Inc., a related party, amounted to approximately
$917,000 in 2007 and $1,074,000 in 2006.





The
increase in the gross margin percentage was planned and was due to the
performance of several large projects that were bid at a higher gross margin
percentage than was the Company’s average prior to 2007 in order to increase the
overall gross margin dollars.








Selling, General, and
Administrative Expenses





During
the year ended December 31, 2007, selling, general, and administrative
(“SG&A”) expenses increased 29% to $7,525,635 compared to $5,853,744
reported for the previous year.





SG&A
expenses as a percentage of revenue increased to 23% for the year ended December
31, 2007 from 17% for the year ended December 31, 2006.





When
comparing 2007 to 2006, the overall increase in operating expenses is primarily
due to the following increases:





·
            Payroll
      and related expenses increased 23% to $3,533,448 from $2,862,992 in
      2006.  The increase is related to an increase in workers
      compensation expense, and an increase in employee benefit costs and
      non-billable labor.


·
            Business
      Insurance increased 27.4% to $636,180 from
  $499,233.


·
            An
      increase in bad debt expense of 315% to $258,253 from $62,157 in 2006 as a
      result several receivable collection difficulties reserved for in the
      allowance for doubtful accounts.


·
            Equipment
      expense, net of usage credit increased 87% to $905,128 from $492,491
      primarily attributed to increases in fuel expense, depreciation expense
      and repair expense.


14





Provision for Impairment of
Land and Buildings Held for Sale





In
September 2006 the Company recognized a provision for impairment of its land and
buildings held for sale in the amount of $150,000 to adjust the carrying value
of the land and building held for sale to its fair value.  In November
2006, the Company sold the land and buildings for $700,000, which generated an
additional loss of $49,873.








Operating
Income





As a
result of the factors discussed above, for the year ended December 31, 2007, the
Company reported an operating income of $218,632 compared to income of
$1,058,394 for the previous year.








Interest
Expense





Interest
expense increased 9% to $669,379 in 2007 compared to $615,361 in
2006.  The increase in interest expense was primarily due to an
increase in the average outstanding balance on the revolving loan when comparing
the year ended December 31, 2007 with the same period in 2006.  The
increase in interest expense is mitigated by a decrease in the rates paid on the
Company’s floating rate debt that is tied to changes in the prime
rate.  The prime rate decreased from 8.25% at December 31, 2006 to
7.25% at December 31, 2007.








Net Income Before Income
Taxes





Net loss
before income taxes amounted to $451,619 in 2007 compared to net income before
income taxes of $388,938 in 2006.








Income Tax
Benefit





The
Company recorded a net income tax benefit of $46,045 in 2007 compared to an
income tax expense of $180,965 in 2006.








Net
Income





Net loss
for the year ended December 31, 2007 was $405,574 or ($.03) per share basic and
diluted compared to net income of $207,973 or $.02 per share basic and diluted
for the year ended December 31, 2006.








15





2006
COMPARED TO 2005





Revenues





During
the year ended December 31, 2006, the Company’s revenues increased 61% to
$35,069,989 as compared to $21,784,096 for the year ended December 31,
2005.





When
comparing 2006 to 2005, the overall increase in project revenue is due to an
increase in the amount of larger projects performed by the
Company.  The Company has made a concerted and planned effort to bid
on larger projects at a lower gross margin percentage in order to grow overall
gross margin dollars.





Project Costs and Gross
Margin





Project
costs for the year ended December 31, 2006 increased 76% to $28,007,851 from
$15,955,533 for the year ended December 31, 2005.  Project costs as a
percentage of revenues was 80% for the year ended December 31, 2006 compared to
73% for the year ended December 31, 2005.  The gross profit margin for
the year ended December 31, 2006 was 20% compared to 27% for the year ended
December 31, 2005.  Gross profit in dollars increased 21% to
$7,062,138 from $5,828,563 in 2005.  Project costs paid to St.
Lawrence Industrial Services, Inc., a related party, amounted to approximately
$1,074,000 in 2006 and $734,000 in 2005.





The
decrease in the gross margin percentage was planned and was due to the
performance of several large projects that were bid at a lower gross margin
percentage than was the Company’s average prior to 2006 in order to increase the
overall gross margin dollars.











Selling, General, and
Administrative Expenses





During
the year ended December 31, 2006, selling, general, and administrative
(“SG&A”) expenses increased 15% to $5,853,744 compared to $5,107,218
reported for the previous year exclusive of a $450,000 accrual for a litigation
reserve in 2005.





SG&A
expenses as a percentage of revenue decreased to 17% for the year ended December
31, 2006 from 23% for the year ended December 31, 2005.





When
comparing 2006 to 2005, the overall increase in operating expenses is primarily
due to inflationary increases in several areas including payroll expense, office
expense and business insurance, as well as the recording of stock compensation
expense.








Provision for Impairment of
Land and Buildings Held for Sale





In
September 2006 the Company recognized a provision for impairment of its land and
buildings held for sale in the amount of $150,000 to adjust the carrying value
of the land and building held for sale to its fair value.  In 2005 an
impairment provision of $100,000 was recorded.  In November 2006, the
Company sold the land and buildings for $700,000.





16





Operating
Income





As a
result of the factors discussed above, for the year ended December 31, 2006, the
Company reported operating income of $1,058,394 compared to $171,345 for the
previous year.








Interest
Expense





Interest
expense increased 60% to $615,361 in 2006 compared to $384,240 in
2005.  The increase in interest expense was primarily due to an
increase in the average outstanding balance on the revolving loan when comparing
the year ended December 31, 2006 with the same period in 2005.  The
increase in interest expense is also due to an increase in the rates paid on the
Company’s floating rate debt that is tied to changes in the prime
rate.  The prime rate increased from 7.25% at December 31, 2005 to
8.25% at December 31, 2006.








Net Income Before Income
Taxes





Net
income before income taxes amounted to $388,938 in 2006 compared to net loss
before income taxes of $242,744 in 2005.




Income Tax
Benefit





The
Company recorded a net income tax expense of $180,965 in 2006 compared to an
income tax benefit of $97,000 in 2005.





Net
Income





Net
Income for the year ended December 31, 2006 was $207,973 or $.02 per share basic
& diluted compared to net loss of $145,744, or $.01 per share basic and
diluted, for the year ended December 31, 2005.








ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK





The
Company is exposed to market risk, including changes in interest rates because
of its variable rate debt.  To manage the potential exposure, the
Company enters into various derivative transactions, mainly interest rate
swaps.  The financial impact of these hedging instruments are offset
in part or in whole by corresponding changes in the underlying exposures being
hedged.  The Company does not hold or issue derivative financial
instruments for trading purposes.  Note 9 to the consolidated
financial statements includes a discussion of the Company’s accounting policies
for financial instruments.





Interest
rate swaps are used to hedge a term debt obligation.  Based on the
Company’s overall interest rate exposure as of and during the year ended
December 31, 2007, including derivative and other rate sensitive instruments, a
one percent change in interest rates would increase or decrease interest expense
by approximately $70,000 annually.





The
Company is aware that if the economy were to slow down, the Company’s business
could be affected by other companies closing operations or reducing production,
which could reduce the amount of waste generated or industrial cleaning projects
available.  In order to try to mitigate this market risk, the Company
continues to make every effort to secure more emergency spill response contracts
and long-term environmental remediation and industrial cleaning
projects.





For more
information regarding market risk, see the audited financial statements
submitted under Item 15 of this report.





17


ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The
consolidated financial statements and related financial schedule of the Company
and the report of Dannible & McKee LLP are submitted under Item 15 of this
report.


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





None





ITEM 9a – MANAGEMENT’S REPORT ON
FINANCIAL INFORMATION AND INTERNAL CONTROLS




Responsibility
For Financial Information —We are responsible for the preparation, accuracy, integrity and objectivity of
the Consolidated Financial Statements and the other financial information
included in this report.  Such information has been prepared in conformity
with accounting principles generally accepted in the United States of America
and accordingly, includes certain amounts that represent management’s best
estimates and judgments. Actual amounts could differ from those
estimates.




Responsibility
for Internal Controls —We
are also responsible for establishing and maintaining adequate internal controls
over financial reporting. These internal controls consist of policies and
procedures that are designed to assess and monitor the effectiveness of the
control environment including: risk identification, governance structure,
delegations of authority, information flow, communications and control
activities.  While no system of internal controls can ensure
elimination of all errors and irregularities, Op-Tech’s internal controls, which
are reviewed and modified in response to changing conditions, have been designed
to provide reasonable assurance that assets are safeguarded, policies and
procedures are followed, transactions are properly executed and reported, and
appropriate disclosures are made. The concept of reasonable assurance is based
on the recognition that there are limitations in all systems of internal control
and that the costs of such systems should be balanced with their benefits. The
Audit Committee of the Board of Directors, which is comprised solely of
independent directors, meets regularly with Op-Tech’s senior financial
management, and independent registered public accounting firm to review audit
plans and results, as well as the actions taken by management in discharging its
responsibilities for accounting, financial reporting and internal controls. The
Audit Committee is responsible for the selection and compensation of the
independent registered public accounting firm. Op-Tech’s financial management,
internal auditors and independent registered public accounting firm have direct
and confidential access to the Audit Committee at all times.




Report
On Internal Control Over Financial Reporting— We have evaluated Op-Tech’s internal
control over financial reporting as of December 31, 2007. This evaluation
was based on criteria for effective internal control over financial reporting
set forth inInternal Control —
Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.





Based on the evaluation performed, we
identified the following material weakness in our internal control over
financial reporting as of December 31, 2007. A material weakness is a
control deficiency, or combination of control 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.







18




We did not maintain effective controls
over reconciliations or journal entries. Specifically, (a) our controls
over the preparation, review and monitoring of account reconciliations were
ineffective to provide reasonable assurance that account balances were accurate
and agreed to appropriate supporting detail, calculations or other
documentation, and (b) effective controls were not designed and in place to
provide reasonable assurance that journal entries, both recurring and
non-recurring, were prepared with acceptable support and sufficient
documentation and that journal entries were reviewed and approved to provide
reasonable assurance of the validity, accuracy and completeness of the entries
recorded. These control deficiencies could result in a misstatement to accounts
and disclosures that would result in a material misstatement to the annual or
interimfinancial
statements that maynot be
prevented or detected.There wereaudit adjustments to our 2007
consolidated financial
statements including the restatement of certain liabilities to
2006.







Because of the above described material
weaknesses in internal control over financial reporting, management concluded
that our internal control over financial reporting was not effective as of
December 31, 2007 based on the criteria set forth inInternal
Control — Integrated Frameworkissued by the COSO.  This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report


Report
On Disclosure Controls And Procedures —As of December 31, 2007, we
carried out an evaluation of the effectiveness of the design and operation of
Op-Tech’s disclosure controls and procedures pursuant to Rule 13a-15 under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon
that evaluation, we concluded that Op-Tech’s disclosure controls and procedures
are effective in ensuring that information required to be disclosed in Op-Tech’s
periodic filings under the Exchange Act is accumulated and communicated to us to
allow timely decisions regarding required disclosures, and such information is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and
forms.








ITEM 9b – OTHER
INFORMATION





None






19





PART
III





ITEM
10. DIRECTORS AND OFFICERS OF THE COMPANY




The
following table sets forth certain information about the directors of the
Company, all of whom were unanimously elected at the Annual Meeting of
Stockholders of the registrant on November 1, 2007 for a term of one
year.





Each
director has served continuously since he was first elected.





The Board
of Directors held four meetings during the last calendar year.  All of
the directors attended more than 75% of the total number of meetings held by the
Board of Directors.








Name,
      Age
              Principal Occupation
            Year
      First
              Elected
            Certain Other
InformationRobert
      J. Berger (61)
              Director
      and Co-Chairman of the Board
            1998
            Mr.
      Berger has served in his present position as Director since November 1998,
      and as Chairman of the Board since February 2000 and as Co-Chairman of the
      Board since January 2007.  Mr. Berger was employed in various
      positions for ONBANCORP, Inc. from 1978 through March 31, 1998, his last
      position being Senior Vice President, Treasurer, and Chief Financial
      Officer.  Mr. Berger is also Chairman, President, and Chief
      Executive Officer of St. Lawrence Industrial Services, Inc. and also
      serves as Vice Chairman of Beacon Federal Bancorp, Inc.Richard
      Messina (45)
              Director
      and Co-Chairman of the Board
            2005
            Mr.
      Messina was elected to the Board in November 2005 and elected Co-Chairman
      of the Board in January 2007.  Mr. Messina founded The Benchmark
      Company, LLC, a securities broker-dealer, in 1988.  Benchmark is
      primarily engaged in equity research, sales, and trading on behalf of
      institutional clients.  Mr. Messina currently serves as Co-Chief
      Executive Officer of Benchmark.Cornelius
      B. Murphy, Jr. (63)
              Director
            1991
            Dr.
      Murphy has served in his current position since December
      1991.  Dr. Murphy has been a director of O’Brien & Gere
      Limited since 1985.  Dr. Murphy also served as President of
      O’Brien & Gere Limited from December 1997 to May 1999 and Chairman of
      the Board of O’Brien & Gere Engineers from January 1993 to December
      1998.  Dr. Murphy currently serves as President of the State
      University of New York College of Environmental Science and Forestry,
      which is located in Syracuse, New York.Richard
      L. Elander (66)
              Director
            1991
            Mr.
      Elander has served in his present position as a Director since November of
      1991. Mr. Elander previously served as the Commissioner of the Onondaga
      County Department of Water Environment Protection prior to
      retirement.Steven
      A. Sanders (62)
              Director
            1991
            Mr.
      Sanders has served in his present position as a Director since December
      1991.  Mr. Sanders is currently Senior Partner of Sanders,
      Ortoli, Vaughn-Flam, Rosenstadt, LLP.  From January 1, 2004
      until June 30, 2007, he was of counsel to the law firm of Rubin, Bailin,
      Ortoli, LLP.  From January 1, 2001 to December 31, 2003, he was
      counsel to the law firm of Spitzer & Feldman
      PC.  .  Mr. Sanders also serves as a Director of
      Genesis Gold Limited, Helijet International, Inc., NaiKun Wind
      Development, Inc.  Additionally, he is a Director of the Roundabout
      Theatre (the largest not-for-profit theatre in North America), Town Hall
      New York City, and the New York Theatre BalletGeorge
      W. Lee, Jr. (59)
              Director
            2002
            Mr.
      Lee was elected to the Board in December 2002.  Mr. Lee
      co-founded Blasland, Bouck and Lee, Inc., an Engineering News Record top
      100 worldwide engineering and scientific services company in
      1984.  He served in various capacities in this firm, including
      Executive VP, Director of Marketing and Director of Health and Safety from
      1984 to 1994.  Mr. Lee served on the Board of Directors of
      Blasland, Bouck and Lee, Inc. from 1984 to 2005.  Since 1984 Mr.
      Lee has been active as a consultant to new business ventures involved in
      professional development and wastewater treatment.  In October
      2005 Mr. Lee joined Pyramid Brokerage of Central New York as a commercial
      real estate sales agent.Richard
      Jacobson (44)
              Director
            2006
            Mr.
      Jacobson was elected to the Board in February 2006.  Mr.
      Jacobson is currently a Senior Managing Director with Stern
      Capital.  From 1999 to 2003 he was a Vice President and Managing
      Director in the merchant banking group of Indosuez
      Capital.  From 1997 to 1999 he was a Vice President in the
      leveraged finance group of SG Cowen.  From 1994 to 1997 he was
      an associate in the leveraged finance group of Chemical Securities,
      Inc.  Mr. Jacobson began his career as an attorney for the law
      firm of Jacobs, Persinger and
Parker.





20





INDEPENDENCE





The Board
recognizes the importance of director independence.  Under the rules
of the New York Stock Exchange, to be considered independent, the Board must
determine that a director does not have a direct or indirect material
relationship with the Company.  Moreover, a director will not be
independent if, within the preceding three (3) years: (i) the director was
employed by the company or receives $25,000 per year in direct compensation from
the company, other than director and committee fees or other forms of deferred
compensation for prior service, (ii) the director was  partner of or
employed by the company’s independent auditor, (iii) the director is part of an
interlocking directorate in which an executive officer of the company serves on
the compensation committee of another company that employs the director, (iv)
the director is an executive officer or employee of another company that makes
payments to, or receives payments from, the company for property or services in
an amount which, in any single fiscal year, exceeds the greater
of  $100,000 or 2% of such other company’s consolidated gross
revenues, (v) or the immediate family member in any of the categories in (i) –
(iv) above.





The Board
has determined that six (6) of the company’s seven (7) directors are independent
under these standards.  As a result of Director Berger’s ownership of
St. Lawrence Industrial Services Corp., he is not considered to have independent
status.  Mr. Berger does serve on the Compensation committee based
upon his prior business experience and the fact that he is a holder of almost
ten percent (10%) of the outstanding shares of the company’s stock.








RELATED
PARTY TRANSACTION REVIEW





The Board
has adopted a policy concerning the review, approval and monitoring of
transactions involving the Company and “related persons” (directors and
executive officers or their immediate family members, or shareholders owning
five percent (5%) or greater of the Company’s outstanding
shares).  The policy covers any transaction exceeding $1,000 in which
the related person has a direct or indirect material
interest.  Related person transactions must be approved in advance by
the Co-chairmen and reported to the Board at the next meeting following the
transaction.  The policy is intended to restrict transactions to only
those which are in the best interests of the Company.








AUDIT
COMMITTEE





In
October of 2002, the Company’s Board of Directors formed an Audit Committee (the
“Committee”). The members of the Committee are Messrs. Cornelius Murphy, Richard
Elander, and George Lee. The Committee operates under a written charter adopted
by the Board of Directors.  The Committee held three meetings during
the year ended December 31, 2007.  Its duties and responsibilities
include the following:





·
            Provides
      oversight of the financial reporting process and management’s
      responsibility for the integrity, accuracy and objectivity of financial
      reports, and accounting and financial reporting
  practices.


·
            Recommends
      to the Board the appointment of the Company’s independent registered
      accounting firm.


·
            Provides
      oversight of the adequacy of the Company’s system of internal
      controls.


·
            Provides
      oversight of management practices relating to ethical considerations and
      business conduct, including compliance with laws and
      regulations.





The
Committee has met and held discussions with the Chief Financial Officer and the
Company’s independent accountants, Dannible & McKee, LLP, regarding audit
activities. Management has the primary responsibility for the Company’s systems
of internal controls and the overall financial reporting process.  The
independent accountants are responsible for performing an independent audit of
the Company’s consolidated financial statements in accordance with auditing
standards of the Public Company Accounting Oversight Board (United States), and
to issue a report thereon.  The Committee’s responsibility is to
monitor and oversee these processes.  However, the members of the
Committee are not certified public accountants, professional auditors or experts
in the fields of accounting and auditing and rely, without independent
verification, on the information provided to them and on the representations
made by management and the independent accountants.





The
Committee recommended to the Board of Directors the appointment of Dannible
& McKee, LLP as the Company’s independent accountants for the year 2007, as
ratified by shareholders.  The Company’s independent accountants
provided to the Committee the written disclosure required by Independence
Standards Board Standard No. 1 (Independence Discussions with Audit Committees),
and the Committee discussed with the independent accountants that firm’s
independence.





Management
represented to the Committee that the Company’s consolidated financial
statements were prepared in accordance with generally accepted accounting
principles.  The Committee has reviewed and discussed the consolidated
financial statements with management and the independent
accountants.  The Committee discussed with the independent accountants
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees) as currently in effect.  Based
on these discussions and reviews, the Committee recommended that the Board of
Directors include the audited consolidated financial statements in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007 for filing with
the Securities and Exchange Commission.





The
Committee does not have a financial expert.  Due to the small size of
the Company and lack of financial complexity, the Committee does not anticipate
adding a financial expert.








21


REPORT
OF AUDIT COMMITTEE





The Audit
Committee reviews the company’s financial reporting process on behalf of the
Board.  Management has the primary responsibility for establishing and
maintaining adequate internal financial controllership, for preparing the
financial statements and for the public reporting process.  Dannible
& McKee, LLP, our company’s independent auditor for 2007, is responsible for
expressing an opinion on the conformity of the company’s audited financial
statements with generally accepted accounting principles.





In this
context, the committee has reviewed and discussed with management and Dannible
& McKee, LLP the audited financial statements for the year ended December
31, 2007.  The committee has discussed with Dannible & McKee, LLP
the matters that are required to be discussed by Statement on auditing Standards
No. 61 (Communication with Audit committees).  Dannible & McKee,
LLP has provided to the committee the written disclosures and the letter
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and the committee has discussed with
Dannible & McKee, LLP that firm’s independence.  The committee has
concluded that Dannible & McKee, LLP’s provision of audit and non-audit
services to the company is compatible with Dannible & McKee, LLP’s
independence.





Based on
the considerations and discussions referred to above, the committee recommended
to the Board of Directors that the audited financial statements for the year
ended December 31, 2007 be included in the Annual Report on form 10-K for
2007.  This report is provided by the following independent directors,
who comprise the committee:





Cornelius B. Murphy, PhD
(Chairman)


Richard L. Elander


George W. Lee, Jr.










EXECUTIVE
OFFICERS OF THE COMPANY





Name
            Age
            Position HeldCharles
      B. Morgan
            54
            Chief
      Executive OfficerJon
      S. Verbeck
            48
            Chief
      Financial Officer & Treasurer





Mr.
Morgan was named Chief Executive Officer (“CEO”) in November 2006.  He
has been with the Company since January of 2002 and has previously served as
Executive Vice President and Chief Operating Officer.  Prior to
joining the company, Mr. Morgan served as a Vice President with the firm of
Camp, Dresser and McKee, an Engineering News Record top 20, Boston, MA based
consulting, engineering, construction and operations firm.  Mr. Morgan
has 34 years of experience as a senior executive and corporate director of
environmental, engineering, construction and energy companies.  Mr.
Morgan has experience with all aspects of senior level company management
including marketing and sales, strategic planning, financial management, product
and service development, project management and mergers and
acquisitions.  Mr. Morgan has also managed a variety of large scale
projects domestically and internationally for a broad spectrum of private sector
industrial clients.








Mr.
Verbeck was named Chief Financial Officer (“CFO”) and Treasurer in May
2007.  Mr. Verbeck is a Certified Public Accountant in New York
State.  He previously worked as an Auditor for a public accounting
firm from 1985 to 1991, as CFO for a manufacturing and distributor from 1991 to
October 2005, and as the Managing Director of a consulting firm from
2005.





CODE
OF ETHICS FOR SENIOR OFFICERS





The
Company has adopted a code of ethics that applies to its senior executive and
financial officers.  The Code of Ethics for senior officers is
included in Exhibit 14.






BENEFICIAL
OWNERSHIP AND REPORTING COMPANIES




Section
16(a) of the Exchange Act requires our directors, officers (including a person
performing a principal policy-making function) and persons who own more than 10%
of a registered class of our equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of our common
stock and other equity securities of ours. Directors, officers and 10% holders
are required by Commission regulations to send us copies of all of the Section
16(a) reports they file. Based solely upon a review of the copies of the forms
sent to us and the representations made by the reporting persons to us, we
believe that during the fiscal year ended December 31, 2007, our directors,
officers and 10% holders complied with the filing requirements under Section
16(a) of the Exchange Act.







22


ITEM
11. EXECUTIVE COMPENSATION




A.
      Compensation Committee




The
Compensation Committee of the Board of Directors reviews and administers the
Company’s compensation policies and practices for the executive officers of the
Company. The Compensation Committee is currently comprised of Dr. Murphy, Mr.
Messina and Mr. Berger, all of whom are nonemployee directors.  The
Company’s financial accounting group supports the Compensation Committee’s work
by providing information reports to the Compensation Committee when
requested.  The Committee’s authority is not set out in a
charter.  The Committee has not delegated authority and has not hired
compensation consultants.




B.
      Compensation Discussion and
Analysis




Compensation
      Philosophy




The
Compensation Committee has adopted an executive compensation policy that rewards
executives if the Company achieves its operational, financial and strategic
goals and for building shareholder value.  The material elements of
the total compensation which is considered for executives each year under the
Company’s policy are (i) base salary, (ii) annual cash bonus, (iii)
stock-based awards, and (iv) retirement, health and welfare and other
benefits.




The
Compensation Committee intends for the compensation earned by executive officers
to be commensurate with performance and competitive with the compensation paid
to executives at comparable companies.   The Compensation
Committee has not engaged in any benchmarking of total compensation or any
material element thereof.  The named executive officers do not play a
role in the compensation setting process other than negotiating employment
agreements on their own behalf.




Base
      Salaries




Base
salaries provide a baseline level of compensation to executive officers. Base
salaries are not linked to the performance of the Company, because they are
intended to compensate executives for carrying out the day-to-day duties and
responsibilities of their positions.




The
Compensation Committee reviews and adjusts base salary levels in
January each year. During the review and adjustment process, the
Compensation Committee considers:




·
            individual
      performance;




·
            the
      duties and responsibilities of each executive officer
      position;




·
            the
      relationship of executive officer pay to the base salaries of other
      employees of the Company; and




·
            whether
      the base salary levels are competitive when compared to compensation paid
      to executives at comparable
companies.




23


Annual
      Cash Bonus Awards




The
Compensation Committee also considers bonus awards to the named executives at
its January meeting each year. In general, the Committee does not award bonuses
to executive officers under a pre-established plan or formula. Instead, the
Committee makes bonus awards based on its review of the individual performance
of the executives and the financial performance of the Company during the
preceding year. The Committee believes that awarding bonuses in this manner
keeps executives focused on making decisions that are in the long-term best
interests of the Company and its shareholders and not for the purpose of
achieving a pre-established performance level over a shorter term.




At its
January 2008 meeting, the Compensation Committee made cash bonus awards to
the named executives for 2007 in the amounts shown in the Summary Compensation
Table that follows this MD&A.




Stock-Based
      Awards






The
Compensation Committee follows procedures that are substantially similar to the
bonus award procedures for making stock-based awards to executive
officers.  The 2002 Omnibus Plan (“Omnibus Plan”) maintained by the
Company is intended to promote the growth and general prosperity of the Company
by offering incentives to its key employees who are primarily responsible for
the growth of the Company and to attract and retain qualified
employees.  Awards granted under the Plan may be (a) Stock Options
which may be designated as Incentive Stock Options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, or Nonqualified Stock Options
(“NQSO’s) not intended to so qualify; (b) stock appreciation rights; (c)
restricted stock awards; (d) performance awards; or (e) other forms of
stock-based incentive awards. The shares of stock with respect to which the
Awards may be granted shall be the common stock, par value at $0.01, of the
Company (“Common Stock").




All
stock-based awards are made under the Company’s Omnibus Plan.  The
number of shares included in stock-based awards is not determined under a
pre-established formula. Instead, as is the case with bonus awards, all
stock-based awards are discretionary based on the Committee’s review of the
individual performance of the executives and the financial performance of the
Company during the preceding year.




Under the
Omnibus Plan, on January 26, 2005 the Company granted 369,000 NQSO’s, of which
160,000 were granted to named executives.




Retirement
      and Other Benefits




The
Company sponsors the OP-TECH Environmental Services 401(k) Plan (the “Plan”), a
tax-qualified Code Section 401(k) retirement savings plan, for the
benefit of all of its employees, including the named executives. The Plan
encourages saving for retirement by enabling participants to save on a pre-tax
basis and by providing Company matching contributions equal to 25% of the first
6% that each employee contributes to the Savings Plan.




None of
the named executives receive perquisites whose aggregate value exceeds $10,000
annually.




24







Post
      Termination of Employment Benefits
–




The
Company has not entered into employment agreements with any executive officers
that provide severance or other benefits following their resignation,
termination, retirement, death or disability




Mr.
Morgan has signed a new employment agreement on March 28, 2008 that runs through
March 31, 2010.    Under the Agreement, if seventy-five
percent (75%) of the common stock or assets of the Company is sold, Mr. Morgan
shall be entitled to a sale fee.  The sale fee shall be based on the
total common stock value or total asset value in the case of an asset
sale.  The value, which shall be finally determined by the Board of
Directors, shall not include debt, holdbacks, escrow funds, earn-outs or similar
items.




D.
      Conclusion




The
Compensation Committee has read the compensation discussion and analysis and has
reviewed all components of the named executives’ compensation, including salary,
bonus, long-term incentive compensation, accumulated realized and unrealized
stock option and restricted stock gains, the dollar value of all perquisites and
other personal benefits.  Based on this review, the Compensation
Committee is of the view that the compensation payable under the new employment
agreement with Mr. Morgan is reasonable and appropriate.




E.
      Executive Officer Compensation Disclosure
Tables




Summary
Compensation Table




Name and Principal
              Position(s)
              (a)
            
            Year
              (b)
            
            Salary
              ($)
              (c)
            
            Bonus
              ($)
              (d)
            
            Stock Awards
              ($)
              (e)
            
            Option Awards
              ($)
      (1)
              (f)
            
            Change in
              Pension value
              and Nonqualified
              Deferred
              Compensation
              Earnings
              (h)
            
            All Other
              Compensation
              ($)
      (2)(3)
              (i)
            
            Total
              ($)
              (j)Charles
      B. Morgan
            
            2007
            
            $
            161,700
            
            $
            17,500
            
            
            $
            0
            
            
            
            $
            11,666
            
            
            
            $
            0
            
            
            
            $
            20,477
            
            
            $
            211,343Chief
      Executive Officer
            
            2006
            
            $
            148,500
            
            $
            17,500
            
            
            $
            0
            
            
            
            $
            11,666
            
            
            
            $
            0
            
            
            
            $
            2,228
            
            
            $
            179,894








(1) See
relevant SFAS No. 123R assumptions in Note 2 of the Consolidated Financial
Statements.





(2)
Amounts represent the Company’s matching contribution to the named executive’s
401(k) account.  The aggregate value of the perquisites do not exceed
$10,000 for any of the named executives.





(3) In
2007, Mr. Morgan was paid $18,300 for unused vacation.








Column g,
Non-Equity Incentive Plan Compensation, is not applicable and is
omitted.





25





Grants
of Plan-Based Awards Table





Grants of
plan-based awards table is not included since the Company did not grant any
plan-based awards in 2007.





Outstanding
Equity Awards at Fiscal Year-End Table




Option AwardsName
              (a)
            
            Number of
              Securities
              Underlying
              Unexercised
              Options
              (#) Exercisable
              (b)
            
            Number of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
              (c)
            
            Option
              Exercise Price
              ($)
              (e)
            
            Option
              Expiration
              Date
              (f)Mr. Morgan
            
            
            16,667
            
            
            
            0
            
            
            
            $0.06
            
            
            
            05/21/1233,333
            
            
            
            0
            
            
            
            $0.15
            
            
            
            11/19/1333,333
            
            
            
            16,667
            
            
            
            $0.40
            
            
            
            01/26/15
            (1)





(1)As of January 26, 2008, all of these options had
      vested.




Columns
      d, i and j related to Equity Incentive Plan Awards are not applicable and
      are omitted.










Aggregated
Option Exercises in Last Fiscal Year





Number
      of securities underlying unexercised

                  options
      at year-end
              Value
      of Unexercised in-the money options

                  at
      year-endName
              Shares
      acquired on exercise
              Value
      realized
              (Exercisable
      / Unexercisable)
              (Exercisable
      / Unexercisable)Christopher
      J. Polimino
              125,000
              $77,250
              0 /
      0
              $0
      / $0Douglas
      R. Lee
              63,334
              $29,700
              0 /
      0
              $0
      / $







Pension
Benefits Table




Pension
benefits table is not included since the Company does not maintain any qualified
defined benefit plans or supplemental executive retirement plans.








Non-Qualified
Deferred Compensation Table





Non-qualified
deferred compensation table is not included since the Company does not maintain
any plans on a non-qualified basis.







26


Director
Compensation Table




The
following table summarizes the compensation paid to the Chairman and each
nonemployee director for his or her service to the Board and its committees
during 2007:









Name
              (a)
            
            
            
            Fees
              Earned or
              Paid in
              Cash ($)
              (b)
      (1)
            
            Option Awards
              ($)
              (d)
      (2)
            
            All Other
              Compensation
              ($)
              (g)
            
            Total ($)
              (h)Robert
      J. Berger
            
            
            $
            8,000
            
            
            
            $
            1,833
            
            
            $
            0
            
            
            $
            9,833Richard
      Messina
            
            
            $
            8,000
            
            
            
            $
            0
            
            
            $
            0
            
            
            $
            8,000Richard
      L. Elander
            
            
            $
            9,500
            
            
            
            $
            1,833
            
            
            $
            0
            
            
            $
            11,333Cornelius
      B. Murphy, Jr.
            
            
            $
            7,500
            
            
            
            $
            1,833
            
            
            $
            0
            
            
            $
            9,333Steven
      A. Sanders
            
            
            $
            6,000
            
            
            
            $
            1,833
            
            
            $
            0
            
            
            $
            7,833George
      W. Lee, Jr.
            
            
            $
            9,500
            
            
            
            $
            2,166
            
            
            $
            
            0
            
            
            $
            11,666Richard
      Jacobson
            
            
            $
            6,000
            
            
            
            $
            0
            
            
            $
            0
            
            
            $
            6,000


(1)    
In 2007 Directors of the Company were paid $2,000 for each Board meeting
attended and $500 for each sub-committee meeting attended.


(2)     See
relevant SFAS No. 123R assumptions in Note 2 of the Consolidated Financial
Statements.




Column c
(Stock Awards), column e (Non-Equity Incentive Plan Compensation), and column f
(Change in Pension Value and Nonqualified Deferred Compensation Earnings) are
not applicable and are omitted.







Report
of Compensation Committee





The
Compensation committee reviewed and discussed the compensation Discussion and
Analysis with management of the company.  Based on such review and
discussion, the compensation Committee recommended to the Board of Directors
that the Compensation discussion and Analysis be included in the company’s
Annual Report on Form 10-K for the last fiscal year for filing with the
SEC.





Richard Messina (Chairman)


Robert Berger


Cornelius Murphy, Jr.





27


ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT








The
following table sets forth certain information regarding the beneficial
ownership of the company’s common stock at February 1, 2008 by persons who, to
the knowledge of the Board of Directors, beneficially own more than five percent
of the outstanding shares of common stock of the Corporation.





All
voting power of the Corporation is vested in its common stock.  As of
the close of business on February 1, 2008, 11,937,038 shares of common stock par
value $.01 per share were outstanding.  Each share of common stock is
entitled to one vote.





Name and
Address                                                           Amount
and
Nature


of Beneficial
Owner                                                      of Beneficial Ownership(1)(2)                   
 Percentage of
Class(1)





Richard
Messina                                                                    
 4,208,451(2)
(3)                                                     33%


40 Fulton
Street, 19th
Floor


New York,
NY 10038





Robert
Berger                                                                    
      1,171,667 (4)                                                         
9%


121
Shirley Rd.


Syracuse,
NY 13224





Jurg
Walker                                                                            
 1,000,000                                                                8%


3 Avenue
De La Costa


Monaco
98000





Kevin
Eldred                                                                     
        
835,000                                                               
7%


1007
Overlook Terrace


Cazenovia,
NY 13035




(1)
            Based
      upon the sum of (a) 11,937,038 shares of common stock outstanding, and (b)
      underlying options and warrants that have vested and not been exercised
      and underlying options and warrants that will vest within the next 60 days
      relating to a particular
shareholder.





(2)
            All
      shareholder’s directly or beneficially own all shares except for Mr.
      Messina who owns 1,343,933 shares directly and 2,864,518 shares
      indirectly.





(3)
            Includes
      480,000 shares issuable upon the exercise of warrants to purchase common
      stock issued to Summit Capital Associates, Inc., an affiliate of Mr.
      Messina.





(4)
            Includes
      options to purchase 13,333 shares of Common
  Stock.





28




The
following table sets forth certain information furnished to the Company
regarding the beneficial ownership of the Company’s common stock at February 1,
2008 by each director and nominee for election as director and each elective
officer. Unless otherwise indicated, the beneficial owner has sole voting and
investment power with respect to such shares of common stock.





Name
of                                       Number
of Shares of Common


Beneficial
Owner                      
 Stock
Beneficially Owned
(3)                          Percentage of Class
(4)





Richard
      Messina
      (1)                                  
      4,208,451 (5)
            33%





Robert
      J. Berger
      (1)                                  
       1,171,667
            10%





Richard
      L. Elander
      (1)                                
        429,565
            3%





Steven
      A. Sanders
      (1)                                 
        45,352
            <1%





Cornelius
      B. Murphy, Jr.
      (1)                          21,424
            <1%





George
      W. Lee, Jr.
      (1)                               
         186,666
            1%





Richard
      Jacobson
      (1)                                        
         -0-
            0%





Charles
      Morgan
      (2)                                     
       200,000
            1%





Jon
      S. Verbeck
      (2)                                               
        -0-
            0%





All
      Directors as a Group (7
      persons)      6,063,125
            47%




(1)
            Director


(2)
            Officer


(3)
            Includes
      unexercised options to purchase shares of common
  stock:


·
            Mr.
      Berger                                          
      13,333


·
            Mr.
      Elander                                     
         10,000


·
            Mr.
      Sanders                                      
       13,333


·
            Mr.
      Murphy                                    
         10,000


·
            Mr.
      Lee                                            
         16,667


·
            Mr.
      Morgan                                      100,000


(4)
            Based
      upon the sum of (a) 11,937,038 shares of common stock outstanding, and (b)
      shares underlying options and warrants that have vested and not been
      exercised and shares underlying options and warrants that will vest within
      the next 60 days relating to a particular
  shareholder.


(5)
            Includes
      480,000 shares issuable upon the exercise of warrants to purchase common
      stock issued to Summit Capital Associates, Inc., an affiliate of Mr.
      Messina.






29


ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




Steven A.
Sanders, one of our directors, is a partner at the law firm of Sanders, Ortoli,
Vaughn-Flam, Rosenstadt, LLP, and formerly of counsel at the law firm of Rubin,
Bailin, Ortoli, LLP which provides professional services to the Company, and it
is anticipated that it will continue to do so.  The cost of these
services in 2007 was approximately $13,408.





We
purchase subcontract labor services from St. Lawrence Industrial Services, Inc.,
which is owned by Robert J. Berger, one of our directors.  The costs
for these services amounted to approximately $1,042,000 in 2007, which includes
approximately $80,000 paid for services of the CFO.




ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




Fees
billed by Dannible & McKee, LLP, the Company’s principal accountants in the
aggregate for each of the last two years were as follows:








2007                          2006





Audit
Fees                               
$32,500                      $34,500





Audit Related
Fees                          
$0                      $27,750





Tax
Fees                                   
$13,500                      $12,975











Audit
related fees represent additional internal control related procedures and
inspection of documents as requested by the audit committee.





There
were no other fees billed for services other than those noted
above.





The fees
for tax services represent fees for compliance related to Federal and state tax
return preparation and filing.





The fees
for audit and tax services for 2007 were proposed to the audit committee and
approved by that committee in an engagement letter.  No other services
were provided by the accountants that would require approval by the audit
committee.




30





PART
IV




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K


Page


(a)
            Financial
      Statements





(1)           Report
of Independent
Accountants                                                                            
F-2


Consolidated Balance Sheets at December
31, 2007 and
2006                                  
F-3


Consolidated Statement of Operations
for the years ended


December 31,
2007, 2006, and
2005                                                                            
F-4


Consolidated Statements of
Shareholders’ Equity for


the
years ended December 31, 2007, 2006, and
2005                                               
F-5


Consolidated Statements of Cash Flows
for the years ended


December 31,
2007, 2006, and
2005                                                                            
F-6


Notes to Consolidated Financial
Statements                                                                F-7




(2) Schedule II,
Valuation and Qualifying Accounts for the Years


Ended 2007, 2006, and
2005                                                                                        F-20




All other
schedules are omitted because they are not required, are inapplicable, or the
information is otherwise shown in the Financial Statements or notes
thereto.




(b)           Exhibits




10.1        
Stock Option Plan - Incorporated herein by reference to the


Company’s
Information Statement filed November 6, 2002


14           
Code of
Ethics                                                                                                                   
E-1


21           
Subsidiaries of the
Registrant                                                                                         
E-2


31.1         CEO
Certification                                                                                                               
E-3


31.2         CFO
Certifications                                                                                                             
E-4


32.1         Section
1350 CEO
Certifications                                                                                     
 E-5


32.2         Section
1350 CFO
Certifications                                                                                      
E-6








31





OP-TECH
Environmental




Services, Inc. and
Subsidiaries




Consolidated Financial
Statements




December 31, 2007 and
2006






























Independent Registered Accounting
Firm








To the Shareholders and Board of
Directors of


OP-TECH Environmental Services, Inc. and
Subsidiaries





We have audited the accompanying
consolidated balance sheets of OP-TECH Environmental Services, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the years in the three year period ended December 31,
2007.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.




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




In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of OP-TECH Environmental Services, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of
America.




In connection with our audits of the
financial statements referred to above, we audited the financial schedules
listed under Item 15.  In our opinion, these financial schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information stated
therein.




As
discussed in note 15 to the financial statements, the Company restated its 2006
financial statements for the correction of certain errors that resulted in an
understatement of accrued liabilities and accounts payable as previously
reported at December 31, 2006.  Accordingly, an adjustment has been
made to accumulated deficit as of December 31, 2006.







/s/
Dannible & McKee, LLP


Syracuse,
New York





April 12, 2008















F-2
 
 OP-TECH Environmental Services, Inc. and
Subsidiaries
 
 Consolidated Balance Sheets
 December 31, 200 7 and 200 6





2007
              
              
              2006AssetsCurrent
    assets:Cash (Note
    4)
              
              $
              93,535
              
              
              $
              30,981Accounts receivable, net (Notes 1
      and 5)
              
              
              8,355,280
              
              
              
              10,008,186Costs on uncompleted projects
      applicable to future billings (Note 1)
              
              
              2,188,514
              
              
              
              2,984,323Inventory
              
              
              402,351
              
              
              
              378,439Current portion of deferred tax
      asset (Note 11)
              
              
              301,900
              
              
              
              354,000Prepaid expenses and other current
      assets
              
              
              503,858
              
              
              
              447,759Total current
      assets
              
              
              11,845,438
              
              
              
              14,203,688Property and equipment, net (Note
      6)
              
              
              3,266,973
              
              
              
              3,216,781Deferred tax asset (Note
      11)
              
              
              1,127,700
              
              
              
              1,004,800Other
assets
              
              
              13,961
              
              
              
              44,898Total
Assets
              
              $
              16,254,072
              
              
              $
              18,470,167Liabilities and Shareholders'
      EquityCurrent
      liabilities:Accounts
      payable
              
              $
              2,598,756
              
              
              $
              4,180,070Outstanding checks in excess of
      bank balance (Note 4)
              
              
              592,757
              
              
              
              149,741Billings in excess of costs and
      estimatedprofit on uncompleted contracts
      (Note 1)
              
              
              1,369,899
              
              
              
              796,438Accrued expenses and other current
      liabilities
              
              
              957,625
              
              
              
              1,148,549Accrued litigation reserve (Note
      8)
              
              
              345,645
              
              
              
              400,000Current portion of long-term debt
      (Note 9)
              
              
              840,602
              
              
              
              771,345Total current
      liabilities
              
              
              6,705,284
              
              
              
              7,446,143Long-term debt, net of current
      portion (Note 9)
              
              
              1,871,745
              
              
              
              2,128,193Note payable to bank under line of
      credit (Note 9)
              
              
              4,862,207
              
              
              
              5,731,548Total
      liabilities
              
              
              13,439,236
              
              
              
              15,305,884Shareholders'
      equity:Common stock, par value $.01 per
      share; authorized20,000,000 shares; 11,937,038 and
      11,748,704 sharesoutstanding as of December 31,
      2007 and 2006, respectively
              
              
              119,371
              
              
              
              117,487Additional paid-in
      capital
              
              
              7,005,724
              
              
              
              6,925,581Accumulated deficit (Note
      15)
              
              
              (4,304,059
              )
              
              
              (3,898,485
              )Accumulated other comprehensive
      income (loss)
              
              
              (6,200
              )
              
              
              19,700Shareholders' equity,
      net
              
              
              2,814,836
              
              
              
              3,164,283Total Liabilities and
      Shareholders' Equity
              
              $
              16,254,072
              
              
              $
              18,470,167








The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-3
 
 OP-TECH Environmental Services, Inc. and
Subsidiaries
 
 Consolidated Statements of
Operations
 Years Ended December 31, 200
7 , 200 6 and 200 5





2007
              
              
              2006
              
              
              2005Project billings and
      services
              
              $
              32,483,687
              
              
              $
              35,069,989
              
              
              $
              21,784,096Project
    costs
              
              
              24,739,420
              
              
              
              28,007,851
              
              
              
              15,955,533Gross
margin
              
              
              7,744,267
              
              
              
              7,062,138
              
              
              
              5,828,563Selling, general and
      administrative expenses
              
              
              7,525,635
              
              
              
              5,853,744
              
              
              
              5,107,218Litigation reserve (Note
      8)
              
              
              -
              
              
              
              -
              
              
              
              450,000Provision for impairment of land
      and buildingsheld for sale (Note
      7)
              
              
              -
              
              
              
              150,000
              
              
              
              100,000Operating income
      (loss)
              
              
              218,632
              
              
              
              1,058,394
              
              
              
              171,345Other income
      (expense):Interest
      expense
              
              
              (669,379
              )
              
              
              (615,361
              )
              
              
              (384,240
              )Other, net
              
              
              (872
              )
              
              
              (54,095
              )
              
              
              (29,849
              )(670,251
              )
              
              
              (669,456
              )
              
              
              (414,089
              )Net income (loss) before income
      taxes
              
              
              (451,619
              )
              
              
              388,938
              
              
              
              (242,744
              )Income tax benefit (expense) (Note
      11):Current
              
              
              (7,455
              )
              
              
              (9,201
              )
              
              
              (10,066
              )Deferred
              
              
              53,500
              
              
              
              (171,764
              )
              
              
              107,06646,045
              
              
              
              (180,965
              )
              
              
              97,000Net Income
      (loss)
              
              $
              (405,574
              )
              
              $
              207,973
              
              
              $
              (145,744
              )Earnings (loss) per common
      share:Basic
              
              $
              (0.034
              )
              
              $
              0.018
              
              
              $
              (0.012
              )Diluted
              
              $
              (0.033
              )
              
              $
              0.017
              
              
              $
              (0.012
              )Weighted average shares
      outstanding:Basic
              
              
              11,858,706
              
              
              
              11,746,476
              
              
              
              11,729,154Diluted
              
              
              12,174,820
              
              
              
              12,325,546
              
              
              
              11,729,154







The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-4
 
 OP-TECH Environmental Services, Inc. and
Subsidiaries
 
 Consolidated Statements of Shareholders’
Equity
 Years Ended December 31, 200
7 , 200 6 and 200 5





AccumulatedAdditional
              
              
              
              
              
              OtherCommon
              
              
              Common
              
              
              Paid-In
              
              
              Accumulated
              
              
              ComprehensiveShares
              
              
              Stock
              
              
              Capital
              
              
              Deficit
              
              
              Income
              
              
              TotalBalance at December 31,
      2004
              
              
              11,697,707
              
              
              $
              116,976
              
              
              $
              6,842,942
              
              
              $
              (3,960,714
              )
              
              $
              -
              
              
              $
              2,999,204Issuance of 47,664
      Shares
              
              
              47,664
              
              
              
              478
              
              
              
              5,773
              
              
              
              -
              
              
              
              -
              
              
              
              6,251Tax Benefit of the Exercise of
      Stock Options
              
              
              -
              
              
              
              -
              
              
              
              7,186
              
              
              
              -
              
              
              
              -
              
              
              
              7,186Other Comprehensive
      Income:Change in Fair Value of Cash Flow
      Hedgenet of tax effect of
      $10,000
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,100
              
              
              
              15,100Net Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (145,744
              )
              
              
              -
              
              
              
              (145,744
              )Total Comprehensive
      Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (130,644
              )Balance at December 31,
      2005
              
              
              11,745,371
              
              
              
              117,454
              
              
              
              6,855,901
              
              
              
              (4,106,458
              )
              
              
              15,100
              
              
              
              2,881,997Issuance of  3,333
      Shares
              
              
              3,333
              
              
              
              33
              
              
              
              167
              
              
              
              -
              
              
              
              -
              
              
              
              200Tax Benefit of the Exercise of
      Stock Options
              
              
              -
              
              
              
              -
              
              
              
              900
              
              
              
              -
              
              
              
              -
              
              
              
              900Recognition of Stock Compensation
      Expense
              
              
              -
              
              
              
              -
              
              
              
              68,613
              
              
              
              -
              
              
              
              -
              
              
              
              68,613Other Comprehensive
      Income:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Change in Fair Value of Cash Flow
      Hedgenet of tax effect of
      $2,960
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,600
              
              
              
              4,600Net Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              207,973
              
              
              
              -
              
              
              
              207,973Total Comprehensive
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              212,573Balance at December 31,
      2006
              
              
              11,748,704
              
              
              
              117,487
              
              
              
              6,925,581
              
              
              
              (3,898,485
              )
              
              
              19,700
              
              
              
              3,164,283Issuance of  188,334
      Shares
              
              
              188,334
              
              
              
              1,884
              
              
              
              22,916
              
              
              
              -
              
              
              
              -
              
              
              
              24,800Tax Benefit of the Exercise of
      Stock Options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Recognition of Stock Compensation
      Expense
              
              
              -
              
              
              
              -
              
              
              
              57,227
              
              
              
              -
              
              
              
              -
              
              
              
              57,227Other Comprehensive
      Income:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Change in Fair Value of Cash Flow
      Hedgenet of tax effect of
      $17,300
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (25,900
              )
              
              
              (25,900
              )Net Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (405,574
              )
              
              
              -
              
              
              
              (405,574
              )Total Comprehensive
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (431,474
              )Balance at December 31,
      2007
              
              
              11,937,038
              
              
              $
              119,371
              
              
              $
              7,005,724
              
              
              $
              (4,304,059
              )
              
              $
              (6,200
              )
              
              $
              2,814,836





The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-5
 
 OP-TECH Environmental Services, Inc. and
Subsidiaries
 
 Consolidated Statements of Cash
Flows
 Years Ended December 31, 200
7 , 200 6 and 200 5





2007
              
              
              2006
              
              
              2005Operating
      activities:Net income
      (loss)
              
              $
              (405,574
              )
              
              $
              207,973
              
              
              $
              (145,744
              )Adjustments to reconcile net
      income tonet cash provided by (used in)
      operating activities:Bad debt
      expense
              
              
              258,253
              
              
              
              62,157
              
              
              
              40,975Depreciation and
      amortization
              
              
              716,467
              
              
              
              610,472
              
              
              
              556,605Loss on sale of property and
      equipment
              
              
              -
              
              
              
              49,873
              
              
              
              27,644Provision for impairment of land
      and buildings held for sale
              
              
              -
              
              
              
              150,000
              
              
              
              100,000Provision for deferred income
      taxes
              
              
              (53,500
              )
              
              
              172,664
              
              
              
              (109,000
              )Provision for stock compensation
      expense
              
              
              57,227
              
              
              
              68,613
              
              
              
              -(Increase) decrease in operating
      assets andincrease (decrease) in operating
      liabilities:Accounts
      receivable
              
              
              1,394,653
              
              
              
              (4,257,366
              )
              
              
              (221,743
              )Costs on uncompleted
      projectsapplicable to future
      billings
              
              
              795,809
              
              
              
              (1,581,031
              )
              
              
              (524,092
              )Prepaid expenses, inventory and
      other assets, net
              
              
              (49,074
              )
              
              
              297,030
              
              
              
              127,158Billings and estimated profit in
      excessof costs of uncompleted
      contracts
              
              
              573,461
              
              
              
              195,733
              
              
              
              (495,770
              )Accrued litigation defense
      reserve
              
              
              (54,355
              )
              
              
              (50,000
              )
              
              
              450,000Accounts payable and other accrued
      expenses
              
              
              (1,772,238
              )
              
              
              2,924,422
              
              
              
              (374,233
              )Net cash provided by (used in)
      operating activities
              
              
              1,461,129
              
              
              
              (1,149,460
              )
              
              
              (568,200
              )Investing
      activities:Proceeds from sale of property and
      equipment
              
              
              -
              
              
              
              692,208
              
              
              
              113,000Purchases of property and
      equipment
              
              
              (766,659
              )
              
              
              (1,031,994
              )
              
              
              (870,676
              )Net cash used in investing
      activities
              
              
              (766,659
              )
              
              
              (339,786
              )
              
              
              (757,676
              )Financing
      activities:Proceeds from issuance of common
      stock
              
              
              24,800
              
              
              
              200
              
              
              
              6,251Outstanding checks in excess of
      bank balance
              
              
              443,016
              
              
              
              (207,508
              )
              
              
              357,249Proceeds from notes payable to
      banks andlong-term borrowings, net of
      financing costs
              
              
              16,057,390
              
              
              
              16,351,122
              
              
              
              8,133,127Principal payments on
      currentand long-term
      borrowings
              
              
              (17,157,122
              )
              
              
              (14,714,515
              )
              
              
              (7,181,561
              )Net cash provided by (used in)
      financing activities
              
              
              (631,916
              )
              
              
              1,429,299
              
              
              
              1,315,066Increase (decrease) in cash and
      cash equivalents
              
              
              62,554
              
              
              
              (59,947
              )
              
              
              (10,810
              )Cash and cash equivalents at
      beginning of year
              
              
              30,981
              
              
              
              90,928
              
              
              
              101,738Cash and Cash Equivalents at End
      of Year
              
              $
              93,535
              
              
              $
              30,981
              
              
              $
              90,928Non-cash
    items:Equipment purchased
      throughbank and other financing
      sources
              
              $
              -
              
              
              $
              -
              
              
              $
              198,182Non-cash financing of
      insurance
              
              $
              623,431
              
              
              $
              507,472
              
              
              $
              -







The
accompanying notes are an integral part of the consolidated financial
statements.
 
 F-6
 
 OP-TECH Environmental Services, Inc. and
Subsidiaries
 
 Notes to Consolidated Financial
Statements





1.
            Summary of Significant Accounting
      Policies




Basis of
Presentation




OP-TECH
Environmental Services, Inc. and Subsidiaries (the “Company”), a Delaware
corporation headquartered in Syracuse, New York, provides comprehensive
environmental and industrial services predominately in New York, New England,
Pennsylvania, New Jersey, and Ohio.  The Company performs industrial
cleaning of hazardous and non-hazardous materials and provides varying services
relating to plant facility closure, including interior and exterior demolition
and asbestos removal.  In addition, the Company provides remediation
services for sites contaminated by hazardous and non-hazardous materials and
provides 24-hour emergency spill response services.  The Company’s
revenues are derived from state agencies, industrial companies and
municipalities facing complex environmental clean-up problems associated with
hazardous and non-hazardous materials as required by various governmental
agencies.  The Company’s services include assessing the regulatory,
technical, and construction aspects of the environmental issue, and performing
the necessary remediation activities.  The Company seeks to provide
its clients with remedial solutions which integrate the various aspects of a
project and are well-documented, practical, cost effective, and acceptable to
regulatory agencies and the public.





OP-TECH AVIX, Inc. (AVIX) is a
subsidiary of OP-TECH Environmental Services, Inc. formed in January 2002 to
pursue and engage in diversified lines of business.  In The fourth
quarter of 2004 this subsidiary became inactive and the Company is no longer
pursuing the lines of business that AVIX performed.  Therefore,
separate segment information is no longer presented in the Financial
Statements.




OP-TECH Environmental Services, Ltd. is
an inactive Canadian subsidiary of OP-TECH Environmental Services,
Inc.




J.O. Technologies is a partnership that
is owned 50% by the Company.  The partnership activities are not
material to the operations of the Company.




Principles of
Consolidation




The accompanying consolidated financial
statements include the accounts of OP-TECH Environmental Services, Inc. and its
two wholly-owned subsidiaries (collectively, the “Company”).  All
significant intercompany accounts and transactions have been eliminated in
consolidation.




Use of Estimates




The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements.  Estimates
also affect the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.




Cash and Cash
Equivalents




For
purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents.





Project Income
Recognition




Contracts are predominately short-term
in nature (less than three months), and revenue is recognized as costs are
incurred.  Project costs include all direct material, equipment, and
labor costs and those indirect costs related to contract
performance.




Revenues recognized in excess of amounts
billed are recorded as a current asset.  Deferred revenue resulting
from billings that exceed costs and estimated profit is reflected as a current
liability.




Provisions for estimated losses are made
in the period in which such losses are determined.




Normal delays relating to receipt of
job-related vendor invoices, payroll processing, and billing compilation
typically cause customer invoices relating to revenue earned in a certain month
to be mailed in the first two weeks of the following month.  Such
invoices mailed after year-end that are included in December 31, 2007 and
December 31, 2006 accounts receivable are approximately $2,000,000 and
$3,260,000, respectively.




F-7


Concentration of Business Risk -
Significant Customers




Sales to one customer, other than an
affiliated party, amounted to approximately $7,212,000, $8,509,000, and
$6,047,000 in 2007, 2006 and 2005, respectively.  Accounts receivable
at December 31, 2007 and 2006, include $711,000 and $1,718,316
respectively, from this customer.




Receivables and Credit
Policies




Accounts receivable are unsecured
customer obligations due under normal trade terms requiring payment within 30
days from the invoice date.  Interest is not accrued on past-due
invoices.  Accounts receivable are stated at the amount billed to the
customer. Payments of accounts receivable are allocated to the specific invoices
identified on the customer’s remittance advice.




The carrying amount of accounts
receivable is reduced by a valuation allowance that represents management’s best
estimate of the amounts that will not be collected.  Management
individually reviews all accounts receivable balances that exceed 90 days from
invoice date and, based on assessment of current creditworthiness, estimates the
portion, if any, of the balance that will not be
collected.  Additionally, management estimates a general allowance
based on historical chargeoffs covering other amounts that may not be
collectible.




Inventory




Inventory, consisting of spill response
and remediation supplies and materials, are stated at the lower of cost or
market value.  Cost is determined using the first-in, first-out
method.




Property and
Equipment




Property and equipment are stated at
cost.  Expenditures for repairs and maintenance are charged to expense
as incurred.  Depreciation of assets is provided for using the
straight-line method over useful lives typically ranging from 3 to 15 years and
40 years for leasehold improvements.




Financial
Instruments




The Company maintains various financial
instruments in the ordinary course of business, which consist of cash, accounts
receivable and payable, notes payable, long-term debt and a line of
credit.  The carrying value of the Company’s financial instruments
approximates their fair value at December 31, 2007 and 2006.  The fair
values of fixed rate notes payable and long-term debt are determined using
incremental borrowing rates available to the Company for similar types of
borrowings.  All other financial instruments are short-term in nature
and their fair values are based on the amounts that they have been or will be
settled for subsequent to the balance sheet date.




F-8


Impact of Recently
Issued Statements




In 2007, the Company adopted the
Financial Accounting Standards Board issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”.  There was no
significant impact on its financial position, results of operations or cash
flows as a result of adopting the interpretation in 2007.




Income Taxes




The Company provides for income taxes in
accordance with the liability method.  Under the liability method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that may be in effect in the years
in which the differences are expected to reverse.




2.
            Stock Based
      Compensationand
      Earnings Per Share




Effective
      January 1, 2006 the Company adopted Financial Accounting Standards Board
      Statement No. 123(R) “Share Based Payment”.  The Company has
      chosen to adopt this statement using the modified prospective
      application.  Under this method the Company will recognize the
      fair value of unvested options granted in prior periods as compensation
      over the remaining vesting period or requisite service period using the
      straight line attribution method.  The effect of adopting the
      statement was to reduce income before taxes by $68,613 and net income by
      $41,100, and basic and fully diluted earnings per share by $.004 and $.003
      in 2006.  In 2007, the Company recorded an additional $57,227 of
      expense under FAS 123(R).  Prior to 2006 the Company applied APB
      Opinion No. 25 and related interpretations in accounting for its stock
      options.  Accordingly no compensation cost was recognized for
      the options issued.  The following table sets forth the
      Company’s net income and earnings per share had the provisions of
      Statement No. 123(R) been applied in the fiscal years ended December 31,
      2005.






2005Net income
      (loss):As reported
              
              $
              (145,744
              )Deduct: Total stock-based employee
      compensationexpense determined under fair
      value basedmethod for all awards, net of
      related tax effects
              
              
              52,000Pro forma net income
      (loss)
              
              $
              (197,744
              )Basic earnings (loss) per
      share:As reported
              
              $
              (0.012
              )Pro forma
              
              $
              (0.017
              )Diluted earnings (loss) per
      shareAs reported
              
              $
              (0.012
              )Pro forma
              
              $
              (0.017
              )






Basic
earnings per share is computed by dividing net income (loss) by the weighted
average shares outstanding for the period, which were 11,858,706, 11,746,476,
and 11,729,154 for the years ended December 31, 2007, 2006 and 2005,
respectively.  Diluted earnings per share includes the potentially
dilutive effect of common stock issuable upon conversion of stock options or
warrants.





Warrants
were issued to a financial advisor in May 2002 to purchase 480,000 shares of
common stock at $0.066 per share, expiring in May 2010.





On March 16, 2004 the Company purchased
and retired 1,000,000 shares of its common stock from O’Brien & Gere Limited
for $.25 per share, or $250,000.




F-9


3.
            Related Party
      Transactions




The Company purchases subcontract labor
services from St. Lawrence Industrial Services, Inc. which is owned by a
director of the Company.  The cost for these services amounted
to approximately $1,042,000, $1,074,000, and $734,000 in 2007, 2006, and 2005,
respectively.





A
director of the Company is of counsel for law firms that provided professional
services to the Company.  The cost for these services amounted to
approximately $15,000, $5,000, and $5,000 in 2007, 2006 and 2005,
respectively.





4.      Cash





Using a
zero balance account, the Company voluntarily applies all available cash in the
Company’s operating account to pay down the Company’s note payable to bank under
the line of credit (Note 9) nightly.  From time to time cash balances
held at the Financial Institution may exceed the Federal Deposit Insurance
Corporation limit of $100,000.





1.
            Accounts
      Receivable





Accounts
receivable at December 31, 2007 and 2006 consists of:




2007
              
              2006Accounts Receivable,
      gross
              $      8,616,187
              
              $
      10,122,510Allowance for uncollectible
      receivables
              (260,907)
              
              (114,324)Accounts Receivable,
      net
              $      8,355,280
              
              $
      10,008,186




All customer accounts receivable
collateralize the Company’s outstanding loans with its primary lender (see Note
9).

















F-10
 
 OP-TECH Environmental Services, Inc. and
Subsidiaries
 
 Notes to Consolidated Financial
Statements

















6.
            Property and
      Equipment




Property and equipment at
December 31, 2007 and 2006 consist of:




2007
              
              
              2006Furniture and
      fixtures
              
              $
              21,758
              
              
              $
              21,758Leasehold
      improvements
              
              
              192,221
              
              
              
              185,741Office
    machines
              
              
              248,139
              
              
              
              233,056Field
    equipment
              
              
              6,732,474
              
              
              
              5,987,3777,194,592
              
              
              
              6,427,932Less: Accumulated
      depreciation
              
              
              (3,927,619
              )
              
              
              (3,211,151
              )$
              3,266,973
              
              
              $
              3,216,781






Depreciation expense approximated
$716,000, $610,000, and $557,000 for 2007, 2006 and 2005,
respectively.




7.
            Land and Buildings Held for
      Sale




On November 17, 2006, the Company sold
approximately 14 acres of land, and buildings thereon, which it owned on the St.
Lawrence River in Massena, NY for $692,208 and recorded a loss on sale of
property in the amount of $199,873, which included a $150,000 impairment loss
recognized in the quarter ended September 30, 2006.  An impairment
loss of $100,000 was recognized in 2005.




8.
            Accrued LitigationReserve




The
Company has accrued a liability of $345,645 and $400,000 at December 31, 2007
and 2006, respectively.  The liability has been recorded to cover potential
legal costs and fees, and also any indemnity, settlement, or other payments
necessary to dispose of a
particularclaim against the
Company.  The reserve will be reduced by legal fees or other costs
paid.




F-11


9.
            Long-Term Debt
      Obligations




Long-term debt at December 31, 2007
and 2006 consists of:




2007
              
              
              2006Note payable to bank under line of
      credit. Due January 1, 2009. (a)
              
              $
              4,862,207
              
              
              $
              5,731,548Term Loan due in monthly
      installment payments of $24,848plus interest at prime plus .75%,
      hedged by an interest rate swap. (a)
              
              
              1,216,694
              
              
              
              1,471,673Term Loans due in monthly
      installment payments aggregating$20,024 and $13,223 at December
      31, 2007 and 2006, respectivelyplus interest at prime plus
      .75%. (a)
              
              
              1,097,899
              
              
              
              908,205Insurance Financing Note, due in
      monthly installment paymentsof $64,864 and $46,134 including
      interest at 7.5% and 5.94% atDecember 31, 2007 and 2006,
      respectively collateralized byassignment of unearned
      premiums.
              
              
              191,613
              
              
              
              184,535Equipment Notes, due in monthly
      installment payments aggregating$11,803 and $12,538 at December
      31, 2007 and 2006, includinginterest at rates ranging from
      5.3% to 7.9%, collateralized byequipment with a carrying value of
      approximately $900,000and $400,000 at December 31,
      2007 and 2006, respectively.
              
              
              206,141
              
              
              
              335,1252,712,347
              
              
              
              2,899,538Less: Current
      portion
              
              
              (840,602
              )
              
              
              (771,345
              )$
              1,871,745
              
              
              $
              2,128,193








(a)
            The
      Company has entered into financing agreements (the “Agreements”) with a
      lender (“Primary Lender”).




As of
December 31, 2007 the Agreements include a Line of Credit note which provided
for borrowings up to $6,000,000 to be used to provide working capital and
expires on January 1, 2009, unless renewed by the lender.  Interest is
charged at prime plus .50%




The
Agreements also include a Term Loan agreement which is due in monthly principal
installment payments of $24,848 plus interest at a rate of prime plus .75%,
hedged by an Interest Rate Swap Transaction.




On
January 25, 2005, the Company entered into an Interest Rate Swap Transaction
with its Primary Lender to hedge against rising interest rates on the floating
rate Term Loan debt.  The liability being hedged is the variability in
cash flows related to fluctuations in interest payments made.  The
fluctuation in interest rates exposes the Company to the risk of higher interest
expense.  The purpose of the Swap Agreement is to limit the Company’s
exposure to rising interest rates during the term of the floating rate Term Loan
noted above.  The swap has been designated as a cash flow
hedge.




The
interest rate swap hedge instrument has a fixed rate of 7.05%, matures on
February 1, 2012, and has a notional amount that remains equal to the principal
balance on the Term Loan.   The difference between the prime
rate, as periodically adjusted, and the Interest Rate Swap rate of 7.05% will be
settled monthly.  The effect of the interest rate swap is to fix the
floating rate on the Term Loan at 7.80%.  The Mark to Market
valuation, representing the net present value of the expected cash flow from the
Interest Rate Swap, is approximately ($10,800) and $32,400 at December 31, 2007
and 2006, respectively and is included in long-term debt.




The
Agreements also include Term Loan agreements, which are not hedged by Interest
Rate Swap Transactions, which are due in monthly principal installment payments
that aggregate $20,024 plus interest at prime plus .75 %.




F-12


The
Agreements are collateralized by all present and future right, title and
interest in all of the personal property of the Company including, but not
limited to, all accounts receivable, inventory and equipment.  This
collateral has a carrying value at December 31, 2007 as follows:




Accounts Receivable, net of
      Allowance for Doubtful Accounts
              
              $
              8,355,280Inventory
              
              
              402,351Equipment, net of Accumulated
      Depreciation
              
              
              3,029,326$
              11,786,957




The
Agreements also include certain financial covenants including a minimum fixed
charge coverage ratio, a tangible net worth ratio, a debt to net worth ratio,
and a consecutive quarterly net loss provision; cross-collateralization
provisions; and a material adverse change clause which permits the financial
institution to call its obligation if the Company fails to comply with
covenants, as defined, or in the event of a material adverse change in the
Company’s business.  Management does not anticipate any adverse
changes in the next twelve months, however, there can be no
assurances.




The
Company was not in compliance with the covenants as of December 31, 2007 and
obtained a waiver.







Interest paid amounted to
      approximately $670,000, $615,000, and $380,000 in 2007, 2006 and 2005,
      respectively




Scheduled principal payments on
long-term debt for the next five years, not including the note payable to bank
under line of credit, are as follows:




2008
              
              $
              840,6022009
              
              
              616,5442010
              
              
              545,9042011
              
              
              520,6652012
              
              
              150,537Thereafter
              
              
              38,095$
              2,712,347


At
December 31, 2006 the Company has outstanding commitments in the form of standby
letters of credit in the amount of approximately $440,000 securing various
agreements.









F-13


10.    Operating
Lease Obligations




Office facilities and various field
equipment are leased under noncancelable operating leases expiring at various
dates through 2012.  Rent expense incurred under operating leases
amounted to approximately$896,000,$725,000,and$694,000in 2007, 2006and 2005, respectively.  Future
minimum lease payments under noncancelable operating leases are as
follows:




2008
              
              $
              577,5532009
              
              
              522,4412010
              
              
              440,0362011
              
              
              347,6202012
              
              
              127,633$
              2,015,283


11.
            Income
  Taxes




The following summarizes the income tax
(benefit) expense at December 31, 2007, 2006and 2005:






2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              -
              
              
              $
              -
              
              
              $
              -State
              
              
              7,455
              
              
              
              9,201
              
              
              
              10,0667,455
              
              
              
              9,201
              
              
              
              10,066Deferred
              
              
              (53,500
              )
              
              
              265,664
              
              
              
              (107,066
              )$
              (46,045
              )
              
              $
              274,865
              
              
              $
              (97,000
              )




In2007,2006and 2005the differencebetween the expected tax provision
resulting from the application of the federal statutory income tax rate to
pre-tax incomeis due to
nondeductible items, state taxes and graduated federal tax rates.  The
deferred tax expense(benefit)recognized in 2007, 2006and 2005represents the effect of changes in
temporary differencesand
net operating loss carryforwards.




At
December 31, 2007, the Company has federal net operating loss ("NOL")
carryforwards of approximately $5,600,000 for income tax
purposes.  The federal net operating loss carryforwards expires at
various times beginning in 2009 through the year ending December 31,
2027.  The Company believes that it is more likely than not that the
taxable income in future years will be sufficient to utilize a portion of these
loss carryforwards.  Minimum taxable income is anticipated to be
approximately $400,000 per year to enable utilization of a portion of these loss
carryforwards.  Income taxes and franchise taxes paid were
approximately $7,000, 9,000 and $10,000 in 2007, 2006 and 2005,
respectively.




Deferred income taxes reflect the net
tax effect of temporarydifferences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes.




F-14


Significant components of the Company's
deferred tax liabilities and assets as of December 31, 2007and 2006are as follows:




2007
              
              
              2006Deferred tax
      liabilities:Property and
      equipment
              
              $
              (531,986
              )
              
              $
              (492,176
              )Deferred tax
      assets:Net operating loss
      carryforward
              
              
              2,281,593
              
              
              
              1,964,178Accounts receivable
      reserve
              
              
              101,754
              
              
              
              44,586Accrued
      expenses
              
              
              228,239
              
              
              
              342,2122,611,586
              
              
              
              2,350,976Net Deferred tax
      asset
              
              
              2,079,600
              
              
              
              1,858,800Valuation allowance for deferred
      assets
              
              
              (650,000
              )
              
              
              (500,000
              )Net deferred tax asset, net of
      valuation allowance
              
              $
              1,429,600
              
              
              $
              1,358,800









12.
            Employee Benefit
      Plan




The Company maintains a defined
contribution employee retirement plan (“Retirement Plan”) which covers
substantially all employees.  The Retirement Plan is funded by
voluntary employee contributions which are matched by the Company at a
designated percentage, and additional contributions by the Company at the
discretion of the Board of Directors.  Matching contributions made by
the Company to the Retirement Plan were approximately $33,000, $27,000, and
$24,000 in 2007, 2006 and 2005, respectively.  The Company did not
make discretionary contributions to the Retirement Plan in 2007, 2006 and
2005.









13.    Stock Option
Plan




The 2002 Omnibus Plan (“Omnibus Plan”)
maintained by the Company is intended to promote the growth and general
prosperity of the Company by offering incentives to its key employees who are
primarily responsible for the growth of the Company and to attract and retain
qualified employees.  Awards granted under the Omnibus Plan may be (a)
Stock Options which may be designated as Incentive Stock Options intended to
qualify under Section 422 of the Internal Revenue Code of 1986, or Nonqualified
Stock Options (“NQSO’s) not intended to so qualify; (b) stock appreciation
rights; (c) restricted stock awards; (d) performance awards; or (e) other forms
of stock-based incentive awards. The shares of stock with respect to which the
Awards may be granted shall be the common stock, par value at $0.01, of the
Company (“Common Stock").  Shares delivered upon exercise of the
Awards, at the election of the Board of Directors of the Company, may be stock
that is authorized but previously unissued or stock reacquired by the Company,
or both. The maximum number of shares with respect to which the Awards may be
granted under the Omnibus Plan shall not exceed 1,000,000 shares of Common
Stock; provided, however, that such number of shares of Common Stock may also be
subject to adjustment, from time to time, at the discretion of the Board of
Directors of the Company.  Compensation cost subsequent to January 1,
2006 is measured based on the fair value of the options granted.  No
options were granted in 2007 or 2006.




Under the Omnibus Plan, on May 21, 2002
the Company granted 335,000 NQSO’s.  The exercise price of each NQSO
equals the market price of the Company’s stock on the date of grant ($0.06), and
an NQSO’s maximum term is 10 years.  The NQSO’s vest and are
exercisable on a three-year vesting schedule.




Under the Omnibus Plan, on February 24,
2003 the Company granted 10,000 NQSO’s.  The exercise price of each
NQSO equals the market price of the Company’s stock on the date of grant
($0.10), and an NQSO’s maximum term is 10 years.  The NQSO’s vest and
are exercisable on a three-year vesting schedule.




Under the Omnibus Plan, on November 19,
2003 the Company granted 335,000 NQSO’s.  The exercise price of each
NQSO equals the market price of the Company’s stock on the date of grant
($0.15), and an NQSO’s maximum term is 10 years.  The NQSO’s vest and
are exercisable on a three-year vesting schedule.




Under the Omnibus Plan, on January 26,
2005 the Company granted 369,000 NQSO’s.  The exercise price of each
NQSO equals the market price of the Company’s stock on the date of grant
($0.40), and an NQSO’s maximum term is 10 years.  The NQSO’s vest and
are exercisable on a three-year vesting schedule.




F-16


A summary of the status of the Company’s
NQSO’s granted under the Omnibus Plan as of December 31, 2007, 2006 and 2005,
and changes during the years ending on those dates follows:




Shares
              
              
              Exercise
    PriceOutstanding at December 31,
      2004
              
              
              448,343
              
              
              $
              0.06 - 0.15Granted January 26,
      2005
              
              
              369,000
              
              
              $
              0.40Exercised
              
              
              (47,664
              )
              
              $
              0.06 - 0.15Forfeited
              
              
              (61,335
              )
              
              $
              0.06 - 0.15Forfeited
              
              
              (33,000
              )
              
              $
              0.40Expired
              
              
              -
              
              
              $
              -Outstanding at December 31,
      2005
              
              
              675,344
              
              
              $
              0.06 - 0.40Exercised
              
              
              (3,333
              )
              
              $
              0.06Forfeited
              
              
              -
              
              
              $
              -Expired
              
              
              -
              
              
              $
              -Outstanding at December 31,
      2006
              
              
              672,011
              
              
              $
              0.06 - 0.40Exercised
              
              
              (188,334
              )
              
              $
              0.06 - 0.15Forfeited
              
              
              (148,334
              )
              
              $
              0.15 - 0.40Outstanding at December 31,
      2007
              
              
              335,343
              
              
              $
              0.06 - 0.40Exercisable at December 31,
      2007
              
              
              271,009
              
              
              $
              0.06 - 0.40
  F-17
  Shares vesting under
the plan had a fair value of $57,227, $68,613, and $73,144 in 2007, 2006, and
2005 respectively.





The remaining weighted average
contractual life of options outstanding is approximately 5.8
years.








14.
            Commitment and
      Contingencies




The Company is subject to various
federal, state and local regulations relating to environmental matters,
including laws which require the investigation and, in some cases, remediation
of environmental contamination.  The Company's policy is to accrue and
charge to operations environmental investigation and remediation expenses when
it is probable that a liability has been incurred and an amount is reasonably
estimable.




The Company is a party to various
proceedings arising from the normal course of business.  Based on
information currently available, management believes adverse decisions relating
to litigation and contingencies in the aggregate would not materially affect the
Company's results of operations, cash flows or financial
condition.




15.
            Restatement




On March 31, 2008, the Company
determined that the worker’s compensation liability and accounts payable
recorded at December 31, 2006 were understated by $205,000 and $36,000,
respectively.  As a result, the Company restated its 2006 financial
statements.  The impact of these adjustments on the Company’s
financial results as originally reported at December 31, 2006 is summarized
below:




As Reported
              
              
              As RestatedCurrent
    assets
              
              $
              14,109,788
              
              
              $
              14,203,688Total
assets
              
              $
              18,376,267
              
              
              $
              18,470,167Current
      liabilities
              
              $
              7,205,547
              
              
              $
              7,446,143Total
      liabilities
              
              $
              15,065,288
              
              
              $
              15,305,884Accumulated
      deficit
              
              $
              (3,751,789
              )
              
              $
              (3,898,485
              )Net income
              
              $
              354,669
              
              
              $
              207,973Basic earning per
      share
              
              $
              0.030
              
              
              $
              0.018Diluted earning per
      share
              
              $
              0.029
              
              
              $
              0.017









F-18




16.    Two-Year
Selected Quarterly Financial Data (Unaudited)




Year Ended December 31,
      2007Quarter
              
              
              Quarter
              
              
              Quarter
              
              
              QuarterEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedMarch 31
              
              
              June 30
              
              
              September
30
              
              
              December 31Project
      billings
              
              $
              7,455,990
              
              
              $
              8,994,960
              
              
              $
              8,109,003
              
              
              $
              7,923,734Gross
margin
              
              
              1,608,760
              
              
              
              1,782,642
              
              
              
              2,312,940
              
              
              $
              2,039,925Net income
      (loss)
              
              
              (175,626
              )
              
              
              (252,507
              )
              
              
              147,205
              
              
              $
              (124,646
              )Net income (loss) per
      sharebasic
              
              $
              0.02
              
              
              $
              (0.02
              )
              
              $
              0.01
              
              
              $
              (0.01
              )diluted
              
              $
              0.01
              
              
              $
              (0.02
              )
              
              $
              0.01
              
              
              $
              (0.01
              )




In all of the quarters in 2007, the
Company restated its accounts payable, operating expenses, and deferred
taxes.




Year Ended December 31,
      2006Quarter
              
              
              Quarter
              
              
              Quarter
              
              
              QuarterEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedMarch 31
              
              
              June 30
              
              
              September
30
              
              
              December 31Project
      billings
              
              $
              7,851,240
              
              
              $
              7,106,271
              
              
              $
              8,235,199
              
              
              $
              11,877,279Gross
margin
              
              
              1,521,763
              
              
              
              2,006,325
              
              
              
              1,846,972
              
              
              $
              1,687,078Net income
      (loss)
              
              
              36,567
              
              
              
              262,267
              
              
              
              (38,232
              )
              
              $
              (52,629
              )Net income (loss) per
      sharebasic
              
              $
              0.00
              
              
              $
              0.02
              
              
              $
              (0.00
              )
              
              $
              (0.00
              )diluted
              
              $
              0.00
              
              
              $
              0.02
              
              
              $
              (0.00
              )
              
              $
              (0.00
              )


In the quarter ended September 30, 2006,
the Companyrecorded animpairment loss of $150,000 on the carrying value of the land and
buildings held for sale (Note 7).  In the quarter ending December 31,
2006, the Company restated certain assets and liabilities (Note
15).







F-19





SCHEDULE II - VALUATION AND
      QUALIFYING ACCOUNTSBalance at
            
            
            
            
            
            
            
            
            
            Balance atBeginning
            
            
            
            
            
            
            
            
            
            End ofDescription
            
            of Period
            
            
            Additions
            
            
            Deductions
            
            
            
            PeriodYEAR ENDED DECEMBER 31,
      2007Reserves deducted from assets
      towhich they
      apply:Doubtful
      accounts receivable
            
            $
            114,324
            
            
            $
            258,253
            
            
            $
            111,670
            
            (a)
            
            $
            260,907Valuation
      allowance for deferred tax assets
            
            $
            500,000
            
            
            $
            150,000
            
            
            $
            -
            
            
            
            $
            650,000YEAR ENDED DECEMBER 31,
      2006Reserves deducted from assets
      towhich they
      apply:Doubtful
      accounts receivable
            
            $
            104,163
            
            
            $
            62,157
            
            
            $
            51,996
            
            (a)
            
            $
            114,324Valuation
      allowance for deferred tax assets
            
            $
            500,000
            
            
            $
            -
            
            
            $
            -
            
            
            
            $
            500,000YEAR ENDED DECEMBER 31,
      2005Reserves deducted from assets
      towhich they
      apply:Doubtful
      accounts receivable
            
            $
            174,500
            
            
            $
            40,975
            
            
            $
            111,312
            
            (a)
            
            $
            104,163Valuation
      allowance for deferred tax assets
            
            $
            500,000
            
            
            $
            -
            
            
            $
            -
            
            
            
            $
            500,000(a) Doubtful accounts written off
      and adjustments.





F-20








SIGNATURES








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






OP-TECH Environmental Services,
      Inc. (Registrant)Date:
      April 12, 2008
              By:
              /s/ Charles
      B. MorganCharles
      B. MorganChief
      Executive Officer
  Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on the 11th day of
April, 2008.





/s/
      Robert J. Berger
            Director and Co-Chairman of the BoardRobert
      J. Berger/s/
      Richard Messina
            Director and Co-Chairman of the BoardRichard
      Messina/s/
      Richard L. Elander
            DirectorRichard
      L. Elander/s/
      Cornelius B. Murphy
            DirectorCornelius
      B. Murphy/s/
      Richard Jacobson
            DirectorRichard
      Jacobson/s/
      Steven A. Sanders
            DirectorSteven
      A. Sanders/s/
      George W. Lee, Jr
            DirectorGeorge
      W. Lee Jr./s/
      Charles B. Morgan
            Chief Executive OfficerCharles
      B. Morgan/s/
      Jon S. Verbeck
            Chief Financial Officer and TreasurerJon
      S. Verbeck